NCC5000 Packet 2015.pdf

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NCC 5000Financial

Accounting

Professor Robert Libby

Fall 2015

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2015 NCC 5000 FINANCIAL ACCOUNTING

ROBERT LIBBY

Packet Table of Contents*

1. Snyder’s-Lance Cases2. Snyder’s-Lance Solutions3. 1st Exam Summer 19954. Other Cases

page 3 page 27 page 45 page 63

Intel (A) Denny’s Cash Flow (B) Intel (B) Cash Flow (C) Honda Motor Kimberly-Clark (A) Nabors Industries Kimberly-Clark (B)

5. Practice Quiz 1s page 119 6. Practice Old Midterms page 133 7. Practice Quiz 2s page 221 8. Practice Old Finals page 235

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Snyder’s-Lance Cases Snyder’s Lance (A) Snyder’s Lance (B) Snyder’s Lance (C) Snyder’s-Lance (D) Snyder’s-Lance (E) Snyder’s-Lance (F) Snyder’s-Lance (G) Snyder’s-Lance (H) Snyder’s-Lance (I) (The solutions follow the last Snyder’s-Lance case.)

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Snyder’s-Lance (A) Required: Review the Snyder’s-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.

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Snyder’s-Lance (B) Required: Answer the following questions based on the Snyder’s-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.)

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Snyder’s-Lance (C) Accounts Receivable Required: Answer the following questions based on the Snyder’s-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 Snyder’s-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?

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Snyder’s-Lance (D) Inventory Required: Answer the following questions based on the following information from Snyder’s-Lance’s recent annual reports. Assume a 35% marginal tax rate. 1. It’s inventory note from the 2008 report is printed below:

If Snyder’s-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. It’s inventory note from the 2009 report is printed below:

NOTE 4. INVENTORIES

(in thousands) 2008 2007Finished goods 23,227$ 21,910$ Raw materials 11,556 7,701Supplies, etc. 15,293 14,297Total inventories at FIFO cost 50,076 43,908Less: adjustment to reduce FIFO cost to LIFO cost (6,964) (5,249)Total inventories 43,112$ 38,659$

Inventories at December 27, 2008 and December 29, 2007 consisted of the following:

NOTE 4. INVENTORIES

(in thousands) 2009 2008Finished goods 33,060$ 23,227$ Raw materials 11,732 11,556Supplies, etc. 19,081 15,293Total inventories at FIFO cost 63,873 50,076Less: adjustments to reduce FIFO cost to LIFO cost (5,836) (6,964)Total inventories 58,037$ 43,112$


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If Snyder’s-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, Snyder’s-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:

The effect on the Consolidated Balance Sheet at December 26, 2009 was as follows:

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

(in thousands, except share data) 2009 2008Cost of sales 1,128$ (1,715)$ Income before interest and income taxes (1,128) 1,715Income tax expense (362) 593Net Income (766) 1,122Basic earnings per share (0.02) 0.03Diluted earnings per share (0.02) 0.03

Increase/(Decrease)

Increase/(in thousands) (Decrease)Inventories 5,836$ Deferred income tax asset (2,013)Retained Earnings 3,823

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Snyder’s-Lance (E) Long-Lived Assets Required: Answer the following questions based on the Snyder’s-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 decrease no effect

b. Cash flow from operating activities ___________ increase decrease no effect

c. Cash flow from investing activities ___________ increase decrease no effect

2. What entry did Snyder’s-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 decrease no effect

b. Cash flow from operating activities ___________ increase decrease no effect

c. Cash flow from investing activities ___________ increase decrease no effect

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Snyder’s-Lance (F) Leases Required: Answer the following questions based on the Snyder’s-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. Snyder’s-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

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Snyder’s-Lance (G) Debt Required: Answer the following questions based on the Snyder’s-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 Snyder’s-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 Snyder’s-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 Snyder’s-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?

.

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Snyder’s-Lance (H) Equity Method Investments

Required: Answer the following questions based on Snyder’s-Lance's 2011 Annual Report. 1. What entry (entries) did Snyder’s-Lance make in 2011 related to their investment in Late

July Snacks LLC accounted for under the equity method?

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Snyder’s-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 D’oro brand and certain manufacturing equipment from Stella D’oro 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 Snyder’s and Lance was accounted for as an acquisition of Snyder’s by Lance. Lance paid for Snyder’s 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?

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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 Snyder’s, with the result that Snyder’s became a wholly owned subsidiary of Lance. As part of the Merger, Snyder’s shareholders received 108.25 shares of Lance stock for each share outstanding as of the merger date. All of the outstanding Snyder’s 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 Snyder’s-Lance, Inc. The results of Snyder’s operations are included in the Company’s 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 Lance’s common stock on the merger date, adjusted by the amount of the special dividend received by Lance shareholders, the consideration received by Snyder’s shareholders in the Merger had a value of approximately $676.2 million as detailed below.

(in thousands, except share data)

Conversion Calculation Fair Value

Snyder’s common stock outstanding as of the Merger date 301.6 Multiplied by the exchange ratio of 108.25 108.25 Multiplied by Lance’s special dividend-adjusted stock

price as of the merger date ($23.08-$3.75) $ 19.33 $ 631,182 Fair value of vested and unvested stock options

pertaining to pre-Merger service issued to replace existing grants at closing 45,029

Cash paid to settle fractional shares - Total fair value of consideration transferred $ 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:

(in thousands)

Purchase Price Allocation

Cash and cash equivalents $ 96,336 Accounts receivable, net 48,192 Inventories 40,463 Other current assets 15,144 Fixed assets, net 117,061 Goodwill, net 283,267 Other intangible assets, net 373,500 Other noncurrent assets 15,471

Total assets acquired 989,434

Accounts payable 16,100 Other current liabilities 34,360 Current portion of long-term debt 7,806 Long-term debt 116,661 Deferred income tax liability 125,616 Other long-term liabilities 8,672

Total liabilities assumed 309,215 Less: Non-controlling interests assumed 4,008 Net assets acquired $ 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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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 Snyder’s 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) 2010 2009 Net sales and other operating revenue $ 1,585,208 $ 1,561,155 Income before interest and income taxes 87,574 98,145 Net income attributable to Snyder’s-Lance, Inc. 49,409 57,409 Weighted average diluted shares 65,863 65,037 Diluted earnings per share $ 0.75 $ 0.88

2009 Acquisition On October 13, 2009, we completed the purchase of the Stella D’oro® brand and certain manufacturing equipment from Stella D’oro Biscuit Co., Inc. Stella D’oro® is a leading brand in the specialty cookie market. Stella D’oro® 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 D’oro® 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 D’oro 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 $ 26,743 $ 60,829 $ 180,145 $ 10,793 $ - $ 278,510 Comprehensive income: Net income 2,512 19 2,531 Net unrealized gains on derivative

instruments, net of $505 tax effect 700 700 Foreign currency translation adjustment 3,611 3,611

Total comprehensive income 6,842 Stock issued in connection with Merger 32,652,949 27,209 649,002 676,211 Non-controlling interests assumed in Merger 4,008 4,008 Cash dividends paid to stockholders (142,458) (142,458) Amortization of nonqualified stock options 3,665 3,665 Equity-based incentive reclassified to a liability plan (4,199) (4,199) Restricted stock units settled in common stock, net of repurchases 172,650 144 (3,551) (3,407) Stock options exercised, including $3,199 tax benefit 1,456,615 1,214 11,888 13,102

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Snyder’s-Lance (A) Required: Review the Snyder’s-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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Snyder’s-Lance (B) Required: Answer the following questions based on the Snyder’s-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 $1,065,107−$601,015

$601,015= 77.22%

Net revenue $1,635,036−$979,835$979,835

= 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).

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Snyder’s-Lance (C) Accounts Receivable Required: Answer the following questions based on the Snyder’s-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 Snyder’s-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: $402

$1,635,036= 0.025% 𝑜𝑓 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑠

Bad debt expense in 2010: $2,649$979,835

= 0.27% 𝑜𝑓 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑠

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

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Snyder’s-Lance (D) Inventory Required: Answer the following questions based on the following information from Snyder’s-Lance’s recent annual reports. Assume a 35% marginal tax rate. 1. It’s inventory note from the 2008 report is printed below:

If Snyder’s-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 $5,249 – $6,964 = –$1,715 (lower)

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. It’s inventory note from the 2009 report is printed below:

NOTE 4. INVENTORIES

(in thousands) 2008 2007Finished goods 23,227$ 21,910$ Raw materials 11,556 7,701Supplies, etc. 15,293 14,297Total inventories at FIFO cost 50,076 43,908Less: adjustment to reduce FIFO cost to LIFO cost (6,964) (5,249)Total inventories 43,112$ 38,659$


NOTE 4. INVENTORIES

(in thousands) 2009 2008Finished goods 33,060$ 23,227$ Raw materials 11,732 11,556Supplies, etc. 19,081 15,293Total inventories at FIFO cost 63,873 50,076Less: adjustments to reduce FIFO cost to LIFO cost (5,836) (6,964)Total inventories 58,037$ 43,112$


Note: this is in the normal direction.

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If Snyder’s-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 $6,964 – $5,836 = $1,128 ($1,128 higher)

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, Snyder’s-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:

The effect on the Consolidated Balance Sheet at December 26, 2009 was as follows:

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 Snyder’s-Lance 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%.

Note: this is NOT in the normal direction.

(in thousands, except share data) 2009 2008Cost of sales 1,128$ (1,715)$ Income before interest and income taxes (1,128) 1,715Income tax expense (362) 593Net Income (766) 1,122Basic earnings per share (0.02) 0.03Diluted earnings per share (0.02) 0.03

Increase/(Decrease)

Increase/(in thousands) (Decrease)Inventories 5,836$ Deferred income tax asset (2,013)Retained Earnings 3,823

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Snyder’s-Lance (E) Long-Lived Assets Required: Answer the following questions based on the Snyder’s-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

b. Cash flow from operating activities no effect

c. Cash flow from investing activities 4,351 increase

2. What entry did Snyder’s-Lance make to record impairment of fixed assets? Impairment expense (+E, -SE) 12,704

Fixed assets (-A) 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

From cash flow statement

From Note 9 Fixed Assets

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Snyder’s-Lance (F) Leases Required: Answer the following questions based on the Snyder’s-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. Snyder’s-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

PV Factor (n, i)

Present Value

2012 $15.9 1, 10 $14.42013 13.6 2, 10 11.22014 10.4 3, 10 7.82015 7.1 4, 10 4.82016 4.2 5, 10 2.6

Thereafter 8.4 7, 10 4.345.2

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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Snyder’s-Lance (G) Debt Required: Answer the following questions based on the Snyder’s-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 Snyder’s-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 Snyder’s-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 Snyder’s-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 firm’s Income Statement would show a gain of $19.98 (104.77-84.79.) On the firm’s Balance Sheet, liabilities would decrease by $104.77, cash would decrease by

84.79, and owner’s equity would increase by 19.98. The firm’s Statement of Stockholder’s Equity would show an increase in retained earnings

of $19.98. The firm’s 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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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

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Snyder’s-Lance (H) Equity Method Investments

Required: Answer the following questions based on Snyder’s-Lance's 2011 Annual Report. 1. What entry (entries) did Snyder’s-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) 100.0 Investments in Equity Cos. (A) 100.0

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Snyder’s-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 D’oro brand and certain manufacturing equipment from Stella D’oro 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 Snyder’s and Lance was accounted for as an acquisition of Snyder’s by Lance. Lance paid for Snyder’s 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 27,209 Additional Paid-in Capital 649,002

(S/E and Note 3)

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b) What amount of the net assets acquired will not be subject to amortization for book purposes?

Goodwill 283,267 Trade name 265,400 Routes 50,600 Total 599,267

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1st Exam Summer 1995

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46© Robert Libby

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 Suggested Points Assigned and Suggested Times Assigned Times Problem I Gannett 80 60 minutes Problem II Ford 20 15 minutes 100 75 minutes

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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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3) (a) Assume that all of Gannett’s 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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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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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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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 Gannett’s 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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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 U/S O/S NE on Dec. 31, 1993 b) Net income U/S O/S NE for 1993 c) Cash flow U/S O/S NE from operations for 1993 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 200 Cash 200 No subsequent adjustment was made.

a) Current liabilities U/S O/S NE on Dec. 31, 1993 b) Net income U/S O/S NE for 1993 c) Cash flow U/S O/S NE from operations for 1993 d) Retained earnings U/S O/S NE on Dec. 31, 1993

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57© Robert Libby

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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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.

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60© Robert Libby

NCC 510 Financial Accounting Midterm Solution Summer 1995

Problem 1 7 Net income 397,752 Note change1 R E Depr exp 164,420 in solution

2,158,583 beginning bal. A/R (17,770) divs. decl.* 190,089 397,752 net income Other rec. (112,028)

2,366,246 ending bal. Inventories (5,007) Prepaid expenses 10,461

2 PPE (net) A/P 3,622 beginning bal. 1,475,291 Accrued liabs 32,539 cash purch 132,122 164,420 depr. exp. Income tax pay (20,077) non-cash purch 49,533 14,257 disposals* Deferred income 5,429 ending bal. 1,478,269 Def. income taxes 111,875

Post-retire. Medical 3,161 3a Allowance for D.A. Cash flow from ops. 574,377

12,241 beginning bal.writeoffs 19,304 20,978 bad debt exp.* 8a Subscr. revenue (R) 100

13,915 ending bal. Deferred income (L)a) U/S b) O/S c) NE 100

3b A/ R d) O/Sbeginning bal. 443,534 8b Prepaid ins (A) 2,000

19,304 writeoffs Accrued liab (L)sales 3,641,621 3,602,873 collections* Cash (A) 200ending bal. 462,978 a) U/S b) NE c) O/S 1,800

d) NE4a Income before income taxes 668,452 Problem 2 less added rent expense -700 1 Lifo ending inventory Corrected amount 667,752 Difference 6,816.8

Fifo ending inventory 1,235.0 4b Total assets 3,823,798 8,051.8 less expired prepaid rent -700 2 BI + P - EI = CGS

3,823,098 CGS LIFO+change in Beg inv 74,315.0

5 Compensation expense 53,922 -change in End inv 1,246.0 Accrued compensation liab. 53,922 CGS FIFO (1,235.0)

74,326.0 6 525,000 From cash flow statement

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62© Robert Libby

NCC5000 ROBERT LIBBY

Other Cases Intel (A)

Denny’s

Cash Flow (B)

Intel (B)

Cash Flow (C)

Honda Motor

Kimberly-Clark (A)

Nabors Industries

Kimberly-Clark (B)

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64© Robert Libby

Intel (A) According to their annual report, Intel is the “world’s 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?

65© Robert Libby

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.

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

a) Total liabilities US OS NE

at year end b) Income before income US OS NE taxes for the year c) Total assets US OS NE d) Shareholders’ equity US OS NE at year end

b) No entry for accrued interest earned of $4 on debt securities in "Short-term investments" was made. No adjustment was made.



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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.



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INTEL CORPORATION CONSOLIDATED BALANCE SHEETS

December 25, 2010 and December 26, 2009 (In Millions—Except Par Value) 2010

2009

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

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Total liabilities and stockholders’ equity $ 63,186 $ 53,095

INTEL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME Three Years Ended December 25, 2010 (In Millions—Except Per Share Amounts)

2010

2009

2008

Net revenue $ 43,623 $ 35,127 $ 37,586 Cost of sales 15,132 15,566 16,742

Gross margin 28,491 19,561 20,844

Research and development 6,576 5,653 5,722 Marketing, general and administrative 6,309 7,931 5,452 Restructuring and asset impairment charges — 231 710 Amortization of acquisition-related intangibles 18 35 6

Operating expenses 12,903 13,850 11,890

Operating income 15,588 5,711 8,954 Gains (losses) on equity method investments, net 348 (147 ) (170 ) Gains (losses) on other equity investments, net 231 (23 ) (376 ) Interest and other, net 109 163 488

Income before taxes 16,045 5,704 7,686 Provision for taxes 4,581 1,335 2,394

Net income $ 11,464 $ 4,369 $ 5,292

Basic earnings per common share $ 2.06 $ 0.79 $ 0.93

Diluted earnings per common share $ 2.01 $ 0.77 $ 0.92

Weighted average common shares outstanding: Basic 5,555 5,557 5,663

Weighted average common shares outstanding: Diluted 5,696 5,645 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) 2010

2009

Land and buildings $ 17,421 $ 16,687 Machinery and equipment 30,421 28,339 Construction in progress 2,639 2,796

Total property, plant and equipment, gross 50,481 47,822 Less accumulated depreciation (32,582 ) (30,597 )

Total property, plant and equipment, net $ 17,899 $ 17,225

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Intel (A) According to their annual report, Intel is the “world’s 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?

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).

Solution

30,597 BegDisposals 2,413 4,398 Depr. Exp.

32,582 End

Acc. Depr. (XA)

Beg 47,822Purchases 5,207 2,548 Disposals

End 50,481

P&E (Gross)

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

End 2,867

Accounts Rec. (A)

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) 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) NE; NE; NE; NE

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

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 NE; US; US; US

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74© Robert Libby

Denny’s Case

This assignment includes a total of 8 pages. Denny’s 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?

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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) Denny’s paid $268,769 of principal on long-term debt and $25,277 of interest during 2010.

Denny’s 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.

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5) Assume that Denny’s 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?

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7) Assuming that Denny’s 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 U/S O/S NE on Dec. 29, 2010 b) Net income U/S O/S NE for 2010 c) Cash flow U/S O/S NE from operations for 2010 d) Shareholders’ equity U/S O/S NE on Dec. 29, 2010

b) Assume that “Accrued salaries” was properly recorded at the end of 2009. When Denny’s 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 U/S O/S NE on Dec. 29, 2010 b) Net income U/S O/S NE for 2010 c) Cash flow U/S O/S NE from operations for 2010 d) Shareholders’ equity U/S O/S NE on Dec. 29, 2010

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Denny’s Financial Statements

79© Robert Libby

Denny’s Corporation and Subsidiaries Consolidated Balance Sheets

December 29,

2010

December 30,

2009

Assets Current Assets:

(In thousands)

Prepaid and other current assets 10,162 9,549

Total Shareholders' Deficit (103,712 ) (127,498

Cash and cash equivalents $ 29,074 $ 26,525 Receivables, less allowance for doubtful accounts of $207 and $171, respectively 17,280 18,106 Inventories 4,037 4,165 Assets held for sale 1,933 —

Total Current Assets 62,486 58,345

Property, net of accumulated depreciation of $247,492 and $258,695, respectively 129,518 131,484

Other Assets:

Goodwill 31,308 32,440 Intangible assets, net 52,054 55,110 Other noncurrent assets 35,840 35,248

Total Assets $ 311,206 $ 312,627

Liabilities Current Liabilities:

Current maturities of notes and debentures $ 2,583 $ 900 Current maturities of capital lease obligations to finance company 4,109 3,725 Accounts payable 25,957 22,842 Other current liabilities 57,685 64,641

Total Current Liabilities 90,334 92,108

Long-Term Liabilities: Notes and debentures, less current maturities, net of discount of $3,455 and $0, respectively 234,143 254,357 Capital lease obligations to finance company, less current maturities 18,988 19,684 Liability for insurance claims, less current portion 18,810 21,687 Deferred income taxes 13,339 13,016 Other noncurrent liabilities and deferred credits 39,304 39,273

Total Long-Term Liabilities 324,584 348,017 Total Liabilities 414,918 440,125

Commitments and contingencies

Shareholders' Deficit

Common stock $0.01 par value; shares authorized - 135,000; issued and outstanding: 2010 – 100,073; 2009 – 96,613 1,001 966

Paid-in capital 548,490 542,576 Deficit (630,114) (652,827) Accumulated other comprehensive loss, net of tax (19,199) (18,213)

(99,822) (127,498) Treasury stock, at cost, 1,037 and 0 shares, respectively (3,890) —

) Total Liabilities and Shareholders' Deficit $ 311,206 $ 312,627

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Denny’s Corporation and Subsidiaries Consolidated Statements of Cash Flows

Fiscal Year Ended December 29, December 30, December 31 2010 2009 2008

Noncash investing activities:

Non-cash purchase of property $ 1,953 $ 908 $ 1,011

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82© Robert Libby

Denny’s Case Solution

This assignment includes a total of 8 pages. Denny’s 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

Solution

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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

4) Denny’s paid $268,769 of principal on long-term debt and $25,277 of interest during 2010.

Denny’s 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 (268,769) Issuance of long term debt 246,250 Net cash used in financing activities (22,519)

22,713 Depreciation and Amortization 29,637

2,840826128

(613)3,115

(6,956) Liab. for insurance claims less curr. (2,877) Deferred income taxes 323

49,136

Net income

Inventories

Cash flow from ops.

Share-based compensation Receivables

Prepaid and other current assets A/P Other current liabilities

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5) Assume that Denny’s 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) 100 Customer Advance (L) 100 a. Reported 414,918 plus: 100 Revised 415,018

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

2010.

b. Reported 24,094 less: 100 Revised 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.

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7) Assuming that Denny’s 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 U/S O/S NE on Dec. 29, 2010 b) Net income U/S O/S NE for 2010 c) Cash flow U/S O/S NE from operations for 2010 d) Shareholders’ equity U/S O/S NE on Dec. 29, 2010

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

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

b) Assume that “Accrued salaries” was properly recorded at the end of 2009. When Denny’s 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 U/S O/S NE on Dec. 29, 2010 b) Net income U/S O/S NE for 2010 c) Cash flow U/S O/S NE from operations for 2010 d) Shareholders’ equity U/S O/S NE on Dec. 29, 2010

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

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

86© Robert Libby

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 -(6) Cash proceeds from disposal of property, plant,

and equipment and investments +(7) Cash Flow From Investing Subtotal

Financing:

Dividends paid -(8) Cash proceeds from issuance of debt or stock +(9) Cash paid to retire debt or stock -(10)

Cash Flow From Financing Subtotal

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.

87© Robert Libby

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.

88© Robert Libby

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 -(6) Cash proceeds from disposal of property, plant,

and equipment and investments +(7) Cash Flow From Investing Subtotal

Financing:

Dividends paid -(8) Cash proceeds from issuance of debt or stock +(9) Cash paid to retire debt or stock -(10)

Cash Flow From Financing Subtotal

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

89© Robert Libby

b. Paid $6,000 for three months rent in advance for a warehouse building. b. Prepaid Rent -(5) 6,000 Cash -(11) 6,000

-OR- Rent Expense -(1) 6,000 Cash -(11) 6,000

c. Used but was not billed for $1,000 worth of electricity during the month of January. c. Utilities Expense -(1) 1,000 Utilities Payable +(4) 1,000

d. Purchased $12,000 worth of store fixtures for cash. d. Store Fixtures -(6) 12,000 Cash -(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 +(11) 4,000 Accounts Receivable -(5) 11,000 Sales + (1) 15,000

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

i Equipment 6,000 Common Stock 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) -(1) 1,500 Inventory +(4) 1,000 PPE +(2) 500

90© Robert Libby

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 -(5) 5,000 Cash -(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 -(1) 4,500 Salaries Payable + (4) 500 Cash -(11) 4,000

91© Robert Libby

92© Robert Libby

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) Income before income US OS NE taxes for the year

b) Cash flow from US OS NE operations for the year







93© Robert Libby

94© Robert Libby

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.




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

investments" was made. No adjustment was made.






Solution

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

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

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 US; NE

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

96© Robert Libby

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.

97© Robert Libby

98© Robert Libby

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) 4,000 A/R (CA) 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) 5,000 Allowance for Doubtful Accounts (XCA) 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) 600 Interest Revenue (OE-R) 600

Solution

99© Robert Libby

100© Robert Libby

Honda Motor Case Honda Motor Company is the world’s 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 (billions) 2009 2010 2011 Net sales and other operating revenue (notes 2&6) Y 10,011 Y 8,579 Y 8,937 Cost of sales (notes 1(u)&2) 7,420 6,415 6,497 Selling, general and administrative (note 1(u)) 1,839 1,337 1,383 Research and development 563 463 488 (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.

101© Robert Libby

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 U/S O/S NE operations for the year b) Income before income U/S O/S NE taxes for the year c) Current assets U/S O/S NE at year end d) Shareholders’ equity U/S O/S NE at year end

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 U/S O/S NE operations for the year b) Income before income U/S O/S NE taxes for the year c) Non-current assets U/S O/S NE at year end d) Shareholders’ equity U/S O/S NE at year end

102© Robert Libby

Honda Motor Case Honda Motor Company is the world’s 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 (billions) 2009 2010 2011 Net sales and other operating revenue (notes 2&6) Y 10,011 Y 8,579 Y 8,937 Cost of sales (notes 1(u)&2) 7,420 6,415 6,497 Selling, general and administrative (note 1(u)) 1,839 1,337 1,383 Research and development 563 463 488 (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.

InventoryBeginning 936Additions 6,461 6,497 Cost of good soldEnding 900

Finished Goods InventoryBeginning 560Transfers 6,468 6,497 Cost of good soldEnding 531

Solution

103© Robert Libby

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 operations for the year b) Income before income US OS NE taxes for the year c) Current assets US OS NE at year end d) Shareholders’ equity US OS NE at year end

NE; NE; US; NE

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 US OS NE operations for the year b) Income before income US OS NE taxes for the year c) Non-current assets US OS NE at year end d) Shareholders’ equity US OS NE at year end

DONE Nothing SHOULD BE: WIP Inventory (+A) Accrued Wages Payable (+L) Finished Goods Inventory (+A) WIP Inventory (-A) CORRECTION Finished Goods Inventory (+A) Accrued Wages Payable (+L)

What if sold: Cost of Goods Sold (+E,-SE) Accrued Wages Payable (+L) NE; O/S; NE; O/S

DONE Nothing SHOULD BE: WIP Inventory (+A) 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

104© Robert Libby

Kimberly-Clark (A) Stockholders’ Equity Required: Answer the following questions based on the partial Statement of Stockholders’ Equity and Cash Flow Statement from Kimberly-Clark’s 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?

105© Robert Libby

Year Ended December 31 2011(Millions of dollars)

Financing ActivitiesCash dividends paid (1,099)Net increase (decrease) in short-term debt 13Proceeds from issuance of long-term debt 839Repayments of long-term debt (107)Redemption of redeemable preferred securities of subsidiary (500)Cash paid on redeemable preferred securities of subsidiary (57)Proceeds from exercise of stock options 435Acquisitions of common stock for the treasury (1,246)Other (19)Cash Used for Financing (1,741)

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIESCONSOLIDATED CASH FLOW STATEMENT

106© Robert Libby

AccumulatedAdditional Other

Paid-in Retained Comprehensive NoncontrollingShares Amount Capital Shares Amount Earnings Income (Loss) Interests

Balance at December 31, 2010 478,597 598 425 71,741 (4,726) 11,086 (1,466) 285Net income - - - - - 1,591 - 39Other comprehensive incomeUnrealized translation - - - - - - (236) (13)Employee postretirement benefits, net of tax - - - - - - (133) (1)Other - - - - - - (31) 1Stock-based awards exercised or vested - - (47) (7,924) 490 - - - Income tax benefits on stock-based compensation - - 10 - - - - - Shares repurchased - - - 19,120 (1,247) - - - Shares retired (50,000) (62) - (50,000) 3,378 (3,316) - - Recognition of stock-based compensation - - 48 - - - - - Dividends declared - - - - - (1,107) - (29)Other - - 4 - - (10) - (2)Balance at December 31, 2011 428,597 536$ 440$ 32,937 (2,105)$ 8,244$ (1,866)$ 280$

(Dollars in millions, shares in thousands)

Common StockIssued

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

Treasury Stock

107© Robert Libby

108© Robert Libby

Kimberly-Clark (A) Stockholders’ Equity

Required: Answer the following questions based on the partial Statement of Stockholders’ Equity and Cash Flow Statement from Kimberly-Clark’s 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

SOLUTION

109© Robert Libby

110© Robert Libby

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?

111© Robert Libby

3. INVESTMENTS Certain information regarding our debt and equity securities is presented below:

Year Ended December 31,

2012

2011

2010

(In thousands)

Available-for-sale

Proceeds from sales and maturities

$ 24,010

$ 12,672

$ 13,062

Realized gains (losses), net

$ 13,405

$ 3,036

$ 1,694

NABORS INDUSTRIES LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

Year Ended December 31,

2012

2011

2010

(In thousands)

Net income (loss) attributable to Nabors

$ 164,034

$ 243,679

$ 94,695

Other comprehensive income (loss), before tax:

Translation adjustment attributable to Nabors

21,073

(20,257 ) 60,897

Unrealized gains/(losses) on marketable securities

98,138

5,356

278

Less: reclassification adjustment for (gains)/losses included in net income (loss)

(13,405 ) (3,036 ) (1,694 ) Unrealized gains/(losses) on marketable securities

84,733

2,320

(1,416 ) Pension liability amortization

(324 ) (5,391 ) (376 ) Unrealized gains/(losses) on cash flow hedges

702

763

(5,282 ) Other comprehensive income (loss), before tax

106,184

(22,565 ) 53,823

Income tax expense (benefit) related to items of other comprehensive income (loss)

(4,147 ) (1,777 ) 4,477

Other comprehensive income (loss), net of tax

110,331

(20,788 ) 49,346

Comprehensive income (loss) attributable to Nabors

274,365

222,891

144,041

Net income (loss) attributable to noncontrolling interest

621

1,045

85

Translation adjustment attributable to noncontrolling interest

311

(185 ) 723

Comprehensive income (loss) attributable to noncontrolling interest

932

860

808

Comprehensive income (loss)

$ 275,297

$ 223,751

$ 144,849

112© Robert Libby

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) 98,138 Net unrealized losses/gains on AFS (+OCI, +SE) 98,138

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

during 2012?

Cash (+A) 24,010 Investment in AFS (-A) 24,010 Net unrealized losses/gains on AFS (-OCI, -SE) 13,405 Gain on sale (+R, +SE) 13,405

SOLUTION

113© Robert Libby

114© Robert Libby

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?

115© Robert Libby

116© Robert Libby

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?

(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?

(From income statement and operating activities section of cash flow statement.)

Investments in Equity Cos. (A) 161.0Share of net income of equity companies (R) 161.0

Cash (A) (161 - 23) 138.0 Investment in Equity Cos. (A) 138.0

SOLUTION

117© Robert Libby

118© Robert Libby

Practice Quiz 1s

Summer 2005

Summer 2008

119© Robert Libby

120© Robert Libby

NCC 500 Quiz 1 Name ________________________ Summer 2005 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?

121© Robert Libby

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.

122© Robert Libby

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 $ 67,194 $ 72,127 Marketable securities 19,979 7,379 Accounts receivable 6,711 3,262 Inventories 63,247 50,006 Prepaid expenses and other current assets 13,872 8,633 Deferred taxes 4,832 4,358

Total current assets 175,835 145,765

Property and equipment, net 121,919 108,847 Marketable securities 52,315 15,640 Deferred income taxes and other assets 9,526 8,925

$ 359,595 $ 279,177

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities: Accounts payable $ 27,353 $ 19,186 Accrued compensation 7,756 5,197 Accrued expenses and other current liabilities 22,653 19,870

Total current liabilities 57,762 44,253 Other liabilities 11,703 10,539

Total liabilities 69,465 54,792

Commitments and contingencies (see Note 10) Shareholders’ equity: Preferred shares; $.0001 par value, 10,000,000 shares authorized, none issued — — Common shares; 5 4 Additional paid-in capital 83,282 67,160 Retained earnings 204,905 156,529 Accumulated other comprehensive income 1,938 692

Total shareholders’ equity 290,130 224,385

$ 359,595 $ 279,177

123© Robert Libby

URBAN OUTFITTERS, INC.

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

Fiscal Year Ended January 31, 2004 2003 2002 Net sales $ 548,361 $ 422,754 $ 348,958 Cost of sales, including certain buying, distribution and occupancy costs 334,888 271,963 235,311

Gross profit 213,473 150,791 113,647 Selling, general and administrative expenses 132,767 105,392 88,149

Income from operations 80,706 45,399 25,498 Interest income 1,524 1,497 318 Other expenses, net (926 ) (823 ) (594 )

Income before income taxes 81,304 46,073 25,222 Income tax expense 32,928 18,660 10,215

Net income $ 48,376 $ 27,413 $ 15,007

Net income per common share: Basic $ 1.23 $ 0.73 $ 0.44

Diluted $ 1.20 $ 0.71 $ 0.43

Weighted average common shares outstanding: Basic 39,267,463 37,776,456 34,537,230

Diluted 40,415,569 38,776,904 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 $ 1,880 $ 1,095 Accrued rent expense 2,840 2,867 Gift certificates and merchandise credits 5,712 3,523 Accrued income taxes 2,610 4,379 Other current liabilities 9,611 8,006

Total $ 22,653 $ 19,870

124© Robert Libby

NCC 500 Quiz 1 Name ____SOLUTION_________ Summer 2005 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?

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.

156,529 BegDiv. Declared 0 48,376 Net earnings

204,905 End

Retained Earnings (SE)

Beg 3,262Sales 548,361 544,912 Collections

End 6,711

Accounts Rec. (A)

Cash (+A) 16,123 Common Stock (+SE) (5 - 4) 1 Additional Paid-in Capital (+SE) (83,282 - 67,160) 16,122

2,867 BegRent paid 53,809 53,782 Rent expense

2,840 End

Accrued rent expense (L)

125© Robert Libby

126© Robert Libby

NCC 500 Quiz 1 Name ________________________ Summer 2008 Campbell Soup Company is a major player in soups and sauces (Campbell’s 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.

127© Robert Libby

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 U/S O/S NE on August 3, 1997 b) Net Income U/S O/S NE for 1997 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 __________________________

128© Robert Libby

CAMPBELL SOUP CO

Consolidated Balance Sheet

In Millions For Period Ended 8/03/97 7/28/96 CURRENT ASSETS -- -- Cash and cash equivalents 26 34 Accounts receivable (Note 9) 633 618 Inventories (Note 10) 762 739 Other current assets (Note 11) 162 227 Total current assets $1,583 $1,618 Plant assets, net of depreciation (Note 12) 2,560 2,681 Intangible assets, net of amortization (Note 13) 1,793 1,808 Other assets (Note 14) 523 525 Total assets $6,459 $6,632 CURRENT LIABILITIES -- -- Notes payable (Note 15) 1,506 865 Payable to suppliers and others 608 568 Accrued liabilities 642 593 Dividend payable 88 86 Accrued income taxes 137 117 Total current liabilities $2,981 $2,229 LONG-TERM DEBT (NOTE 15) 1,153 744 NONPENSION POSTRETIREMENT BENEFITS (NOTE 7) 442 452 OTHER LIABILITIES (NOTE 16) 463 465 Total liabilities $5,039 $3,890 SHAREOWNERS' EQUITY (NOTE 18) -- -- Preferred stock; authorized 40 shares; none issued -- -- Capital stock, $.0375 par value; authorized 560 shares; issued 542 shares 20 20 Capital surplus 338 228 Earnings retained in the business 3,571 3,211 Capital stock in treasury, 84 shares in 1997 and 48 shares in 1996, at cost (2,459) (779) Cumulative translation adjustments (50) 62 Total shareowners' equity $1,420 $2,742 Total liabilities and shareowners' equity 6,459 6,632 The accompanying Summary of Significant Accounting Policies and Notes on pages 39 to 46 are an integral part of the financial statements. --

129© Robert Libby

CAMPBELL SOUP CO

Consolidated Statements of Income

In Millions Except Per Share Amounts For Period Ended 8/03/97 8/03/96 8/03/95 53 weeks 52 weeks 52 weeks -- -- -- NET SALES 7,964 7,678 7,250 Costs and expenses -- -- -- Cost of products sold 4,305 4,363 4,255 Marketing and selling expenses 1,636 1,499 1,371 Administrative expenses 324 343 326 Research and development expenses 77 84 88 Other expense (Note 4) 140 72 63 Restructuring charge (Note 3) 216 -- -- Total costs and expenses $6,698 $6,361 $6,103 EARNINGS BEFORE INTEREST AND TAXES 1,266 1,317 1,147 Interest expense (Note 5) 167 126 115 Interest income 8 6 10 Earnings before taxes $1,107 $1,197 $1,042 Taxes on earnings (Note 8) 394 395 344 NET EARNINGS $713 $802 $698 EARNINGS PER SHARE (NOTE 18) 1.51 1.61 1.40 WEIGHTED AVERAGE SHARES OUTSTANDING 472 498 498

130© Robert Libby

NCC 500 Quiz 1 Name ____SOLUTION________ Summer 2008 Campbell Soup Company is a major player in soups and sauces (Campbell’s 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?

R E 3,211 beginning bal. divs. decl. 353 713 net income 3,571 ending bal.

2) 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

465 beginning bal. Revenues 974 972 Adv. payments

463 ending bal.

Other liabilities or def. rev. (L) 974 Revenues (R) 974

131© Robert Libby

132© Robert Libby


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

133© Robert Libby

134© Robert Libby


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.

Points Assigned and Suggested Times

Problem I American Eagle Outfitters

Problem ll Gateway Computers

Review

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

Points Assigned

104

16

Suggested Times

104 minutes

16 minutes

15 minutes

135 minutes

135© Robert Libby

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?

\ I 1_,

136© Robert Libby

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)

137© Robert Libby

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)

\ 138© Robert Libby

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)

139© Robert Libby

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: $

140© Robert Libby

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)

141© Robert Libby

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)

(a) Current liabilities U/S 0 /S NE at year-end

(b) Net income for the U/S 0/S NE year

(c) Cash flow from Operations for the U/S 0/S NE year

(d) Total assets U/S 0 /S NE at year-end

(b) AEOS incorrectly recorded a $100 payment on account to one of its suppliers in the following manner. ·

Prepaid expenses I 0 Cash 10

No correcting entry was made. (8 points)

(a) Cunent liabilities U/S 0 /S NE at year-end

(b) Cash flow from operations for the U/S 0/S NE year

(c) Operating income for U/S 0/S NE

(d)

the year

Total assets at year-end

lJ/S 0/S NE

142© Robert Libby

(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 U/S O/S NE at year-end

(b) Operating income for U/S O/S NE the year

(c) Cash flow from operations for the U/S O/S NE

year

(d) Retained earnings U/S O/S NE at year-end

143© Robert Libby

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)

(a) Current assets U/S 0/S NE at year-end

(b) Net income for the U/S 0/S NE year

(c) Cash flow from operations for the U/S 0/S NE year

(d) Stockholders' equity U/S 0/S NE at year-end

144© Robert Libby

(

i

Financial Statements and Notes

First Examination NCC 500 Financial Accounting

Fall2001

There are 8 pages to this booklet.

145© Robert Libby

146© Robert Libby

2

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 $ 1,093,477 $ 832,104 $ 587,600 Cost of sales 657,252 475,596 353,089 ----------- ---------- ----------- Gross profit 436,225 356,508 234,511 Selling, general and administrative 266,474 194,795 138,847 expenses Depreciation and amortization expense 23,200 12,199 8,611 ----------- ---------- ----------- Operating income 146,551 149,514 87,053 Interest expense 623 - - Other income (expense), net 5,626 (160) 2,436 ----------- ---------- ----------- Income before income taxes 151,554 149,354 89,489 Provision for income taxes 57,796 58,694 35,371 ----------- ---------- ----------- Net income $ 93,758 $ 90,660 $ 54,118 ----------- ---------- ----------- Basic earnings per common share $ 1.35 $ 1.30 $ 0.80 ----------- ---------- ----------- Diluted earnings per common share $ 1.30 $ 1.24 $ 0.75 ----------- ---------- ----------- Weighted average common shares outstanding -- basic 69,652 69,555 67,921 ----------- ---------- ----------- Weighted average common shares outstanding -- diluted 72,132 73,113 71,928 ----------- ---------- ----------- See Notes to Consolidated Financial Statements

AMERICAN EAGLE OUTFITTERS INC


147© Robert Libby

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


02103/01 01/29/00 01130/99

93,758 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)

$( 1 09,449)$( 130, 947) $(38,273)

$15,302 $2,676 $2,033 421

$56,865 $4,641 $23,581 76,581 71,940 48,359

133,446 76,581 71 ,940

148© Robert Libby


AMERICAN EAGLE OUTFITTERS INC Consolidated Balance Sheet

In Thousands For Period Ended 02103101 01129/00 01/30199 Current assets:

Cash and cash equivalents 133,446 76,581 71,940 Short-term investments 27,927 91,911 13,360 Merchandise inventory 84,064 60,375 49,688 Accounts and note receivable, including related 29,466 13,471 8,560 party

Prepaid expenses and other 18,864 6,640 2,757 Deferred income taxes 24.894 13,584 8,199

Total current assets $318,661 $262,562 $154,504 Property and equipment, at cost, net of

accumulated depreciation and amortization 183,373 84,926 53,370 Goodwill, net of accumulated amortization 23,780 Deferred income taxes 10,129 4,029 2,200 Other assets, net of accumulated amortization 7,103 3,111 874

Total assets $543,046 $354,628 $210,948 Current liabilities:

Accounts payable 42,038 30,700 18,551 Current portion of note payable 4,300 Accrued compensation and payroll taxes 25,549 21,307 17,739 Accrued rent 22,577 17,755 13,042 Accrued income and other taxes 29,719 7,927 4,773 Unredeemed stored value cards and gift

certificates 13,085 7,703 3,372 Other liabilities and accrued expenses 11,879 3,033 2,274

Total current Uabilities $149,147 $88,425 $59z?51 Non-current liabilities: Commitments and contingencies

Note payable 24,889 Other non-current liabilities 1,315 1,702

Total non-current liabilities $26,204 $1,702 Contributed capital 93,403 83,967 61,323 Retained earnings 2741292 180,534 89.874

Stockholders' equity 367.695 264,501 151 ,197 Total liabilities and stockholders' equity $543.046 $3541628 $210,948

149© Robert Libby

2. Summary.of Significant Accounting Policies

Revenue Recognition


Revenue is recorded upon purchase of merchandise by customers. In connection with stored value cards and gift 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 expense is summarized as follows:

(In thousands)

February 3, 2001

For the Years Ended

January 29,

2000

January 30, 1999

Advertising expense

$ 36,262 $ 27,243 $ 16,431

Supplemental Disclosures of Cash Flow Information

(In thousands)

Cash paid during the periods for :

Income taxes

Interest

$

$

February 3, 2001

37, 362

607

For the Years Ended

$

January 29, 2000

45,741

Noncash Investing and Financing Activities: OMITTED

$

January 30, 1999

41,706

150© Robert Libby


6. Property and Equipment

Property and equipment consists of the following:

(In thousands) February January January 3, 29, 30, 2001 2000 1999

--------- -------- ----------Land $ 1,855 $ $ Buildings 10,266 Leasehold improvements 134,930 70,4 03 46,996 Fixtures and equipment 93,186 52,336 36, 30 7

--------- -------- ----------240,237 122 ,739 83,303

Less: Accumulated depreciation and (56, 864) (37,813) (29, 933) amortization

--------- --------Net property and equipment $ 183,373 $ 84,926

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

Depreciation expense is summarized as follows:

( In thousands)

Depreciation expense

For the Years Ended February 3,

January 29, 2001 2000

$ 21,472 $ 11, 782

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

January 30,

1999

$ 8,215

151© Robert Libby

Gateway

GATEWAY INC Consolidated Statements of Income

In Thousands Except Per Share Amounts For Period Ended 12131/2000 12131/1999 12131/1998

Net sales 9,600,600 8,964,900 7,703,279 Cost of goods sold 7,541,606 7,127,678 6,290,227 Gross profit 2,058,994 1,837,222 1,413,052 Selling, general and Administrative expenses 1,547,701 1,241,552 918,825

Operating income is11 ,29~ $59~ .670 $494,227 Other income (loss}, net (102,693) 67.si59 47,021

Income before Income taxes $408,600 $663,479 1541,248 Provision for income taxes 1~5,26~ 23~.535 194,849

Net income before cumulative effect of change in accounting principle $253,334 $427,944 $346,399 Cumulative effect of change in accounting principle, net of tax (11,851l Net income $241,483 $42,,944 $346,399 Net income per share before cumulative effect of change in accounting principle: Basic 0.79 1.36 1.11 Diluted 0.76 1.32 1.09 Net income per share after cumulative effect of change in accounting principle: Basic 0.75 1.36 1.11 Diluted 0.73 1.32 1.09 Weighted average shares outstanding: Basic 321,742 313,974 311,084 Diluted 331,320 324,421 317,857

152© Robert Libby

I Gateway

GATEWAY INC

11. SELECTED BALANCE SHEET INFORMATION:

(in thousands) 2000 1999

Accounts receivable, net: Accounts receivable 557,479 662,811 Allowance for uncollectible accounts (12,724} (16,472)

544,755 646,339

Inventory: Components and subassemblies 252,085 183,321 Finished goods 62,984 8,549

315,069 191,870

Property, plant and equipment, net: Land 18,766 18,758 Leasehold improvements 169,715 107,317 Buildings 202,100 202,102 Construction in progress 159,386 158,305 Internal use software 250,775 172,501 Office and production equipment 348,742 319,585 Furniture and fixtures 134,009 99,959 Vehicles 25,203 13,477

1,308,696 1,092,004 Accumulated depreciation and amortization (411,282) (346,344)

897,414 745,660

Intangibles: Intangibles 226,702 91,220 Accumulated amortization (60,788) (38,918}

165,914 52,302

Other assets: Financing receivables, net of allowance for losses 701,659 295,812 Long·term investments 339,143 212,865 Deferred Income taxes 290,596 211,921 Other 283,924 261 ,548

1,615,322 982,146 Less other current assets (793,166) (522,225)

153© Robert Libby

··. 154© Robert Libby

Fall2001 First Examination Solution

I!' .; '"';{ American Eagi8 Outflli"ars (1) (6poims) Retained earnings (9} Sales revenue (R) 3,000

180,534 Beg -2 Unredeemed stored ... (l) 3,000 Div. Declared . 93,758 Net income -2 Compensaton expense (E) 2,800

274,292 End -2 Accrued compensation (l) 2,800

(2) Sold more than they redeemed -4 (a} Operating income (as reported) 146,551 -2 Because the ending balance in the liability (13,085} is larger than the -4 Reduce sales revenue (3,000) -2

beginning balance (7,703) Increase compensation expense (2,800) -2 (8poinrs) Operating income (corrected) 140.751

(6 points) (3} Interest paid (cash flow note} 607 (b) Working capital (as reported) 169,514 -2

Interest expense (income statement) 623 Increase unredeemed stored .. (3.000) -2 Paid Ius than recognized j16J Increase accrued compensation (2,800} -2 (-4 sign, -4 amount: 8 points) Working capital (corrected} 163,714

(6 points} (4} Purchase of Oylex for stock should be omitted (in note only) -5

Dividends received on short-term investments should be omitted -5 (10a) (a) U/S (b) 0/S (c) NE (d) NE (-2 each) (they are Operating} (10 poitlls} (-5 extras) Correcting Entry: (8 poillls)

Rent expense (E) 30 (5) (2 poinrs) Accum. Depreciation Accrued rent (l) 30

37,813 Beg -2 AID on disp. 2,421 21 .472 Depreciation Exp. -2 (10b) (a)O/S (b) 0/S (c) NE (d) 0/S (-2 each)

56,864 End -2 Correcting Entry: (8 points) Accounts payable (L) 100

(6) (8 points) Notes Pay CL &NCL) Prepaid expenses (A) 10 0 Beg -2 Cash (A} 90

Repayment - 29,189 Borrowing -4

29,1 89 End -2 (10c) (a} NE (b) 0/S (c) NE (d) 0/S (-2 each) or4300+24889 (-4 if missing current or non-current) Correcting Entry: (8points)

-4 -4 Amoritzation expense (E) 300 (7) Rent expense (SG&A) (E) (-2) 22.577 -4 Intangibles, net (A) 300

Accrued rent (L) (-2) 2.2,577 (8 points) Gat:iwa'Y: C<lml)(lter ~ ':...~· -; ~ 1~

(1) (8 points) Allowance for DA (XA)

(8) (14 points~ 2000 1999 16,472 Beginning -I

Net income 93,758 Writeoffs 100,754 97,006 Expense*

Depr & Amort 23,200 12,724 End -1 StockComp. 6,952 *( (.01 X 9,600,600) + 1,000 = 97,006)

Merchandise inventory 84,064 60,375 (23,689) -3 -3 Accounts and note receivable 29,466 13,471 (15,995) Prepaid expenses and olher 18,864 6,640 (12,224) (2) (a) U/S (b) UIS (c) NE {d) U/S (·2 each) Deferrecl income taxes 24,894 13,584 (11,310) Correcting Entry: (8points) Deferred income taxes 10,129 4,029 (6,100) Inventory (A) Accounts payable 42,038 30,700 11,338 S,G&A expense (E) Accrued compensation and p. 25,549 21,307 4,242 Accrued rent 22,577 17,755 4,822 Accrued income and olher Ia> 29,719 7,927 21,792 Unrecleemed stored value cat 13,085 7,703 5,382 Other liabiliUes and accrued e 11,879 3,033 8,846 Net Cash provided by operating activities 111,014

(-I each t:xtra or omirted or wrong sign to -I 4)

155© Robert Libby

156© Robert Libby



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,


examination.

Signature

Points Suggested Points Assigned and Suggested Times Assigned Times Problem I Fountain Powerboats 120 120 minutes Review 45 minutes 120 165 minutes

157© Robert Libby

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?

158© Robert Libby

3) a. Which was larger during 2003 (circle one)? Fountain Powerboat’s: 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?

159© Robert Libby

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?

160© Robert Libby

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.)

161© Robert Libby

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

+___________ -_____________ NE

162© Robert Libby

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?

163© Robert Libby

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 U/S O/S NE on June 30, 2003 b) Net Income U/S O/S NE for 2003 c) Cash flow U/S O/S NE from operations for 2003 d) Stockholders’ U/S O/S NE equity on June 30, 2003

164© Robert Libby

(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 U/S O/S NE on June 30, 2003 b) Net Income U/S O/S NE for 2003 c) Cash flow U/S O/S NE from operations for 2003 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 U/S O/S NE on June 30, 2003 b) Cash flow U/S O/S NE from investing activities for 2003 c) Cash flow U/S O/S NE from operations for 2003 d) Stockholders’ U/S O/S NE equity on June 30, 2003

165© Robert Libby

(d) They failed to record $1,000 in bad debt expense during 2003.

a) Total assets U/S O/S NE on June 30, 2003 b) Cash flow U/S O/S NE from financing activities for 2003 c) Cash flow U/S O/S NE from operations for 2003 d) Stockholders’ U/S O/S NE equity on June 30, 2003

166© Robert Libby

Chap. 6



Summer 2004 There are 6 pages to this booklet.

167© Robert Libby

FOUNTAIN POWERBOAT INDUSTRIES INC


For Period Ended Jun 30, 2003 6/30/2003 REVENUES: -- NET SALES 52,557,084 COST OF SALES (44,037,957) Gross Profit $8,519,127 EXPENSES: -- Selling expense 4,609,253 General and administrative 1,820,764 Impairment of long-lived assets --Total expenses $6,430,017OPERATING INCOME (LOSS) 2,089,110 NON-OPERATING INCOME (EXPENSE): -- Other income (expense) 5,567 Interest expense (1,037,002) Gain (loss) on disposal of assets (8,378)

$(1,039,813)INCOME (LOSS) BEFORE INCOME TAXES 1,049,297 DEFERRED TAX EXPENSE (BENEFIT) 569,944NET INCOME (LOSS) $479,353

168© Robert Libby

Supplemental Disclosures of Cash Flow Information: Cash paid during the period for year ended June 30: 2003 2002 2001 Interest $ 1,035,553 $ 798,700 $ 709,585 Income taxes $ - $ 45,424 $ 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

FOUNTAIN POWERBOAT INDUSTRIES INCConsolidated Statements of Cash Flows

For Period Ended Jun 30, 2003 06/30/03CASH FLOWS FROM OPERATING ACTIVITIES: -- Net income (loss) 479,353

CASH FLOWS FROM INVESTING ACTIVITIES: -- Proceeds from sale of equipment 153,810 Purchase of property, plant and equipment (1,325,262) (Increase) decrease in other assets (390,199)Net Cash (Used) by Investing Activities $(1,561,651)CASH FLOWS FROM FINANCING ACTIVITIES: -- Proceeds from long-term debt omitted Proceeds from issuance of common stock omitted Payments of long-term debt (1,265,529)Net Cash Provided (Used) by Financing Activities omittedNet increase (decrease) in cash & cash equivalents 895,295Beginning cash & cash equivalents balance 329,640Ending cash & cash equivalents balance 1,224,935

169© Robert Libby

FOUNTAIN POWERBOAT INDUSTRIES INCConsolidated Balance Sheet

For Period Ended 06/30/03 06/30/02 CURRENT ASSETS: -- -- Cash & cash equivalents 1,224,935 329,640

Accounts receivable, less allowance for doubtful accounts of $27,841 for 2003 and 2002 2,015,371 3,003,992

Inventories 3,460,286 3,090,451 Prepaid expenses 644,581 328,783 Current deferred tax assets 807,315 1,132,181Total Current Assets $8,152,488 $7,885,047 PROPERTY, PLANT AND EQUIPMENT, net 16,165,684 17,114,661 INVESTMENTS 1,378,626 1,179,223 OTHER ASSETS 736,288 355,765

$26,433,086 $26,534,696 CURRENT LIABILITIES: -- -- Current maturities of long-term debt 1,080,562 934,856 Accounts payable 7,667,805 7,024,628 Accrued expenses 1,317,398 1,193,672 Dealer incentives 190,010 921,707 Customer deposits 290,658 631,090 Allowance for boat repurchases 200,000 200,000 Warranty reserve 900,000 870,000Total Current Liabilities $11,646,433 $11,775,953 LONG-TERM DEBT, less current maturities 9,010,527 9,827,161 DEFERRED TAX LIABILITY 1,207,958 962,880 COMMITMENTS AND CONTINGENCIES (See Note 9) -- -- Total Liabilities 21,864,918 22,565,994 STOCKHOLDERS' EQUITY -- --

Common stock, $.01 par value, 200,000,000 shares authorized, 4,757,608 shares issued and outstanding 47,576 47,326

Additional paid-in capital 10,436,551 10,343,935 Retained earnings (deficit) (5,801,326) (6,280,679)

$4,682,801 $4,110,582 Less: Treasury Stock, at cost, 15,000 shares (110,748) (110,748) Deferred compensation for stock options issued (3,885) (31,132)

$4,568,168 $3,968,70226,433,086 26,534,696

170© Robert Libby

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 is its natural business year-end. 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.

171© Robert Libby

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 Balance Charge to Payments/ Balance Account Description June 30, Expense Deductions June 30, 2002 Adjustments 2003 ___________________________ _______________________________________ Allowance for Doubtful accounts 27,841 - - 27,841 Inventory Valuation Reserve 307,393 - 257,393 50,000 Deferred Tax Valuation Allowance 2,599,979 130,287 - 2,730,266 Warranty Expense 870,000 1,182,573 1,152,573 900,000 Allowance for Boat Repurchases 200,000 - - 200,000

172© Robert Libby

(1) (8 points) (9) (8 points) (a) prepayments -4Beg 6,280,679.0 -2 (b) Prepaid expenses increased during 2003 -4

Div. Declared 0.0 479,353 Net income -4End 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)

(2) (8 points)-2 Beg 17,114,661 2,112,051 Depr. Exp. -2 (11) Cash (A) 92,866-2 Purchases 1,325,262 162,188 Disposals Common Stock (SE) 250-2 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)

(3) Purchases on account -4 (12a) (a) U/S (b) U/S (c) U/S (d) U/S (-2 each)Because the ending balance in the liability is larger than the -4 Correcting Entry: (8 points) beginning balance Plant and Equipment (A) 100(8 points) G&A expense (E) 100

Depreciation exp. (E) 20(4) Various expenses (E) (-2) 1,317,398 (-3 for number) Accumulated depr. (XA) 20

Accrued expenses (L) (-2) 1,317,398 (7 points) (the ending balance in "Accrued expenses") (12b) (a)O/S (b) O/S (c) NE (d) O/S (-2 each)

Correcting Entry: (8 points)(5) (8 points) Interest revenue (R) 10

631,090 Beg -2 Accrued interest rev (A) 10 Revenues 827,432 487,000 Deposits -4

290,658 End -2 (12c) (a) NE (b) NE (c) NE (d) O/S (-2 each) Correcting Entry: (8 points)

(6) (8 points) Depreciation exp. (E) 9,00010,762,017 Beg -3* Accum. Depr (XA) 9,000

-2 Payments 1,265,529 594,601 Proceeds10,091,089 End -3* (12d) (a) O/S (b) NE (c) NE (d) O/S (-2 each)

(* -1.5 for each missing element of beginning and ending) Correcting Entry: (8 points)Bad debt expense (E) 1,000

(7) (11 points) 2003 2002 Allow for DA (XA) 1,000Net income 479,353Depreciation 2,112,051Stock compensation 148,312Accounts receivable, net 2,015,371 3,003,992 988,621 (-1 math)Inventories 3,460,286 3,090,451 (369,835)Prepaid expenses 644,581 328,783 (315,798)Current deferred tax assets 807,315 1,132,181 324,866Accounts payable 7,667,805 7,024,628 643,177Accrued expenses 1,317,398 1,193,672 123,726Dealer incentives 190,010 921,707 (731,697)Customer deposits 290,658 631,090 (340,432)Allowance for boat repurchase 200,000 200,000 0Warranty reserve 900,000 870,000 30,000Deferred tax liability 1,207,958 962,880 245,078Cash 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) 50,000Income before income taxes -50,000 -3Cash flow from operating activities NE NE -3Cash flow from investing activites NE NE -3

(9 points)

LT Debt incl. cur. Mat. (L)

Fountain PowerboatsRetained earnings

P&E (Net)

Customer deposits

173© Robert Libby

174© Robert Libby




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,


examination.

Signature

Points Suggested Points Assigned and Suggested Times Assigned Times Problem I Microsoft Corp 120 120 minutes Review 45 minutes 120 165 minutes

175© Robert Libby

Problem I –Microsoft Corp Answer the following questions using the attached financial statements and selected footnotes from Microsoft’s 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.

176© Robert Libby

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

4. The following information includes all of Microsoft’s 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

(1,063 ) Acquisition of Navision, Inc. for Microsoft stock

(803 ) Additions to property and equipment

(891 ) Dividends paid on common stock

(857 ) Dividends received on investments

1,266 Purchases of investments

(89,621 ) Maturities of investments

9,205

Sales of investments 75,157

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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?

178© Robert Libby

7. Prepare the operating section of Microsoft’s 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:

179© Robert Libby

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 million.)

180© Robert Libby

Chap. 6

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


+___________ -_____________ 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:

Income before income taxes

+___________ -_____________ NE


+___________ -_____________ NE

Total assets

+___________ -_____________ NE

181© Robert Libby

Chap. 7

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.

182© Robert Libby

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:

Inventory 50 Cash 50 The related goods were still in inventory. No subsequent adjusting entry was made.

(a) Total assets U/S O/S NE at year-end

(b) Net income for U/S O/S NE the year


year


(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.


(b) Total liabilities At year-end U/S O/S NE

(c) Net income for U/S O/S NE the year

(d) Stockholders’ equity U/S O/S NE at year-end

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Chap. 7

Chap. 7

(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 U/S O/S NE at year-end

(b) Net income for U/S O/S NE the year


year


184© Robert Libby



Summer 2009 There are 5 pages to this booklet including the cover.

185© Robert Libby

INCOME STATEMENTS (In millions, except earnings per share)

Year Ended June 30 2001

2002 2003

Revenue

$ 25,296 $ 28,365

$ 32,187

Operating expenses:

Cost of revenue 3,455

5,191 5,686

Research and development

4,379 4,307

4,659

Sales and marketing 4,885

5,407 6,521

General and administrative

857 1,550

2,104

Total operating expenses 13,576

16,455 18,970

Operating income 11,720

11,910 13,217

Losses on equity investees and other

(159 ) (92 )

(68 ) Investment income/(loss)

(36 ) (305 )

1,577

Income before income taxes 11,525

11,513 14,726

Provision for income taxes

3,804 3,684

4,733

Income before accounting change 7,721

7,829 9,993

Cumulative effect of accounting change (net of income taxes of $185)

(375 ) –

–

Net income $ 7,346

$ 7,829 $ 9,993

Basic earnings per share(1):

Before accounting change

$ 0.72 $ 0.72

$ 0.93

Cumulative effect of accounting change (0.03 )

– –

$ 0.69

$ 0.72 $ 0.93

Diluted earnings per share(1):

Before accounting change

$ 0.69 $ 0.70

$ 0.92

Cumulative effect of accounting change (0.03 )

– –

$ 0.66

$ 0.70 $ 0.92

Weighted average shares outstanding(1):

Basic

10,683 10,811

10,723

Diluted 11,148

11,106 10,882


186© Robert Libby

BALANCE SHEETS

(In millions)

June 30 2002

2003 Assets

Current assets:

Cash and equivalents

$ 3,016 $ 6,438

Short-term investments 35,636

42,610

Total cash and short-term investments 38,652

49,048 Accounts receivable, net

5,129 5,196

Inventories 673

640 Deferred income taxes

2,112 2,506

Other 2,010

1,583

Total current assets 48,576

58,973 Property and equipment, net

2,268 2,223

Equity and other investments 14,191

13,692 Goodwill

1,426 3,128

Intangible assets, net 243

384 Other long-term assets

942 1,171

Total assets $ 67,646

$ 79,571 Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$ 1,208 $ 1,573

Accrued compensation 1,145

1,416 Income taxes

2,022 2,044

Short-term unearned revenue 5,920

7,225 Other

2,449 1,716

Total current liabilities 12,744

13,974 Long-term unearned revenue

1,823 1,790

Deferred income taxes 398

1,731 Other long-term liabilities

501 1,056

Commitments and contingencies

Stockholders’ equity:

Common stock and paid-in capital – shares authorized 24,000; Shares issued and outstanding 10,718 and 10,771

31,647 35,344

Retained earnings 20,533

25,676

Total stockholders’ equity 52,180

61,020

Total liabilities and stockholders’ equity $ 67,646

$ 79,571


187© Robert Libby

CASH FLOWS STATEMENTS (In millions)

Year Ended June 30 2001

2002 2003

Operations

Net income

$ 7,346 $ 7,829

$ 9,993

Net cash from operations

Financing

Common stock issued

1,620 1,497

2,120

Common stock repurchased (6,074 )

(6,069 ) (6,486 )

Omitted

Net cash used for financing (5,586 )

(4,572 ) (5,223 )

Investing

Omitted

Net cash used for investing

Net change in cash and equivalents (898 )

(908 ) 3,361

Effect of exchange rates on cash and equivalents

(26 ) 2

61

Cash and equivalents, beginning of year 4,846

3,922 3,016

Cash and equivalents, end of year $ 3,922

$ 3,016 $ 6,438

188© Robert Libby

Note 1—Accounting 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

Balance at beginning of period

Charged to costs and expenses

Write-offs and other

Balance at end of period

2001 $ 186 $ 157 $ 169 $ 174 2002 174 192 157 209 2003 209 omitted omitted 242 Note 7—Property and Equipment (In millions)

June 30 2002

2003

Land

$ 197 $ 248

Buildings

1,701 1,854

Computer equipment and software

2,621 2,464

Other

1,372 1,512

Property and equipment – at cost 5,891

6,078

Accumulated depreciation (3,623 )

(3,855 )

Property and equipment – net $ 2,268

$ 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.

189© Robert Libby

190© Robert Libby

Summer 2009First Examination Solution

(1) (8 points) (9) (8 points) [(.005 x 32187) -10 = 150.935 -420,533 Beg -2

Div. Declared 4,850 9,993 Net income -3 209 Beginning -225,676 End -2 Writeoffs 118 151 Expense

242 Ending -2(2) (8 points) Current Noncurrent Total

Ending 7,225 1,790 9,015 -3 (10a) Income before income taxes -50 -2

Beginning 5,920 1,823 7,743 -3 Cash flow from operating activities NE -2

Increase 1,272 Cash flow from financing activities NE -2

Advance payments were 1,272 higher (-2 for direction) Compensation expense (E) 50(-3 for leaving out current or non-current or reversing years) CS and PIC (SE) 50

(6 points)(3) (8 points) (10b) Income before income taxes -30 -2

3,623 Beg -2 Cash flow from operating activities NE -2Disposals 697 929 Depr. Exp. -3 Total assets -30 -2

3,855 End -2 CGS (E) 30 Inventory (A) 30

(4) (-2 points each missing or extra to -8) (6 points)Acquisitions of companies, net of cash acquired (1,063)Additions to property and equipment (891) (11) (a) Net Income as reported 9,993 -3Purchases of investments (89,621) Reduce revenue (10) -3Maturities of investments 9,205 Net Income corrected 9,983Sales of investments 75,157 (b) Working capital as reported 44,999 -2Cash flow from investing (7,213) minus: increase st unearned rev (10) -2

plus: increase Inventory 6 -2(5) Cash (A) (from cash flow statement) (-2) 2,120 -3 Working capital corrected 44,995

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

(7 points) Revenue (R) 10 Short-term unearned revenue (CL) 10

(6) Accrued Compensation (L) (-2) 1,145 -3 Inventory (CA) 6 Cash (A) (-2) 1,145 Accumulated Depreciation (XA) 6 (7 points) (the beginning balance in "Accrued Compensation") (12 points)

(7) (12 points) 2003 2002 (12a) (a) O/S (b) O/S (c) NE (d) O/S (-2 each)Net income 9,993 Correcting Entry: (8 points)Depreciation 929 Sales and marketing exp. (E) 50Accounts receivable 5,196 5,129 (67) Inventory (CA) 50Inventories 640 673 33Deferred income taxes 2,506 2,112 (394) (12b) (a)U/S (b) NE (c) U/S (d) U/S (-2 each)Other CA 1,583 2,010 427 Correcting Entry: (8 points)Other long-term assets 1,171 942 (229) Lifo Reserve (XA) 5Accounts payable 1,573 1,208 365 CGS (E) 5Accrued compensation 1,416 1,145 271Income taxes 2,044 2,022 22 (12c) (a) NE (b) O/S (c) NE (d) O/S (-2 each)Short-term unearned revenue 7,225 5,920 1,305 Correcting Entry: (8 points)Other CL 1,716 2,449 (733) Revenue (R) 50Long-term unearned revenue 1,790 1,823 (33) Long-term unearned revenue (NCL) 50Deferred income taxes 1,731 398 1,333Other long-term liabilities 1,056 501 555Cash Flow from Operations 13,777(-1 each extra or omitted to -12; if years consistently reversed -3)

(8) (8 points) (-1 year flip up to -5)-2 Beg 2,010 (-1 math)

Payments 4,232 4,659 R&D exp. -4-2 End 1,583

Prepaid Expenses (Other CA) (A)

MicrosoftRetained earnings

Acc. Depr. (XA)

Allow for DA (XA)

191© Robert Libby

192© Robert Libby

1


Midterm Examination NCC 5000


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 Suggested Points Assigned and Suggested Times Assigned Times Problem I Green Mountain Coffee Roasters 120 140 minutes Review 25 minutes 120 165 minutes

193© Robert Libby

2

Problem I – Green Mountain Coffee Roasters Answer the following questions using the attached financial statements and selected footnotes from Green Mountain’s 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?

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3

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.)

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4

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?

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5

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?

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6

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?

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7

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.

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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:

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.

Interest expense 10 Cash 10


(b) Cash flow from operations for the U/S O/S NE

year


(d) Cash flow from U/S O/S NE investing activities for the year

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Chap. 6

Chap. 8

9

(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 U/S O/S NE at year-end


year



(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.



year



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(d) 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 U/S O/S NE the year 2006


year 2006

(d) Net income for U/S O/S NE the year 2007

(a) Retained earnings U/S O/S NE at year-end 2007

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Midterm NCC 5000 Financial Accounting


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2

GREEN MOUNTAIN COFFEE ROASTERS INC Consolidated Balance Sheet

In Thousands For Period Ended 09/30/06 09/24/05 Current assets: -- -- Cash and cash equivalents 1,274 6,450

Receivables, less allowances of $1,021 and $544 at September 30, 2006, and September 24, 2005, respectively 30,071 16,548

Inventories 31,796 14,072 Other current assets 2,816 1,274 Income tax receivable 618 -- Deferred income taxes, net 1,384 1,346Total current assets $67,959 $39,690 Fixed assets, net 48,811 39,507 Investment in Keurig, Inc. -- 9,765 Intangibles, net 39,019 -- Goodwill 75,305 1,446 Other long-term assets 2,912 739 $234,006 $91,147 Current liabilities: Current portion of long-term debt 97 3,530 Accounts payable 23,124 11,228 Accrued compensation costs 5,606 1,929 Accrued expenses 9,108 5,054 Other short-term liabilities 874 60 Income tax payable -- 717Total current liabilities $38,809 $22,518 Long-term revolving line of credit 102,800 -- Long-term debt 71 5,218 Deferred income taxes 17,386 3,019 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 879 864

Additional paid-in capital 27,923 21,833 Retained earnings 46,138 37,695Total stockholders' equity $74,940 $60,392 $234,006 $91,147

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GREEN MOUNTAIN COFFEE ROASTERS INCConsolidated Statements of Income

30-Sep-06

In Thousands Except Per Share Amounts For Period 9/30/2006 Net sales $225,323 Cost of sales 143,289 Gross profit 82,034 Selling and operating expenses 46,808 General and administrative expenses 17,112Operating income 18,114 Other income (losses) (761) Interest expense (2,261)Income before income taxes 15,092 Income tax expense (6,649)Net income $8,443

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4

GREEN MOUNTAIN COFFEE ROASTERS INCConsolidated Statements of Cash Flows

30-Sep-06

In Thousands For Period Ended Sep 30, 2006 09/30/06Cash flows from operating activities: -- Net income Adjustments to reconcile net income to net cash provided by operating activities: --

Omitted

Net cash provided by operating activities

Cash flows from investing activities: --Omitted

Expenditures for fixed assets (13,613) Proceeds from disposals of fixed assets 493Net cash used for investing activities

Cash flows from financing activities: -- Net change in revolving line of credit 102,800 Repayment of long-term debt (8,580)

Omitted

Net cash provided by (used for) financing activities

Net (decrease) increase in cash and cash equivalents (5,176)Cash and cash equivalents at beginning of year 6,450Cash and cash equivalents at end of year 1,274

Supplemental disclosures of cash flow information: --Cash paid for interest 2,235Cash paid for income taxes 5,487

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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.

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4. Fixed Assets Fixed assets consist of the following: Useful Life in September 30, September 24, Years 2006 2005 Production equipment 1 - 15 $ 37,177 $ 28,169 Equipment on loan to wholesale 3 - 7 12,294 11,263 customers Computer equipment and software 2 - 10 13,932 11,241 Building 30 5,455 5,455 Furniture and fixtures 1 - 10 3,414 3,214 Vehicles 4 - 5 915 898 Leasehold improvements 1 - 11 or 2,093 1,861 remaining life of the lease, whichever is less Construction-in-progress 4,433 1,684 Total fixed assets 79,713 63,785 Accumulated depreciation (30,902) (24,278) $ 48,811 $ 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 Additions Description Balance at Charged to Charged to Deductions Balance at Beginning of Costs and Other End of Period Expenses Accounts Period Allowance for doubtful accounts: Fiscal 2006 $ 544 $ 577 -- $ ? $ 1,021 Fiscal 2005 $ 481 $ 315 -- $ 252 $ 544 Fiscal 2004 $ 439 $ 253 -- $ 211 $ 481

208© Robert Libby

Summer 2010 Midterm (with chapter 8)

6 (1) (6 points) (9) Cash (A) 6105 637,695 Beg -2 Common Stock (SE) 15

Div. Declared 0 8,443 Net income -2 Paid-in Capital (SE) 609046,138 End -2 (-1 for each account and amount; 6 points)

Since no dividends payable, Dividends paid = 08 (2) (8 points) Current Noncurrent Total

Ending 97 71 168Beginning 3,530 5,218 8,748 (10) (a) Net Income as reported 8,443 -2 10(8 points) Increase interest revenue 6 -2

8,748 Beg -2 Net Income corrected 8,449-4 Repayment 8,580 0 Issuance

168 End -2 (b) Working capital as reported 29,150 -2(-4 for leaving out current or non-current, plus: increase inventory 10 -2-3 additional item or reversing years) plus: increase accrued rev. 6 -2

12 (3) (12 points) 2006 2005 Working capital corrected 29,166Net income 8,443 Inventory (CA) 10Depreciation and amort of FA 7,906 Fixed Assets (NCA) 10Amort of Intangibles 1,402 Accrued revenues (CA) 6Gain on Disposal of FA (31) Interest revenue (R) 6Accounts receivable 30,071 16,548 (13,523) (10 points) (-2 for extra amounts also)Inventories 31,796 14,072 (17,724)Other current assets 2,816 1,274 (1,542) (11) (9 points) 9Income tax receivable 618 0 (618) Income before income taxes -20 -3Deferred income taxes 1,384 1,346 (38) Cash flow from operating activities NE -3Other long-term assets 2,912 739 (2,173) Total assets -20 -3Accounts payable 23,124 11,228 11,896 Bad debt exp (E) 20Accrued compensation 5,606 1,929 3,677 Allow for Bad debts (XA) 20Accrued expenses 9,108 5,054 4,054Other short-term liabilities 874 60 814 (12a) (a) U/S (b) U/S (c) U/S (d) O/S (-2 each) 8Income taxes payable 0 717 (717) Correcting Entry: (8 points)Deferred income taxes 17,386 3,019 14,367 Plant and equip (+A)Cash Flow from Operations 16,193 Interest exp (-E)(-1 each extra or omitted to -11; if years consistently reversed -3)(including impairment loss ok) (12b) (a)U/S (b) NE (c) O/S (d) O/S (-2 each) 8

9 (4) 9 points) Correcting Entry: (8 points)Interest Expense 2,261 Sales revenue (R) Cash 2,235 Deferred revenues (L) Accrued interest (L) 26(-1 each account and -2 each amount) (12c) (a) O/S (b) NE (c) O/S (d) O/S (-2 each) 8

Correcting Entry: (8 points)7 (5) (7 points) Interest revenue (R) 5

-2 Beg 138 Accrued interest rec. (A) 5Payments 9,107 9,132 Adv. Exp. -3-2 End 113 (12d) (a) O/S (b) NE (c) U/S (d) NE (-2 each) 8

2006 Sales revenue (R) (8 points)7 (6) (7 points) Accounts Rec. (A)

24,278 Beg -2 2007 Accounts Rec. (A)Disposals 1,282 7,906 Depr. Exp. -3 Sales revenue (R)

30,902 End -2

8 (7) (8 points)544 Beg -1

Writeoffs 100 577 Bad Debt Exp. -21,021 End -1

Allowance for DA 100Accounts Rec. 100

(-2 for each account, -4 for the amount as indicated above)(-1 math) 57

6 (8) 1,542 Higher 120(-3 amount and -3 direction)

63

Acc. Depr. (XA)

Allowance for DA (XA)

Green Mountain CoffeeRetained earnings

Long-term debt (L)

Prepaid Advertising (A)

209© Robert Libby

210© Robert Libby

1

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. 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

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Chap. 6

2

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?” 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

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Chap. 7

3

3. If Lilly reduced the useful lives of some equipment for book purposes only in 1994: 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 Decrease No Effect

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Chap. 8

4

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...................... $6,763.8 $5,711.6 $5,198.5 Cost of sales.................. 1,885.7 1,679.7 1,448.0 Research and development....... 1,042.3 838.7 755.0 Acquired research (Note 2)..... - 58.4 - Marketing and administrative... 1,854.0 1,398.3 1,332.4 Restructuring and special charges (Note 3).................... - 66.0 1,032.6 Interest expense............... 286.3 103.8 70.6 Other income--net.............. (70.1) (131.9) (102.9) ------- ------ ------ 4,998.2 4,013.0 4,535.7 ------- ------- ------- Income from continuing operations before income taxes and cumulative effect of change in accounting principle...................... 1,765.6 1,698.6 662.8 Income taxes (Note 10)......... 459.0 513.5 198.0 ------- ------- ------- Income from continuing operations before cumulative effect of change in accounting principle........... 1,306.6 1,185.1 464.8 Discontinued operations, net of tax (Note 4)...................... 984.3 101.0 26.3 ------- ------- ------- Income before cumulative effect of change in accounting principle... 2,290.9 1,286.1 491.1 Cumulative effect of change in accounting principle - net of tax (Note 5)........................ - - (10.9) ------- ------ ------ Net income....................... $2,290.9 $1,286.1 $480.2 ======= ======= ===== See notes to consolidated financial statements.

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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 $ 536.9 Short-term investments............. 84.6 209.8 Accounts receivable, net of allowances of $55.1 (1995) and $46.6 (1994).... 1,520.5 1,550.2 Other receivables.................. 287.9 284.4 Inventories (Note 1)............... 839.6 968.9 Deferred income taxes (Note 10).... 259.2 245.0 Prepaid expenses................... 147.3 167.1 ------- ------ Total current assets............ 4,138.6 3,962.3 Other Assets Prepaid retirement (Note 11)....... 484.2 411.9 Investments (Note 6)............... 573.8 464.1 Goodwill and other intangibles, net of allowances for amortization of $192.2 (1995) and $326.2 (1994) (Note 2) 4,105.2 4,411.5 Sundry................................... 871.4 846.1 ------- ------- 6,034.6 6,133.6 Property and Equipment (Note 1) 4,239.3 4,411.5 ------- ------- $14,412.5 $14,507.4 ======== ========

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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) $1,908.8 $2,724.4 Accounts payable 1,018.0 878.2 Employee compensation 316.0 304.6 Dividends payable 189.1 188.8 Income taxes payable (Note 10) 660.5 508.4 Other liabilities 874.6 1,065.1 ------- ------- Total current liabilities 4,967.0 5,669.5 Other Liabilities Long-term debt (Note 7) 2,592.9 2,125.8 Deferred income taxes (Note 10) 295.5 188.9 Retiree medical benefit obligation (Note 11) 147.8 170.5 Other noncurrent liabilities 976.7 997.1 ------- ------- 4,012.9 3,482.3 Commitments and contingencies (Note 12) - - Shareholders' Equity (Notes 8 and 9) Common stock--no par value Authorized shares: 800,000,000 Issued shares: 568,902,054 355.6 183.0 Additional paid-in capital 418.3 421.7 Retained earnings 6,484.3 5,062.1 Deferred costs--ESOP (199.5) (218.2) Currency translation adjustments (0.6) (38.0) ------- ------- 7,058.1 5,410.6 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.

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Notes Inventories: The company states all its inventories at the lower of cost or market. The company uses the last-in, first- out (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: 1995 1994 ---- ---- Finished products $ 273.8 $ 288.0 Work in process 446.4 515.1 Raw materials and supplies 154.0 239.0 ----- ------- 874.2 1,042.1 Less reduction to LIFO cost 34.6 73.2 ----- ------- $ 839.6 $ 968.9 ===== =======

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8

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.

Allow. for DA 46.6beginning bal. writeoffs 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

No effect (because cash is unaffected) Allow for DA 19.5

AR 19.5

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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. 73.2 -Change in End. Inv. 34.6 Change in CGS 38.6 ICOBITCE (LIFO) 1765.6 Change in income -38.6 ICOBITCE (FIFO) 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)

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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)

220© Robert Libby

Practice Quiz 2s

Fall 2003 (Chapters 6, 7, 8, 9, 10)

Fall 2008 (Chapters 7, 8, 9, 10)

221© Robert Libby

222© Robert Libby

NCC 500 Quiz 2 Name _____________________ 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. Assume that Peet’s adjusts the books at the end of each year. What adjusting journal entry for

bad debt expense did Peet’s record on December 31, 2002? 2. What was the net book value of property and equipment sold during 2002?

223© Robert Libby

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, Peet’s 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.

a) Cash flow from U/S O/S NE operations for 2002 b) Net Income for 2002 U/S O/S NE c) Non-current assets U/S O/S NE on Dec. 31, 2002 d) Shareholders’ equity U/S O/S NE on Dec. 31, 2002

224© Robert Libby

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) 4,657 Adjustments to reconcile net income (loss) to net cash provided by operating activities: -- Depreciation and amortization 5,251 Tax benefit from exercise of stock options 1,543 Deferred income taxes 1,274 Gains and losses on sales of investments 406 Loss on disposition of property and equipment 11 Changes in other assets and liabilities: -- Accounts receivable (1,956) Inventories (2,062) Prepaid expenses and other (211) Other assets (1,530) Accounts payable, accrued liabilities and other liabilities 4,419 Net cash provided by operating activities $11,802 Cash flows from investing activities: -- Purchases of property and equipment (9,316) Proceeds from sales of property and equipment 17 Additions to intangible assets (35) Purchase of long term U.S. Government & Agency securities, net (27,875) Net cash used in investing activities $(37,226) Cash flows from financing activities: -- Proceeds from borrowings 46,258 Repayments of debt (2,484) Payments of stock offering costs (completed in January 2001) (1,082) Net proceeds from issuance of common stock 44,862 Net cash provided by financing activities $42,378 Change in cash and cash equivalents 16,954 Cash and cash equivalents, beginning of period 2,718 Cash and cash equivalents, end of period 19,672

225© Robert Libby

PEET S COFFEE & TEA INC

Consolidated Statements of Income For Period Ended Dec 31, 2002

In Thousands Except Per Share Amounts Net revenue 104,073 Operating expenses: -- Cost of sales and related occupancy expenses 48,146 Operating expenses 33,221 Marketing and advertising 4,554 Depreciation and amortization 4,568 General and administrative expenses 6,732 Total operating costs and expenses $97,221 Income (loss) from operations 6,852 Interest income 660 Interest expense (120) Income (loss) before income taxes $7,392 Income tax provision (benefit) 2,735 Net income (loss) $4,657

Selected Notes A summary of the allowance for doubtful accounts is as follows (in thousands)

BALANCE AT ADDITIONS BALANCE BEGINNING CHARGES TO AT END OF OF PERIOD EXPENSE WRITEOFFS PERIOD Allowance for doubtful accounts: Year ended December 31, 2000 $61 $23 $15 $69 Year ended December 31, 2001 69 30 41 58 Year ended December 31, 2002 58 162 145 75

226© Robert Libby

NCC 500 Quiz 2 Name ____Solution___________ 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 Peet’s record on December 31, 2002?

Bad Debt Expense (E) 162 Allowance for Doubtful Accounts (XA) 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, Peet’s recorded depreciation on a factory building by debiting “operating

expenses” and crediting “accumulated depreciation.” By December, the goods had been sold. a) Cash flow from U/S O/S NE operations for 2002 b) Net Income for 2002 U/S O/S NE c) Non-current assets U/S O/S NE on Dec. 31, 2002 d) Shareholders’ equity U/S O/S NE on Dec. 31, 2002

Cost of sales (E) Operating expenses (E) NE; NE; NE; NE

227© Robert Libby

228© Robert Libby

NCC 5000 Quiz 2 Student Number ____________________ Fall 2008 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 company’s 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?

229© Robert Libby

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 U/S O/S NE taxes for the year 2002 b) Non-current assets U/S O/S NE at year end 2002 c) Non-current liabilities U/S O/S NE at year end 2002

230© Robert Libby

December 31

2002

2001

In thousands, except share data

ASSETS Current assets Cash and cash equivalents $ 8,106 $ 109,370 Accounts receivable, less allowance for doubtful accounts (2002—$24,451;

2001—$24,121) 586,447

618,101 Inventories

468,433 447,866

Deferred income taxes

66,911 63,557

Other current assets

116,803 40,750

Discontinued current assets

76,899 89,900

Total current assets

1,323,599 1,369,544

Noncurrent assets Deferred income taxes

190,726 202,867

Prepaid pension cost

1,677 1,532

Intangible pension asset

79,139 101,915

Goodwill, less allowance for amortization (2002—$120,929;

2001—$120,929) 280,952

260,401 Other intangibles, less allowance for amortization (2002—$3,574;

2001—$2,466) 35,573

36,508 Other noncurrent assets

65,270 62,548

Discontinued noncurrent assets

61,205 60,001

Total noncurrent assets

714,542 725,772

Property, plant and equipment Land

24,532 20,854

Buildings and improvements

383,146 352,447

Machinery and equipment

1,992,357 1,812,446

Construction in progress

94,873 146,335

2,494,908 2,332,082

Less accumulated depreciation

1,428,800 1,296,347

Total property, plant and equipment

1,066,108 1,035,735

Total assets $ 3,104,249 $ 3,131,051

231© Robert Libby

Inventories

Inventories consisted of the following: December 31

2002

2001

In thousands Raw materials $ 71,563 $ 62,587 Work in process 51,919 76,524 Finished goods 422,309 382,925 Supplies 8,736 9,659 Total FIFO cost 554,527 531,695 Less excess of FIFO cost over LIFO 86,094 83,829

Inventories $ 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 Company’s 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 1,065,651 Less current portion of long-term debt 195,312 133,586 Long-term debt $ 738,767 $ 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.

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NCC 5000 Quiz 2 Student Number ____________________ Fall 2008 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? Interest expense (E) 71.4 Plant and equipment or Const. in Prog. (A) 1.1 Cash (A) 72.5 2) Assume that the company’s 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 (ΔCGS = 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 U/S O/S NE taxes for the year 2002 b) Non-current assets U/S O/S NE at year end 2002 c) Non-current liabilities U/S O/S NE at year end 2002

(LTD note in paragraph form)

(See classnotes: Same total expense, capitalize more early. Capitalized only record asset and liability.)

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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 Suggested Points Assigned and Suggested Times Assigned Times Problem I Brunswick 72 90 minutes Problem II Starbuck’s 48 60 minutes Review 30 minutes 120 180 minutes

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Problem I – Brunswick Answer the following questions using the attached financial statements and selected footnotes from Brunswick’s 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?

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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?

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

5. Had all of Brunswick’s 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%.

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6. (a) Assume that Brunswick’s “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 no effect Cash flow from operations __________ increase decrease no effect Cash flow from financing __________ increase decrease no effect

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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?

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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?

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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?

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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

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(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


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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 U/S O/S NE at year end 2002 c) Stockholders’ equity U/S O/S NE at year end 2002 d) Cash flow from U/S O/S NE operations for 2002

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 b) Income before income U/S O/S NE taxes for the year 2002 c) Non-current assets U/S O/S NE at year end 2002 d) Shareholders’ equity U/S O/S NE at year end 2002

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BRUNSWICK CORPConsolidated Statements of Income

In Millions Except Per Share Amounts For Period Ended Dec 31, 2002 NET SALES 3711.9 Cost of sales 2852.0 Selling, general and administrative expense 560.5 Research and development expense 102.8 Unusual charges --OPERATING EARNINGS 196.6 Interest expense (43.3) Other income (expense) 8.3EARNINGS BEFORE INCOME TAXES 161.6 Income tax provision 58.1EARNINGS FROM CONTINUING OPERATIONS 103.5 Cumulative effect of change in accounting principle, net of tax (25.1)NET EARNINGS (LOSS) 78.4

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BRUNSWICK CORPConsolidated Statements of Cash Flows

31-Dec-02In Millions For Period Ended Dec 31, 2002 12/31/02CASH FLOWS FROM OPERATING ACTIVITIES -- Net earnings (loss) 78.4 Depreciation and amortization 148.4 Change in accounting principle, net of tax 25.1 Changes in noncash current assets and current liabilities -- Change in accounts and notes receivable (35.1) Change in inventory 35.1 Change in prepaid expenses (9.7) Change in accounts payable 71.0 Change in accrued expense 29.5 Income taxes 64.3 Antitrust litigation settlement payments (0.2) Other, net 6.2 NET CASH PROVIDED BY CONTINUING OPERATIONS 413.0 NET CASH PROVIDED BY DISCONTINUED OPERATIONS --NET CASH PROVIDED BY OPERATING ACTIVITIES 413.0CASH FLOWS FROM INVESTING ACTIVITIES -- Capital expenditures (112.6) Investments (8.9) Acquisitions of businesses, net of debt and cash acquired (21.2) Proceeds on the sale of property, plant and equipment 13.2 Other, net (0.2) NET CASH USED FOR CONTINUING OPERATIONS (129.7) NET CASH PROVIDED BY DISCONTINUED OPERATIONS --NET CASH USED FOR INVESTING ACTIVITIES (129.7)CASH FLOWS FROM FINANCING ACTIVITIES -- Net issuances (repayments) of commercial paper and other short-term debt (9.4) Payments of long-term debt including current maturities (26.2) Cash dividends paid (45.1) Stock repurchases -- Stock options exercised 40.3NET CASH USED FOR FINANCING ACTIVITIES (40.4)Net increase (decrease) in cash and cash equivalents 242.9Cash and cash equivalents at January 1 108.5CASH AND CASH EQUIVALENTS AT DECEMBER 31 351.4SUPPLEMENTAL CASH FLOW DISCLOSURES: --Interest paid 43.3Income taxes paid (received), net (6.2)Treasury stock issued for compensation plans and other 56.0

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BRUNSWICK CORPConsolidated Balance Sheet

In Millions For Period Ended Dec 31, 2002 12/31/02 12/31/01 ASSETS -- -- CURRENT ASSETS Cash and cash equivalents, at cost, which approximates market 351.4 108.5 Accounts and notes receivable, less allowances of $31.8 and $26.1 401.4 361.9 Inventories -- -- Finished goods 272.5 317.2 Work-in-process 201.6 180.9 Raw materials 72.8 59.3 Net inventories 546.9 557.4 Prepaid income taxes 305.1 307.5 Prepaid expenses 49.5 38.9 Income tax refunds receivable 5.9 26.7 CURRENT ASSETS 1660.2 1400.9 PROPERTY -- -- Land 68.3 68.4 Buildings and improvements 478.2 460.0 Equipment 998.2 964.8 Total land, buildings and improvements and equipment 1544.7 1493.2 Accumulated depreciation (871.0) (803.8) Net land, buildings and improvements and equipment 673.7 689.4 Unamortized product tooling costs 119.0 116.2 NET PROPERTY 792.7 805.6 OTHER ASSETS -- -- Goodwill 452.8 474.4 Other intangibles 117.5 128.9 Investments 95.4 80.4 Other long-term assets 288.5 267.3OTHER ASSETS 954.2 951.0TOTAL ASSETS 3407.1 3157.5 CURRENT LIABILITIES -- -- Short-term debt, including current maturities of long term debt 28.9 40.0 Accounts payable 291.2 214.5 Accrued expenses 685.5 648.2CURRENT LIABILITIES 1005.6 902.7 LONG-TERM DEBT -- -- Notes, mortgages and debentures 589.5 600.2 DEFERRED ITEMS -- -- Income taxes 144.1 185.2 Postretirement and postemployment benefits 399.3 216.1 Other 166.8 142.4DEFERRED ITEMS 710.2 543.7 COMMON SHAREHOLDERS' EQUITY -- -- 102,538,000 shares 76.9 76.9 Additional paid-in capital 308.9 316.2 Retained earnings 1112.7 1079.4 Treasury stock, at cost: 12,377,000 and 14,739,000 shares (228.7) (289.8) Unamortized ESOP expense and other (22.2) (27.1) Accumulated other comprehensive loss: -- -- Foreign currency translation (9.9) (20.0) Minimum pension liability (136.5) (20.8) Unrealized investment gains (losses) 2.7 (1.7) Unrealized losses on derivatives (2.1) (2.2) Total accumulated other comprehensive loss (145.8) (44.7)COMMON SHAREHOLDERS' EQUITY 1101.8 1110.9TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 3407.1 3157.5

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BRUNSWICK CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) ACCUMULATED

ADDITIONAL OTHERCOMMON PAID-IN RETAINED TREASURY COMPREHENSIVE

STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) TOTALBALANCE, DECEMBER 31, 1999... $76.90 $265.00 $1,181.50 ($214.00) ($9.20) $1,300.20COMPREHENSIVE INCOMENet 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 -- 12.3BALANCE, DECEMBER 31, 2000... $76.9 $272.6 $1,041.4 ($296.4) ($27.4) $1,067.1COMPREHENSIVE INCOMENet earnings............... -- 81.8 -- -- 81.8Currency translation adjustments.............. -- -- -- (5.0) (5.0)Unrealized gains on investments.............. -- -- -- 4.4 4.4Unrealized losses on derivative instruments... -- -- -- (2.1) (2.1)Minimum pension liability adjustment............... -- -- -- (14.6) (14.6)Total comprehensive income -- 2001.................. -- 81.8 -- (17.3) 64.5Dividends ($0.50 per common share)................. -- (43.8) -- -- (43.8)Compensation plans and other...................... -- 16.5 -- 6.6 -- 23.1BALANCE, DECEMBER 31, 2001... $76.9 $289.1 $1,079.4 ($289.8) ($44.7) $1,110.9COMPREHENSIVE INCOMENet earnings............... -- 78.4 -- -- 78.4Currency translation adjustments.............. -- -- -- 10.1 10.1Unrealized gains on investments.............. -- -- -- 4.4 4.4Unrealized gains on derivative instruments... -- -- -- 0.1 0.1Minimum 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 -- 58.7BALANCE, DECEMBER 31, 2002... $76.9 $286.7 $1,112.7 ($228.7) ($145.8) $1,101.8

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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): 2002 2001 2000 ----- ----- ---- Gains on the sale of property............................... $ 1.5 $16.9 $7.2 Losses on the sale of property.............................. (2.0) (4.2) (0.1) ----- ----- ---- Net gains (losses) on sale of property.................... $(0.5) $12.7 $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

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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)................................ $78.4 $81.8 $(95.8) Goodwill and indefinite-lived intangible amortization....... -- 10.8 9.6 ----- ----- ------ Adjusted net earnings (loss)................................ $78.4 $92.6 $(86.2) ===== ===== ====== BASIC EARNINGS PER COMMON SHARE: Reported net earnings (loss)................................ $0.87 $0.93 $(1.08) Goodwill and indefinite-lived intangible amortization....... -- 0.12 0.11 ----- ----- ------ Adjusted net earnings (loss)................................ $0.87 $1.05 $(0.97) ===== ===== ====== DILUTED EARNINGS PER COMMON SHARE: Reported net earnings (loss)................................ $0.86 $0.93 $(1.08) Goodwill and indefinite-lived intangible amortization....... -- 0.12 0.11 ----- ----- ------ Adjusted net earnings (loss)................................ $0.86 $1.05 $(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

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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 2001 ------ ------ Accrued compensation and benefit plans...................... $158.9 $127.2 Product warranties.......................................... 139.6 138.7 Dealer allowances and discounts............................. 111.3 114.3 Insurance reserves.......................................... 71.3 68.0 Environmental reserves...................................... 61.7 62.6 Other....................................................... 142.7 137.4 ------ ------ Total accrued expenses.................................... $685.5 $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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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): 2002 2001 2000 ----- ----- ----- Basic expense............................................... $42.5 $40.3 $37.5 Contingent expense.......................................... 1.9 1.0 0.3 Sublease income............................................. (1.1) (1.4) (2.1) ----- ----- ----- Rent expense, net........................................... $43.3 $39.9 $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........................................................ $ 28.7 2004........................................................ 23.4 2005........................................................ 19.8 2006........................................................ 15.8 2007........................................................ 11.8 2008........................................................ 35.4 ------ Total.............................................. $134.9 ======

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SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN MILLIONS)

ALLOWANCES FOR BALANCE AT POSSIBLE LOSSES ON BEGINNING CHARGES TO BALANCE AT RECEIVABLES OF PERIOD PROFIT AND LOSS WRITE-OFFS RECOVERIES OTHER YEAR END OF ------------------ ---------- --------------- ---------- ---------- ----- ---------- 2002.......................... $26.1 $10.8 $ (6.6) $0.8 $(0.7) $31.8 ===== ===== ====== ==== ===== ===== 2001.......................... $21.2 $13.7 $(13.1) $0.5 $ 3.8 $26.1 ===== ===== ====== ==== ===== ===== 2000.......................... $18.4 $11.4 $ (8.9) $1.0 $(0.7) $21.2 ===== ===== ====== ==== ===== =====

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STARBUCKS CORPConsolidated Statements of Income

29-Sep-02

In Thousands Except Per Share Amounts For Period Ended Sep 29, 2002 9/29/2002 Net revenues: -- Retail 2,792,904 Specialty 496,004Total net revenues $3,288,908 Cost of sales and related occupancy costs 1,350,011 Store operating expenses 1,121,108 Other operating expenses 127,178 Depreciation and amortization expenses 205,557 General and administrative expenses 202,161 Income from equity investees 35,832Operating income $318,725 Interest and other income, net 9,300 Internet-related investment losses -- Gain on sale of equity investment 13,361Earnings before income taxes $341,386Income taxes 126,313Net earnings $215,073Net earnings per common share - basic 0.56Net earnings per common share - diluted 0.54Weighted average shares outstanding: --Basic 385,575Diluted 397,526

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STARBUCKS CORPConsolidated Statements of Cash Flows

In Thousands For Period Ended Sep 29, 2002 09/29/02OPERATING ACTIVITIES: -- Net earnings 215,073 Adjustments to reconcile net earnings to net cash provided by operating activities: -- Depreciation and amortization 221,141 Gain on sale of equity investment (13,361) Provision for impairment and asset disposals 26,852 Deferred income taxes, net (6,088) Excess of dividends received over equity in income of investees 862 Tax benefit from exercise of non-qualified stock options 44,199 Cash provided/(used) by changes in operating assets and liabilities: -- Accounts receivable (6,703) Inventories (41,379) Prepaid expenses and other current assets (12,460) Accounts payable 5,463 Accrued compensation and related costs 24,087 Accrued occupancy costs 15,343 Accrued taxes (16,154) Deferred revenue 15,321 Other accrued expenses 34,022Net cash provided by operating activities $506,218INVESTING ACTIVITIES: -- Net purchases of trading securities (5,699) Purchase of available-for-sale securities (339,968) Maturity of available-for-sale securities 78,349 Sale of available-for-sale securities 144,760 Additions to equity and other investments (6,137) Proceeds from sale of equity investment 14,843 Additions to property, plant and equipment (375,474) Additions to other assets (24,547)Net cash used by investing activities $(513,873)FINANCING ACTIVITIES: -- Increase/(decrease) in cash provided by checks drawn in excess of bank balances 12,908 Proceeds from sale of common stock under employee stock purchase plan 16,191 Proceeds from exercise of stock options 91,276 Principal payments on long-term debt (697) Repurchase of common stock (52,248)Net cash provided by financing activities $67,430Effect of exchange rate changes on cash and cash equivalents 1,560Net increase in cash and cash equivalents $61,335CASH AND CASH EQUIVALENTS: --Beginning of year 113,237End of year 174,572SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: --Cash paid during the year for: --Interest 303Income taxes 105,339

STARBUCKS

259© Robert Libby

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 366,564,190 $ 366 $ 650,654 $ 313,939 $ (3,946) $ 961,013 Net earnings -- -- -- 94,564 -- 94,564 Unrealized holding losses, net -- -- -- -- (163) (163) Translation adjustment -- -- -- -- (6,867) (6,867) ------------ Comprehensive income 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 ----------------------------------------------------------------------------------------------------------------------------------

STARBUCKS

260© Robert Libby

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.

STARBUCKS

261© Robert Libby

NCC 500 Fall 2003Final Exam Solution

6 8) Cash or Comp. expense 58.7 (-1 each amount and account)

6 1) Allowance for doubtful accounts (XA) 6.6 Additional PIC 2.4 Accounts receivable (A) 6.6 Treasury Stock 61.1(-2 each account and the amount)

6 2) Product warranties expenses recorded 6 9) Investment in SAS (A) 4.4Because the accrued expenses for product warranties went up. Unrealized gains on investments (SE) 4.4(-3 each) (or Accum other comp. income (SE)

5 3a) Change in Cost of Goods Sold -85.7 (-2 for each account and the amount) (4.5 is -1)Change in Cumulative NIBT 85.7Change in taxes to date (.35 * 85.7) 30.0 6 10) Goodwill (A)Change in Retained Earnings (.65 * 85.7) 55.7 (-2) beg 474.4RE (LIFO) + 55.7 =RE (FIFO) (-2) (-2) acquisitions 8.2 29.8 writeoffs (-2)1,112.7+55.7= 1168.4 (-2) end 452.8 (-1) (If also use beginning inventory, -2. 1114.06)

3 3b) Ending Inventory Lifo 546.9 (-1) 72

Ending Lifo reserve 85.7 (-1 sign, amt))Ending Inventory Fifo 632.6 6 1) 376,315,302/ 2=

(-3 -3)8 4)

(-1) beg 317.2 6 2) Proceeds - NBV = Gain (Loss)transfers from WIP 2807.3 2852.0 CGS (-2) 14,843 - x = 13,361 NBV = 1,482

(-1) end 272.5 (-3) (-3)

3 3a) Investments in equity investees (A) 35,832(-1) beg 180.9 Income from equity investees (R) 35,832

additions to WIP 2828.0 2807.3 transfers from WIP (-2) (-1 each amount and account)(-1) end 201.6 3 3b) Cash (A) (35,832 + 862) 36694

(watch for carryforward) Investments in equity investees (A) 366945 5) year amount n PV (-1 each amount and account)

2004............ 23.4 2 $20.83 -1 each2005............ 19.8 3 $16.62 6 4a) CGS (E)2006............ 15.8 4 $12.52 Inventory (A)2007............ 11.8 5 $8.82 decrease, no effect (-3 each)2008............ 35.4 6 $24.96

$83.74 6 4b) RE or APIC (SE) or no entry(-1 if 2003 included, -3 if 88.77) CS (SE)

no effect; decrease (-3 each)4 6a) n=4, PV=249.1, FV=-250, PMT=-16.875 i=6.86 -1 each

or n=5, PV=248.9, FV=-250, PMT=-16.875 6 4c) Plant and Equip. (A) (and some of payment is financing)6 6b) n=2, FV=-250, PMT=-16.875, i=6.856 PV= 249.52 -1 each Lease liability (L)

.0686 *249.52= 17.12 (note 249.75 is n = 1) increase; decrease (-3 each) (-2)(look for rounding differences and carryforwards) 6 5) SG&A expense (E)

5 6c) NBV 249.5 CGS (E)Retirement price 255.0 NE, NE, NE, NE (-1.5 each )Gain (Loss) (5.5) (-1 math)NI 5.5 decrease -1 each direction andCFO NE amount 6 6) In 2001CFF 255 decrease P&E (A)(look for rounding differences and carryforwards) Interest expense (E)

6 7) 228.7/12.377= 18.48 In 2002 (-3 -3) (-3 if reversed) Depr. Expense (E)

Acc. Depr. (XA)120 48 OS, OS, US, US (-1.5 each )

Part I - Brunswick

Part II - Starbucks

FG Inventory

WIP Inventory

188,157,651

263© Robert Libby




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:


Points Suggested Points Assigned and Suggested Times Assigned Times Problem I Tommy Hilfiger 60 80 minutes Problem II Dow Chemical 60 80 minutes Review 20 minutes 120 180 minutes

265© Robert Libby

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 company’s 2003 notes (payable)? (Circle one.)

Higher Lower b) How did you know?

266© Robert Libby

3. a) On average, have the market interest rates for debt similar to the company’s 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).

267© Robert Libby

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?

268© Robert Libby

5

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 investing increase decrease no effect

269© Robert Libby

6

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


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.


Non-current assets increase decrease no effect

270© Robert Libby

Problem II – Dow Chemical Answer the following questions using the attached financial statements and selected footnotes from Dow Chemical’s (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.

271© Robert Libby

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?

272© Robert Libby

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?

273© Robert Libby

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-in-

process 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.


(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.


274© Robert Libby

(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 U/S O/S NE operations for the year b) Income before income U/S O/S NE taxes for the year c) Non-current assets U/S O/S NE at year end d) Shareholders’ equity U/S O/S NE at year end 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 +___________ -_____________ NE

275© Robert Libby

TOMMY HILFIGER CORP

Consolidated Balance Sheet

In Thousands 03/31/02 03/31/01 Current assets -- -- Cash and cash equivalents 387,247 318,431 Accounts receivable 224,395 237,414 Inventories 184,972 205,446 Deferred tax and other current assets 97,274 90,353 Total current assets $893,888 $851,644 Property and equipment, at cost, net of accumulated depreciation and amortization 302,937 281,682 Intangible assets, net of accumulated amortization of $135,794 and $101,262 respectively 1,390,092 1,206,358 Other assets 7,534 2,872 Total Assets $2,594,451 $2,342,556 Current liabilities -- -- Short-term borrowings 62,749 -- Current portion of long-term debt 698 50,000 Accounts payable 28,980 38,628 Accrued expenses and other current liabilities 210,270 171,640 Total current liabilities $302,697 $260,268 Long-term debt 575,287 529,495 Deferred tax liability 214,964 202,123 Other liabilities 4,041 2,077 Commitments and contingencies -- -- Shareholders' equity -- -- Ordinary Shares, $.01 par value-shares authorized 150,000,000; issued 96,031,167 and 95,169,402 respectively 960 952 Capital in excess of par value 598,527 589,184 Retained earnings 956,776 822,231 Accumulated other comprehensive income (loss) 2,430 (2,543) Treasury shares, at cost: 6,192,600 Ordinary Shares (61,231) (61,231) Total shareholders' equity $1,497,462 $1,348,593 Total Liabilities and Shareholders' Equity 2,594,451 2,342,556

Tommy Hilfiger

277© Robert Libby

TOMMY HILFIGER CORP


In Thousands Except Per Share Amounts For Period Ended 3/31/2002 Net revenue 1,876,721 Cost of goods sold 1,073,089 Gross profit 803,632 Depreciation and amortization 114,129 Other selling, general and administrative expenses 503,774 Total operating expenses $617,903 Income from operations 185,729 Interest expense 41,177 Interest income 10,062 Income before income taxes $154,614 Provision for income taxes 20,069 Net income $134,545 Earnings per share: -- Basic earnings per share 1.50 Weighted average shares outstanding 89,430 Diluted earnings per share 1.49 Weighted average shares and share equivalents outstanding 90,000

Tommy Hilfiger

278© Robert Libby

TOMMY HILFIGER CORP

Consolidated Statements of Cash Flows 31-Mar-02

In Thousands For Period Ended 03/31/02 Cash flows from operating activities -- Net income 134,545 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization 117,326 Deferred taxes (6,771) Provision for special charges -- Changes in operating assets and liabilities -- Decrease (increase) in assets -- Accounts receivable 29,963 Inventories 51,016 Other assets (4,138) Increase (decrease) in liabilities -- Accounts payable (15,613) Accrued expenses and other liabilities 46,972 Net cash provided by operating activities $353,300 Cash flows from investing activities -- Purchases of property and equipment (96,923) Acquisition of businesses, net of cash acquired (205,061) Net cash used in investing activities $(301,984) Cash flows from financing activities -- Proceeds of long-term debt 144,921 Payments on long-term debt (155,538) Proceeds from the exercise of stock options 7,997 Purchase of treasury shares -- Short-term bank borrowings (repayments), net 20,120 Net cash provided by (used in) financing activities $17,500 Net increase in cash 68,816 Cash and cash equivalents, beginning of period 318,431 Cash and cash equivalents, end of period 387,247

Tommy Hilfiger

279© Robert Libby

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 ======== ========

Tommy Hilfiger

280© Robert Libby

Note 7 - Long-Term Debt Long-term debt consists of the following: March 31, ----------------------------- 2002 2001 ------------- ------------- Unsecured 9.00% bonds due December 1, 2031 ..... $ 150,000 $ -- Unsecured 6.85% notes due April 1, 2008, less unamortized discount of $298 at March 31, 2002 ............................... 199,702 199,663 Unsecured 6.50% notes due April 1, 2003, less unamortized discount of $82 at March 31, 2002 ............................... 224,918 224,842 Term and revolving credit facilities at a weighted average interest rate of approximately 6.33% at March 31, 2001 ........ -- 154,090 Obligation under capital lease ................. 1,365 -- ------------- ------------- 575,985 579,495 Less current maturities ........................ (698) (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.

Tommy Hilfiger

281© Robert Libby

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 ................. $ 3,445 $18,320 $ 92,332 State and Local .............. (222) 270 25,850 Non-U.S. ..................... 23,617 14,824 16,779 ------- ------- ------- 26,840 33,414 134,961 ------- ------- ------- Deferred: U.S. Federal ................. (3,750) 12,640 (55,683) State and Local .............. (3,021) (3,557) (24,105) Non-U.S. ..................... -- -- -- ------- ------- ------- (6,771) 9,083 (79,788) ------- ------- ------- Provision for income taxes ..... $20,069 $42,497 $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 ............................ $ 6,406 $ 9,479 Non-deductible accruals .................... 38,002 37,125 Accrued compensation ....................... 11,734 10,391 Other items, net ........................... 5,324 7,801 --------- --------- 61,466 64,796 --------- --------- Deferred tax assets (liabilities) - non-current: Depreciation and amortization .............. 19,996 12,740 Intangible assets, other than goodwill ................................. (242,790) (237,129) Net operating loss carry forwards .......... 19,788 14,561 Other, net ................................. (958) 10,705 --------- --------- Subtotal ................................... (203,964) (199,123) Valuation allowance ........................ (11,000) (3,000) --------- --------- Total deferred tax assets (liabilities) - non-current .............. (214,964) (202,123) --------- --------- Total net deferred tax liabilities ........... $(153,498) $(137,327) ========= =========

Tommy Hilfiger

282© Robert Libby

DOW CHEMICAL CO

Consolidated Balance Sheet In Millions 12/31/01 12/31/00 Current Assets Cash and cash equivalents 220 278 Marketable securities 44 163 Accounts receivable: Trade (net of allowance for doubtful Receivables 2001: $123; 2000: $103) 2,868 3,655 Other 2,230 2,764 Inventories: Finished and work in process 3,569 3,396 Materials and supplies 871 817 Deferred income tax assetscurrent 506 250 Total current assets $10,308 $11,323 Investments Investment in nonconsolidated affiliates 1,581 2,096 Other investments 1,663 2,528 Noncurrent receivables 802 674 Total investments $4,046 $5,298 Property Property 35,890 34,852 Less accumulated depreciation 22,311 21,141 Net property $13,579 $13,711 Other Assets Goodwill (net of accumulated amortization 2001: $569; 2000: $459) 3,130 1,928 Deferred income tax assets noncurrent 2,248 1,968 Deferred charges and other assets 2,204 1,763 Total other assets $7,582 $5,659 Total Assets $35,515 $35,991

DOW CHEMICAL CO

283© Robert Libby

DOW CHEMICAL CO

Consolidated Balance Sheet (cont.) In Millions except share amounts 12/31/01 12/31/00 Current Liabilities Notes payable 1,209 2,519 Long-term debt due within one year 408 318 Accounts payable: Trade 2,713 2,975 Other 926 1,594 Income taxes payable $190 $258 Deferred income tax liabilities current 236 35 Dividends payable 323 217 Accrued and other current liabilities 2,120 2,257 Total current liabilities $8,125 $10,173 Long-Term Debt 9,266 6,613 Other Noncurrent Liabilities Deferred income tax liabilities noncurrent 760 1,165 Pension and other postretirement benefits noncurrent 2,475 2,238 Other noncurrent obligations 3,539 3,012 Total other noncurrent liabilities $6,774 $6,415 Minority Interest in Subsidiaries 357 450 Preferred Securities of Subsidiaries 1,000 500 Stockholders' Equity Common stock (authorized 1,500,000,000 shares of $2.50 par value each; issued 981,377,562) 2,453 2,453 Additional paid-in capital Unearned ESOP shares (90) (103) Retained earnings 11,112 12,675 Accumulated other comprehensive loss (1,070) (560) Treasury stock at cost (shares 2001: 76,540,276; 2000: 84,280,041) (2,412) (2,625) Net stockholders' equity $9,993 $11,840 Total Liabilities and Stockholders' Equity 35,515 35,991

DOW CHEMICAL CO

284© Robert Libby

The Dow Chemical Company and Subsidiaries Consolidated Statements of Income (In millions, except per share amounts) For the years ended December 31 2001 ------------------------------------------ ------- Net Sales $27,805 ------- Cost of sales 23,652 OMITTED ------- Net Income $ (385)

DOW CHEMICAL CO

285© Robert Libby

DOW CHEMICAL CO

Consolidated Statements of Cash Flows In Millions For Period Ended 12/31/01 12/31/00 Operating Activities: OMITTED Investing Activities -- -- Capital expenditures (1,587) (1,808) Proceeds from sales of property and businesses 153 166 Acquisitions of businesses, net of cash received (2,098) (857) Investments in nonconsolidated affiliates (92) (186) Proceeds from sales of nonconsolidated affiliates 181 47 Purchases of investments (2,561) (3,074) Proceeds from sales of investments 3,330 4,618 Cash used in investing activities $(2,674) $(1,094) Financing Activities -- -- OMITTED Effect of Exchange Rate Changes on Cash (4) (9) Summary Increase (Decrease) in cash and cash equivalents $(58) $(269) Cash and cash equivalents at beginning of year 278 547 Cash and cash equivalents at end of year 220 278

DOW CHEMICAL CO

286© Robert Libby

The Dow Chemical Company and Subsidiaries Consolidated Statements of Stockholders' Equity

In millions on 31-Dec 2001 2000 Common Stock Balance at beginning of year $2,453 $818 3-for-1 stock split -- 1,635 Balance at end of year 2,453 2,453 Additional Paid-in Capital Balance at beginning of year -- 165 3-for-1 stock split -- (184) Issuance of treasury stock at more than cost -- -- Other -- 19 Balance at end of year -- -- Unearned ESOP Shares Balance at beginning of year (103) (57) Transfer from temporary equity -- (64) Shares allocated to ESOP participants 13 18 Balance at end of year (90) (103) Retained Earnings Balance at beginning of year 12,675 13,357 Net income (loss) (385) 1,675 3-for-1 stock split -- (1,451) Common stock dividends declared (1,162) (906) Other (16) -- Balance at end of year 11,112 12,675 Accumulated Other Comprehensive Income (loss) Unrealized Gains on Investments at beginning of year 325 298 Unrealized gains (losses) (319) 27 Balance at end of year 6 325 Other at beginning of year (885) (709) Adjustments (191) (176) Balance at end of year (1,076) (885) Total accumulated other comprehensive loss (1,070) (560) Treasury Stock Balance at beginning of year (2,625) (2,932) Purchases (5) (4) Issuance to employees and employee plans 218 311 Balance at end of year (2,412) (2,625) Net Stockholders' Equity $9,993 $11,840

DOW CHEMICAL CO

287© Robert Libby

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 2001 2000 1999 ----- ---- ---- Cash payments for interest $ 711 $705 $630 Cash payments for income taxes 278 730 710 Provision (expense) for doubtful receivables 39 24 52

DOW CHEMICAL CO

288© Robert Libby

NCC 500 Summer 2005Final Exam Solution

6 1) 1) 6Prepaid Adv. (A)

beg 4,299 beg 3,655 39 Provision for bad debtscash paid 47,374 44,841 adv. expense Net Sales 27,805 28,553 Cash collections

end 6,832 end 2,868 (-2 each input) (-2 each input)

6 2) a) higher -3b) Because there is a discount -3 2) Change in beginning 682 -1.5 6

Change in ending 146 -1.5Change in CGS 536

6 3) a) Risen -3 Change in NIBT -536b) Because the market value is less than -3 Change in tax expense 160.8 (.3*536) (-1.5) the book value. (if increase in rates, -2) Change in NI -375.2

Net Income LIFO -385 -1.56 4) PV = 199,702; n = 6; FV = -200,000; PMT = -13,700 i = 6.881 Net Income FIFO -760.2

(-1 1/2 each input)6 5) 224,918 -3 3) Additional PIC 184 (-1 each amount and account) 6

224,842 -3 Retained earnings 145176 Common Stock 1635or

Interest expense (E) (.065386 x 224842) 14,702 (-3) 4) Net Unrealized loss (SE) 319 6 Discount (XL) 77 Valuation allowance SAS (A) 319 Cash (A) (.065 x 225,000) (-3) 14,625 (-2 if reversed) (-2 each account and the amount)

5) 66 6) a) $206,789 - (81583 - 76633) = $201,839 -3 beg 2,096

Purchases 92 181 Sales b) None (new rules) (if tax amort. mentioned ok) -3 %NI (426) - Dividends received

end 1,581 (-1.5 each input)6 7) Intangibles (gross) (-2 each input)

beg 1,307,620 6) 2,412,000,000 / 76,540,276 = 31.51282 (0.000032) 6

Purchases 218,266 - sales (-3) (-3) (if 31.73, -2)end 1,525,886 7a) a) NE; b) NE; c) NE; d) NE 6

Depreciation expense (E) (-1.5 each)Intangibles (net) (-1.5 each input) Cost of goods sold (E)

beg 1,206,358 34,532 amortPurchases 218,266 - sales (b) a) NE; b) O/S; c) O/S; d) O/S 6

end 1,390,092 Depreciation expense (E) (-1.5 each) Accum Depreciation (XNCA)

6 8a) CGS (E) no effect, no effect Finished Goods Inventory (-3 each) (c) a) O/S; b) O/S; c) O/S; d) O/S 6

Interest expense (E) (-1.5 each)6 8b) Maint exp (E) decrease; no effect Property (A)

Cash (A) (-3 each)8) Earnings before taxes NE (-2) 6

6 8c) Cash (A) 12,000 increase; decrease CFO NE (-2) P&E (net) (A) 10,000 (-3 each) CFF +251 Gain on sale (R) 2,000 (-2)(-1 for sign and amount)

(-1 each math error)60 60

Part I - Tommy Hilfiger Part II - Dow Chemical

A/R (net)

Investments in Noncon. Affiliates (A)

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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:


Points Suggested Points Assigned and Suggested Times Assigned Times Problem I Nabors 120 150 minutes Review 30 minutes 120 180 minutes

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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 (less) than deferred revenues recognized during 2005.

2. (a)What was the effect of book depreciation and amortization expense on cash flow from operations for 2005? (Check one.) (3 points) (b) What was the effect of tax depreciation and amortization expense on cash flow from operations for 2005? (Check one.) (3 points)

Increase Decrease No effect

Increase Decrease No effect

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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 Nabors’s capitalized its non-cancelable operating lease obligations, what would be the amount of “total current liabilities” reported on the balance sheet at the end of 2005? (8 points)

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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 (12/31/2005) U/S O/S NE

(b) Cash flows from operating activities (year ended 12/31/2005) U/S O/S NE

(c) Net income (year ended 12/31/2005) U/S O/S NE

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)

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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)

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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)

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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

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(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

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(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 increase decrease no effect

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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 equipment’s operations beyond that expected given normal maintenance. They recorded the transaction with the following entry:

Direct costs (+E) 300 Cash (-A) 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)

(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

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NABORS INDUSTRIES LTD Consolidated Balance Sheet

In Thousands For Period Ended 12/31/05 12/31/04 Current assets: -- -- Cash and cash equivalents 565,001 384,709 Short-term investments 858,524 955,304 Accounts receivable, net 822,104 540,103 Inventory 51,292 28,653 Deferred income taxes 199,196 39,599 Other current assets 121,191 72,068 Total current assets $2,617,308 $2,020,436 Long-term investments 222,802 71,034 Property, plant and equipment, net 3,886,924 3,275,495 Goodwill, net 341,939 327,225 Other long-term assets 161,434 168,419 Total assets $7,230,407 $5,862,609 Current liabilities: -- -- Current portion of long-term debt 767,912 804,550 Trade accounts payable 336,589 211,600 Accrued liabilities 224,336 171,234 Income taxes payable 23,619 11,932 Total current liabilities $1,352,456 $1,199,316 Long-term debt 1,251,751 1,201,686 Other long-term liabilities 151,415 146,337 Deferred income taxes 716,645 385,877 Total liabilities $3,472,267 $2,933,216 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 158 150 Capital in excess of par value 1,591,125 1,358,374 Unearned compensation (15,649) -- Accumulated other comprehensive income 192,980 148,229 Retained earnings 1,989,526 1,422,640 Total shareholders' equity $3,758,140 $2,929,393 Total liabilities and shareholders' equity 7,230,407 5,862,609

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NABORS INDUSTRIES LTD


In Thousands Except Per Share Amounts For Period Ended 12/31/2005 Revenues and other income: -- Operating revenues 3,459,908 Earnings from unconsolidated affiliates 5,671 Investment income 85,430 Total revenues and other income $3,551,009 Costs and other deductions: -- Direct costs 1,997,267 General and administrative expenses 249,973 Depreciation and amortization 338,532 Interest expense 44,847 Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net 46,440 Total costs and other deductions $2,677,059 Income before income taxes 873,950 Income tax expense (benefit): -- Current 30,517 Deferred 194,738 Total income tax expense (benefit) $225,255 Net income 648,695 Earnings per share: -- Basic 4.16 Diluted 4 Weighted average number of common shares outstanding: -- Basic 156,067 Diluted 162,189

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NABORS INDUSTRIES LTD Consolidated Statements of Cash Flows

In Thousands For Period Ended 12/31/05 Cash flows from operating activities: -- Net income 648,695 Adjustments to net income: -- Depreciation and amortization 338,532 Deferred income tax expense (benefit) 194,738 Deferred financing costs amortization 4,880 Pension liability amortization 401 Discount amortization on long-term debt 20,729 Amortization of loss on hedges 218 Losses (gains) on long-lived assets, net 19,465 Gains on investments, net (40,197) (Gains) losses on derivative instruments (1,076) Amortization of unearned compensation 4,819 Sales of marketable securities, trading -- Foreign currency transaction losses (gains) 465 Loss on early extinguishment of debt -- Equity in earnings of unconsolidated affiliates, net of dividends (2,600) Changes in operating assets and liabilities, net of effects from acquisitions: -- Accounts receivable (271,969) Inventory (21,704) Other current assets (6,808) Other long-term assets 811 Trade accounts payable and accrued liabilities 121,850 Income taxes payable 8,262 Other long-term liabilities 9,989 Net cash provided by operating activities $1,029,500 Cash flows from investing activities: -- Purchases of investments (745,743) Sales and maturities of investments 749,562 Cash paid for acquisitions of businesses, net (46,201) Deposits on acquisitions closed subsequent to year-end (36,005) Capital expenditures (907,316) Proceeds from sales of assets and insurance claims 27,463 Investments in affiliate -- Net cash used for investing activities $(958,240) Cash flows from financing activities: -- Increase (decrease) in cash overdrafts 10,813 (Increase) decrease in restricted cash (8) Proceeds from long-term debt -- Reduction in long-term debt (424) Debt issuance costs -- Proceeds from issuance of common shares 194,464 Repurchase of common shares (99,483) Termination payment for interest rate swap (2,736) Net cash provided by (used for) financing activities $102,626 Effect of exchange rate changes on cash and cash 6,406 equivalents -- Net increase (decrease) in cash and cash equivalents 180,292 Cash and cash equivalents, beginning of period 384,709 Cash and cash equivalents, end of period 565,001

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Nabors Industries Ltd. and Subsidiaries 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’ (In thousands) Shares Value Par Value Compensation Securities Adjustment Hedges Adjustment Earnings Equity

Balances, December 31, 2004 149,861 $ 150 $ 1,358,374 $ — $ 271 $ (2,419 ) $ (1,143 ) $ 151,520 $ 1,422,640 $ 2,929,393 Comprehensive income (loss):

Net income 648,695 648,695 Translation adjustment 26,589 26,589 Unrealized gains on marketable securities 34,987 34,987 Less:

reclassification adjustment for gains included in net income resulting from sale of marketable securities (16,393 ) (16,393 )

Pension liability amortization, net of income taxes of $148 253 253 Minimum pension liability adjustment, net of income taxes of

$615 (836 ) (836 ) Amortization of loss on cash flow hedges 151 151 Total comprehensive income (loss) — — — — 18,594 (583 ) 151 26,589 648,695 693,446

Issuance of common shares 9,198 9 194,455 194,464 Nabors Exchangeco shares exchanged 110 — Repurchase of common shares (1,789 ) (1 ) (17,673 ) (81,809 ) (99,483 ) Tax effect of stock option deductions 35,501 35,501 Restricted shares issued 327 21,163 (21,163 ) — Forfeitures of restricted shares (10 ) (695 ) 695 — Amortization of unearned compensation 4,819 4,819

Subtotal 7,836 8 232,751 (15,649 ) — — — — (81,809 ) 135,301 Balances, December 31, 2005 157,697 $ 158 $ 1,591,125 $ (15,649 ) $ 18,865 $ (3,002 ) $ (992 ) $ 178,109 $ 1,989,526 $ 3,758,140

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3. INVESTMENTS Certain information regarding our marketable debt and equity securities is presented below: Year Ended December 31, (In thousands) 2005 2004 2003 Available-for-sale:

Proceeds from sales and maturities $ 688,275 $ 838,816 $ 1,393,638 Realized gains, net of realized losses 16,524 13,943 3,417

4. PROPERTY, PLANT AND EQUIPMENT The major components of our property, plant and equipment are as follows: December 31, (In thousands) 2005 2004 Land $ 22,413 $ 16,801 Buildings 40,271 31,394 Drilling, workover and well-servicing rigs, and related equipment 4,565,792 4,078,244 Marine transportation and supply vessels 152,167 161,567 Oilfield hauling and mobile equipment 237,303 166,663 Other machinery and equipment 36,323 31,608 Net profits interests in oil and gas properties 195,146 139,130 Construction in process (1) 332,779 49,925 5,582,194 4,675,332 Less: accumulated depreciation and amortization (1,695,270 ) (1,399,837 ) $ 3,886,924 $ 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 2004 Current assets $ 105,073 $ 89,097 Long-term assets 155,104 143,051 Current liabilities 67,954 48,977 Long-term liabilities 40,201 40,201 Year Ended December 31, (In thousands) 2005 2004 2003 Gross revenues $ 346,127 $ 256,303 $ 312,008 Gross margin 46,722 33,911 41,809 Net income 16,119 14,184 21,689 Nabors’ Earnings from unconsolidated affiliates 5,671 4,057 10,183

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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 Carrying (In thousands) Value Fair Value 4.875% senior notes due December 31, 2009 $ 224,030 $ 224,730 5.375% senior notes due December 31, 2012 270,844 278,285 $700 million zero coupon senior exchangeable notes

due June 2023 700,000 826,700 $1.2 billion zero coupon convertible senior

debentures due February 2021 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) $ 224,030 5.375% senior notes due December 31, 2012 (par value 275,000) 270,844 $700 million zero coupon senior exchangeable notes due June 2023 700,000 $1.2 billion zero coupon convertible senior debentures due February 2021 (1) 824,789 2,019,663 Less: current portion 767,912 $ 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 $ 10,540 2007 7,974 2008 3,049 2009 2,188 2010 1,482 Thereafter 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.

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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 2004 Accrued compensation $ 88,071 $ 67,648 Deferred revenue 19,542 25,304 Workers’ compensation liabilities 37,458 28,994 Interest payable 9,728 10,442 Litigation reserves 30,182 (1) 3,737 Other accrued liabilities 39,355 35,109 $ 224,336 $ 171,234

Supplemental cash flow information for the years ended December 31, 2005, 2004 and 2003 is as follows: Year Ended December 31, (In thousands) 2005 2004 2003 Cash paid for income taxes $ 25,480 $ 29,306 $ 16,542 Cash paid for interest, net of capitalized interest 28,507 27,899 41,033 Acquisitions of businesses:

Fair value of assets acquired 38,682 — — Goodwill 9,554 — — Liabilities assumed or created (2,035 ) — — Common stock of acquired company previously owned — — — Equity consideration issued — — —

Cash paid for acquisitions of businesses 46,201 — — Cash acquired in acquisitions of businesses — — —

Cash paid for acquisitions of businesses, net $ 46,201 $ — $ —

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NCC 500 Fall 2006Final Exam Solution

4 1) New deferred revenues recorded were 5,762 less 10) (a) Decreased 225,304-19,542= 5,762 (-2 for direction; -2 for amount) (b) because the fair value is higher than book value. 2

(c) n=7, PV=278,285, FV=275,000, PMT=14,781.25 43 2a) 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 73 2b) Increase by reducing taxes paid. (-3 each direction) Loss on retirement (E) 7,441

Cash (A) 278,2858 3) 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 9(-1 each account, -2 each of the 2 amounts to -8) (-1 if 2600) Common Shares (SE) 9

Capital in excess of par (SE) 194,4558 4) 2006 payment only for current liabilities (-1.5 each account and amount to -9)

FV=$10,540, n=1, i=10% = $9,582 (-2 each input to -6)(or $10,540/1.1) (-2 each input) 12a) Increase (-3 each) 61,352,456+9,582= 1,362,038 (-2 ) Decrease (-2 if add all payments)

12b) Increase (-3 each) 66 5) a) O/S; b) NE; c) O/S (-2 each) No effect

Compensation expense (E) Accrued compensation (CL) 12c) No effect (-3 each) 6

Decrease6 6) Capital in excess of par or RE (SE) 158

Common Stock (SE) 158 12d) No effect (-3 each) 6(-2 each account and -2 amount) (-3 if indicate no entry) Decrease

8 7) a) 38682+9554-46201= 2,035 increase 12e) Increase (-3 each) 6b) 2,035 increase no effect(-2 each amount and direction)

12f) increase (-3) 37 8) Accumulated Depr and Amort (XA)

1,399,837 Beg (-2)Disposals 43,099 338,532 Depr & Amort exp. (-3) 13) a) U/S; b) O/S (-3 each) 6

1,695,270 End (-2) 20054 9) FV=$225,000; PMT=10,968.75; n=4; i=4.9971% (or 5%) Plant and equipment (A) 400

PV=-224,030 Direct costs (E) 400(-1 each input) Depreciation expense (E) 100 (number approx.)

57 Accum. Depr. (XA) 1002006Depreciation expense (E) 100 Accum. Depr. (XA) 100

63-1 math 120

NABORS

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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 company’s statements. By completing this exam, I acknowledge that I have read and agreed to abide by the School Honor Code. Points Suggested Points Assigned and Suggested Times Assigned Times Problem I TJX 52 65 minutes Problem II Nautilus 24 30 minutes Problem III The Buckle 44 55 minutes Review 30 minutes 120 180 minutes

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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

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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?

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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 (105,251)Cash payments for repurchase of common stock (603,739)Increase in accounts payable 35,010 Interest paid (29,600)Principal payments to financial institution for capital lease obligation (1,580)Payments of rent (774,900)Principal payments on long-term debt (100,000)Proceeds from borrowings of long-term debt 204,427 Proceeds from issuance of common stock 102,438 Proceeds from sale of property 9,688

5. 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 $_____________________

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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?

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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.


(b) Gross profit U/S O/S NE the year


year


(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.



year



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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?”

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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 Decrease No effect for 2009 Stockholders’ equity at the ______________ Increase Decrease No effect end of 2009

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 $50 Inventories 30 Plant and equipment 100 Goodwill 100 Liabilities 80 Alternative B Accounts Receivable $50 Inventories 30 Plant and equipment 50 Goodwill 150 Liabilities 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

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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 Decrease No effect Cash flow from operations ______________ Increase Decrease No effect for 2009 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 Decrease No effect Cash flow from operations ______________ Increase Decrease No effect for 2009

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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.


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%.



Total liabilities increase decrease no effect

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The TJX Companies, Inc. Consolidated Statements of Income

Fiscal Year Ended Amounts in thousands January 26, except per share amounts 2008Net sales $ 18,647,126 Cost of sales, including buying and occupancy costs 14,082,448 Selling, general and administrative expenses 3,126,565 Provision for Computer Intrusion related costs 197,022 Interest (income) expense, net (1,598)

Income before provision for income taxes 1,242,689 Provision for income taxes 470,939 Net income $ 771,750

The accompanying notes are an integral part of the financial statements. F-3

TJX

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The TJX Companies, Inc.

Consolidated Balance Sheets

Fiscal Year Ended January 26, January 27, In thousands 2008 2007

ASSETS

Current assets: Cash and cash equivalents $ 732,612 $ 856,669Accounts receivable, net 143,289 115,245Merchandise inventories 2,737,378 2,581,969Prepaid expenses and other current assets 215,550 159,105Current deferred income taxes, net 163,465 35,825

Total current assets 3,992,294 3,748,813

Property at cost: Land and buildings 277,988 268,056Leasehold costs and improvements 1,785,429 1,628,867Furniture, fixtures and equipment 2,675,009 2,373,117

Total property at cost 4,738,426 4,270,040Less accumulated depreciation and amortization 2,520,973 2,251,579

Net property at cost 2,217,453 2,018,461

Property under capital lease, net of accumulated amortization of $14,890 and $12,657, respectively 17,682 19,915

Other assets 190,981 115,613Goodwill and tradename, net of amortization 181,524 182,898

TOTAL ASSETS $ 6,599,934 $ 6,085,700

LIABILITIES Current liabilities:

Obligation under capital lease due within one year $ 2,008 $ 1,854Accounts payable 1,516,754 1,372,352Accrued expenses and other liabilities 1,213,987 1,008,774Federal, foreign and state income taxes payable 28,244 —

Total current liabilities 2,760,993 2,382,980

Other long-term liabilities 811,333 583,047Non-current deferred income taxes, net 42,903 21,525Obligation under capital lease, less portion due within one

year 20,374 22,382 Long-term debt, exclusive of current installments 833,086 785,645Commitments 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, 427,950 453,650 Additional paid-in capital — —Accumulated other comprehensive income (loss) (28,685) (33,989)Retained earnings 1,731,980 1,870,460

Total shareholders’ equity 2,131,245 2,290,121

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 6,599,934 $ 6,085,700

TJX

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Consolidated Statements of Cash Flows

Fiscal Year Ended January 26, January 27, In thousands 2008 2007

Cash flows from operating activities: Net income $ 771,750 $ 738,039 Adjustments to reconcile net income to net

cash provided by operating activities: Depreciation and amortization 369,396 353,110 Loss on property disposals 18,318 32,743 Asset impairment charge 7,600 — Amortization of stock compensation 57,370 69,804 Excess tax benefits from stock

compensation expense (6,756) (3,632) Deferred income tax (benefit) provision (101,799) 6,286

Changes in assets and liabilities: (Increase) decrease in accounts

receivable (25,516) 26,397 (Increase) in merchandise inventories (112,411) (201,413) (Increase) decrease in prepaid expenses

and other current assets 2,144 (23,179) Increase in accounts payable 117,304 50,165 Increase in accrued expenses and other

liabilities 202,893 170,592 Increase (decrease) in income taxes 37,909 (42,558)

Other, net 22,905 18,679

Net cash provided by operating activities 1,361,10 1,195,03

Cash flows from investing activities: OMITTED

Net cash (used in) investing activities

Cash flows from financing activities: OMITTED

Effect of exchange rate changes on cash (6,241) (8,658) )

Net (decrease) increase in cash and cash equivalents (124,057) 391,020

Cash and cash equivalents at beginning of 856,669 465,649

Cash and cash equivalents at end of year $ 732,612 $ 856,669 $

TJX

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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 Bob’s Stores, which is reflected in Bob’s Stores’ segment results. The impairment charge relates to certain long-lived assets and intangible assets (specifically the Bob’s Stores tradename discussed above) at Bob’s 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. January 26, January 27, In thousands 2008 2007

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) $ 199,881 $ omitted Market value adjustment to debt hedged with interest rate swap 1,215 (4,370) C$235 term credit facility due January 11, 2010 (interest rate Canadian Dollar Banker’s Acceptance rate plus 0.35%) 233,120 199,186

Total general corporate debt 434,216 394,633Subordinated 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) 398,870 omitted

Total subordinated debt 398,870 omitted

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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 twenty-five 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 Operating In thousands Lease Leases

Fiscal Year 2009 $ 3,726 $ 9432010 3,726 8982011 3,726 8092012 3,897 7082013 3,912 586Later years 11,084 1,715Total future minimum lease payments 30,071 $ 5,659Less amount representing interest 7,689 Net present value of minimum capital lease payments $ 22,382

The capital lease commitment relates to a 283,000-square-foot addition to TJX’s 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.

TJX

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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, January 27, In thousands 2008 2007

Employee compensation and benefits, current $ 335,180 $ 307,986Computer Intrusion 117,266 -Rent, utilities and occupancy, including real estate taxes 158,870 138,293Merchandise credits and gift certificates 141,528 128,781Insurance 48,954 51,407Sales tax collections and V.A.T. taxes 117,585 116,092All other current liabilities 294,604 266,215Accrued expenses and other current liabilities $ 1,213,987 $ 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, January 27, In thousands 2008 2007

Employee compensation and benefits, long-term $ 125,421 $ 119,978Reserve related to discontinued operations 46,076 57,677Accrued rent 150,530 141,993Landlord allowances 58,797 53,151Fair value of derivatives 143,091 96,475Tax reserve, long-term 269,157 97,448Long-term liabilities — other 18,261 16,325Other long-term liabilities $ 811,333 $ 583,047

TJX

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NAUTILUS INCPARTIAL Consolidated Statements of Income

(In Thousands Except Per Share Amounts For Period Ended) 12/31/2005 12/31/2004

NET SALES 631,310 523,837 COST OF SALES 352,496 279,043 Gross profit 278,814 244,794

NAUTILUS INCPARTIAL Consolidated Balance Sheet

In Thousands For Period Ended 12/31/05 12/31/04 CURRENT ASSETS: -- -- Cash and cash equivalents 7,984 19,266 Short-term investments -- 85,319 Trade receivables (less allowance for doubtful accounts of 116,908 95,593 $4,085 and $3,252 in 2005 and 2004, respectively) -- -- Inventories 96,084 49,104. . . . . . . . . . . STOCKHOLDERS' EQUITY: -- -- Common stock - 75,000,000 shares authorized; no par value; 1,602 9,478

issued and outstanding, 32,779,611 and 33,147,758 shares in 2005 and 2004, respectively Retained earnings 248,123 238,474 Accumulated other comprehensive income 2,741 4,084Total stockholders' equity $252,466 $252,036TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 413,286 359,641 5. Notes to Consolidated Financial Statements INVENTORIES Inventories at December 31 consisted of the following: 2005 2004 Finished goods $ 69,178 $ 31,170 Work-in-process 1,368 1,104 Parts and components 25,538 16,830 Inventories $ 96,084 $ 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.

Nautilus

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THE BUCKLE, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (Dollar Amounts in Thousands Except Share and Per Share Amounts) Accumulated Additional Unearned Other Number of Common Paid-in Retained Compen- Comprehensive Shares Stock Capital Earnings sation Loss Total BALANCE, February 2, 2008 29,841,668 298 46,977 291,045 - - 338,320 Net income - - - 104,409 - - 104,409 Dividends paid on common stock, ($.1667 per share - 1st and 2nd qtrs) - - - (15,269) - - (15,269) ($.20 per share - 3rd and 4th qtrs) - - - (18,474) - - (18,474) ($2.00 per share - 3rd qtr) - - - (92,922) - - (92,922) Common stock issued on exercise - of stock options 994,555 10 12,714 - - - 12,724 Issuance of non-vested stock, net of forfeitures 139,635 1 (1) - - - - Amortization of non-vested stock grants - - 4,879 - - - 4,879 Stock option compensation expense - - 289 - - - 289

Common stock purchased and retired (557,100) (5) (9,354) - - - (9,359) Income tax benefit related to exercise of stock options - - 13,545 - - - 13,545 3-for-2 stock split 15,487,507 155 (155) - - - - Unrealized loss on investments, - - - - - omitted omitted BALANCE, January 31, 2009 45,906,265 $ 459 $ 68,894 $ 268,789 $ - $ omitted $ omitted

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THE BUCKLE, INC. B. INVESTMENTS The following is a summary of investments as of January 31, 2009: Amortized Gross Gross Other-than- Estimated Cost or Unrealized Unrealized Temporary Fair Par Value Gains Losses Impairment ValueAvailable-for-Sale

Auction-rate securities $ 35,495 $ - $ (1,460) $ (3,757) $ 30,278Preferred stock 2,000 - - (1,400) 600

$ 37,495 $ - $ (1,460) $ (5,157) $ 30,878

Held-to-Maturity Securities: State and municipal bonds $ 31,965 $ 536 $ (90) - $ 32,411Fixed maturities 2,500 37 (7) - 2,530Certificates of deposit 2,945 42 - - 2,987U.S. treasuries 2,985 19 (9) - 2,995

$ 40,395 $ 634 $ (106) $ - $ 40,923

Trading Securities: Mutual funds $ 5,165 $ - $ (1,075) $ - $ 4,090

The following is a summary of investments as of February 2, 2008: Amortized Gross Gross Estimated Cost or Unrealized Unrealized Fair Par Value Gains Losses ValueAvailable-for-Sale Securities:

Auction-rate securities $ 145,835 $ - $ - $ 145,835

Held-to-Maturity Securities: State and municipal bonds $ 26,260 $ 375 $ (10) $ 26,625Fixed maturities 2,899 1 - 2,900U.S. treasuries 4,990 24 - 5,014

$ 34,149 $ 400 $ (10) $ 34,539Trading Securities:

Mutual funds $ 4,143 $ 5 $ (21) $ 4,127

330© Robert Libby

NCC 5000 Summer 2012Final Exam Solution

6 1) Current Non-Cur Total 2) 8Ending 335,180 125,421 460,601 (-3) beg 31,170-Beginning 307,986 119,978 427,964 transfers from WIP 390,504 352,496 CGS (-2)Change 32,637 more (-3) end 69,178(-2 if just current or non-current) -3 -3 (to -6)

3a) Cost of goods sold (+E) (-2 each) 86 2) CGS (+E) (2,737,378 - 2,837,378) 100,000 Selling, general and administrative expense (-E)

Inventories (-A) 100,000 NE, O/S, NE, NEa) 100,000 decrease -1.5 each direction and amountb) 100,000 increase 3b) Unemloyment ins. Exp. (+E) (-2 each) 8

WIP Inventory (-A)8 3a) (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 = 3.7564first half = .037564 x 199881 = 7,508.3299 1) Common Stock (-SE) 5 7.5second half = .037564 x (199881 + 58) = 7,510.5086 Additonal Paid-in Capital (-SE) 9,354Total 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) 84 3b) 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

2 3c) 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)6 4) Cash dividends paid (105,251) Stockholders' equity No effect (-2)

Cash payments for repurchase of common stock (603,739)Principal payments on capital lease obligation (1,580) 4) Alt. A would have extra Depreciation expense (+E, -SE) 6Principal payments on long-term debt (100,000) Accum. Depreciation (+XA, -A)Proceeds from borrowings of long-term debt 204,427 Net Income Alternative BProceeds from issuance of common stock 102,438 Total Assets No DifferenceCash Flows from Financing Activities (503,705) Cash Flow from Ops No Difference(-1 each omitted or extra) (-1 each wrong sign to -3) (-2 each)

6 5) RE or APIC(-1) (453,650/2) 226,825 5a) Unrealized Loss (+E, -SE) 5,157 6 Common Stock 226,825 Investments (-A) 5,157Common Stock 226,825 226,825 Net income 5157 decrease (-1.5, -1.5)Paid in capital zero 226,825 (otherwise -2 each) CFO No effect (-3)Retained earnin 2,097,285 1,870,460

perfect above answer(-1) 5b) Net unreal. Loss (+XSE, -SE) 1,460 6 Allow to value at market (+XA, -A) 1,460

6 1) -Change in End Inv (12,054.0) Net income No effect (-3)Change in Cum. CGS (12,054.0) -2 CFO No effect (-3)Change in Cum. Pretax Income 12,054.0 Taxes saved (.35 x 12,054) 4,218.9 -2 6a) Investment (+A) 500 6Change in RE 7,835.1 Equity in inc. of affiliates (+R, +SE) 500RE as reported 248,123.0 -2 Cash (+A) 200RE under FIFO 255,958.1 Investment (-A) 200(-3 if also use beginning LIFO reserve) Net income Increase (-3)

Cash flow from inv. no effect (-3)

6b) Bonds payable (-L) 6 Discount on BP (-XL) Gain on retirement (+R, +SE) Cash (-A)Net income IncreaseCash flow from operations No effectTotal liabilities Decrease

(-2 each) 44(-1 math) 76

120

TJX

Nautilus

THE BUCKLE

FG Inventory

331© Robert Libby

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