Finman5e_Errata_022218.pdf - 3-36 Module 3\u2002\u2002 Transactions Adjustments and Financial Statements Review 3-2\u2014Solution Income Statement Balance Sheet

Finman5e_Errata_022218.pdf - 3-36 Module 3  ...

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Review 3-2—SolutionBalance SheetIncome StatementCash Assets1Noncash Assets5Liabil-ities1Contrib.Capital1Earned CapitalRev-enues2Expen-ses5Net IncomeBalance January 1, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,00041,00026,00010,00015,000000Transactions1.Issue common stock for $3,000 cash . . . . . . . . . . . . . . . . . . . . . 3,0003,0002.Purchase inventory for $8,000 on credit . . . . . . . . . . . . . . . . . . . 8,000Inventory8,000Accounts payable3.Sell inventory costing $8,000 for $15,000 on credit. . . . . . . . . . . (8,000)Inventory15,000Accounts receivable7,00015,000Revenue8,000Cost of goods sold7,0004.Issue long-term debt for $10,000 cash . . . . . . . . . . . . . . . . . . . . 10,00010,000Long-term debt5.Pay $15,000 cash for PPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,000)15,000PPE6.Pay $500 cash for salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (500)(500)500Salaries expense(500)7.Receive $300 cash in advance for future consulting services . . . 300300Unearned revenue8.Pay $50 cash for interest on long-term debt . . . . . . . . . . . . . . . . (50)(50)50Interest expense(50)9.Receive $3,000 cash from accounts receivable. . . . . . . . . . . . . . 3,000(3,000)Accounts receivable10.Pay $2,500 cash toward accounts payable . . . . . . . . . . . . . . . . . (2,500)(2,500)Accounts payable11.Perform consulting services for client who previously paid in 7 . . (300)Unearned revenue300300Revenue30012.Pay $100 cash for dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . (100)(100)Review 3-3—SolutionBalance SheetIncome StatementCash Assets1Noncash Assets5Liabil-ities1Contrib.Capital1Earned CapitalRev-enues2Expen-ses5Net IncomeAccounting Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.Record depreciation of $600 . . . . . . . . . . . . . . . . . . . . . . . . . . . . (600)PPE(600)600Depreciation expense(600)14.Accrue salaries of $1,000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000Salaries payable(1,000)1,000Salaries expense(1,000)15.Advertising costing $1,300 is aired . . . . . . . . . . . . . . . . . . . . . . . (1,300)Prepaid expense(1,300)1,300Advertising expense(1,300)16.Accrue income taxes of $1,200 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200Taxes payable(1,200)1,200Tax expense(1,200)Balance January 31, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8,15066,1008,15013,00017,55015,30012,6502,6503-36Module 3Transactions, Adjustments, and Financial Statements
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As for all ratios, analysis of financial leverage ratios must consider ratios over time and compar-isons with peers. Appropriate financial leverage varies across industries because different business models generate cash flow streams that differ in amount and variability over time. Generally, business models that generate high and stable levels of cash flow can support a higher level of debt. The median total liabilities-to-equity ratio for all publicly traded companies in 2015 was 0.71, indicating that companies typically borrow money, but have more equity than borrowed money in their capital structures. Financial leverage ratios differ by industry and company size. The median financial leverage ratio for the S&P 500 companies, for example, was 2.74 in 2015 and ranged from 2.4 to 2.7 over the 2011–2015 period. Exhibit 4.4shows a summary of ratios used in the DuPont disaggregation of return on equity. Exhibit 4.4 Summary of Ratios in DuPont Disaggregation of Return on EquityRatioComputationWhat The Ratio MeasuresPositive Indicators IncludeReturn on equityNet income 4Avg. stockholders’ equity, or Return on assets 3Financial leverageROE measures accounting return to shareholders using net income and the book value of stockholders’ equity.
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  • Spring '18
  • Vasilika Kume

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