Module 2

During fiscal year-end 2016, Kohl's Corporation reports the following (in $ millions): net income of $556, retained earnings at the end of the year of $12,522 and retained earnings at the beginning of the year of $12,329. Assume that there were no other retained earnings transactions during fiscal 2016. What dividends did the firm pay in fiscal year ended January 28, 2017?

$ 363 million Retained earnings, 2016 = Retained earnings, 2015 + Net Income - Dividends Dividends = Retained earnings, 2015 + Net Income - Retained earnings, 2016 Dividends = $12,329+ $556- $12,522 = $363 million

In its fiscal 2016 annual report, Nike, Inc. reported cash of $3,138 million at year end. The statement of cash flows reports the following (in millions): Net cash from operating activities $3,096 Net cash from investing activities (1,034) Net cash from financing activities (2,776) What was the balance in Nike's cash account at the start of fiscal 2016?

$3,852 million Cash at end of year = Cash at beginning of year + Change in cash during the year $3,138= Cash at beginning of year + $3,096- $1,034- $2,776 Cash at beginning of year = $3,852 million

In its December 31, 2016 financial statements, Harley-Davidson reported the following (in millions): Long-term Assets Current Liabilities Long-term Liabilities Total Liabilities Equity $6,036 $ 2,863 $ 5,107 $7,970 $1,920 At December 31, 2016, current assets amount to:

$3,854 million Total assets = Total liabilities + Equity. Total assets - Long-term assets = Current assets. Current assets = $7,970 + $1,920- $6,036. Current assets = $3,854 million

In 2016, Southwest Airlines had negative net working capital of $(2,346) million and current assets of $4,498 million. The firm's current liabilities are:

$6,844 million Net working capital = Current assets - Current liabilities. Current liabilities = Current assets - Net working capital Current liabilities =$4,498- $(2,346) Current liabilities = $6,844 million

Which of the following accounts would NOT be involved in preparing the income statement?

Accumulated depreciation Accumulated depreciation is a balance sheet account.

As inventory and property plant and equipment on the balance sheet are consumed, they are reflected:

As an expense on the income statement As assets are consumed (used up), their cost is transferred to the income statement as expenses. Cash is not involved.

During fiscal 2016, Plastics and Synthetic Resins Company recorded cash of $87,800 from customers for accounts receivable collections. Which of the following financial statement effects template entries captures this transaction? Balance Sheet Income Statement Cash Assets + Noncash Assets=Liabilities +Contributed +Earned Revenues-Expenses=Net Income Capital Capital

Balance Sheet Income Statement Cash Assets + Noncash Assets = Liabilities + Contributed + Earned Revenues - Expenses =Net Income Capital Capital +87,800 -87,800 (AR) Collecting cash from customers increases cash and decreases accounts receivable. There is no income statement effect.

How would a sale of $400 of inventory on credit affect the balance sheet if the cost of the inventory sold was $160?

Both the first and the second choices, above happen simultaneously. The sale on credit is an account receivable, a noncash asset that increases revenue and therefore increases equity (the first answer choice). The sale also involves reducing inventory by $160, a noncash asset, which is an expense and therefore a decrease to equity of $160 ( the second answer choice ). Therefore both the first and second answer choices are correct so the answer is the fourth choice.

On January 1, Fey Properties collected $7,200 for six months' rent in advance from a tenant renting an apartment. Fey Company prepares monthly financial statements. Which of the following describes the required adjusting entry on January 31?

Debit Unearned rent revenue for $1,200 and Credit Rent revenue for $1,200 The adjusting entry required consists of a debit to unearned rent revenue and a credit to revenue for $1,200 ($7,200 / 6 months).

Which one of the following statement(s) is (are) most likely to be TRUE? I. In order for an asset to be reported on the balance sheet, it must be owned or controlled by the company and be expected to provide future benefits. II. Assets are reported on the balance sheet at their current market value. III. Assets are listed on the balance sheet in order of liquidity and liabilities are listed in order of maturity. IV. Liabilities and equities are both claims against the assets of a company.

I, III, and IV only we discussed the definitions of assets and liabilities, etc. Assets reported on the balance sheet must be owned or controlled by the company and must be expected to provide future benefits. These benefits can relate to the expected receipt of cash or another asset or the expected decrease in a liability. Assets are generally reported at historical costs. An exception is marketable securities. Assets are reported in the order that they are generally expected to be converted into cash. Receivables are, thus, reported before inventories, and inventories before PPE. Liabilities are reported in order of maturity, with current liabilities expected to be paid within one year and long-term liabilities expected to be paid over a longer period of time. Both liabilities and equity are claims against the assets. In the event of default of a company, liabilities are settled first against the assets of the company. The owners, however, still have an interest in the remaining assets.

How would cash collected on accounts receivable affect the balance sheet?

Increase assets and decrease assets Cash collected on accounts receivable produces an increase in cash and a decrease in accounts receivable, both asset accounts. There is no impact on liabilities or on equity.

An accrual of wages expense would have what effect on the balance sheet?

Increase liabilities and decrease equity An accrual of wages expense increase wages payable (a liability) and decreases retained earnings, resulting from the decrease in net income.

Sales on account would produce what effect on the balance sheet?

Increase noncash assets (Accounts receivable) Revenue is not on the balance sheet, therefore the first, third and fourth answers are incorrect. Cash has not yet been received from the customer.

A company in the growth phase of its product life cycle will normally have the following pattern of cash flows

Negative or positive cash flows from operations, negative cash flows from investing and positive cash flows from financing.

Which one of the following statement(s) is (are) most likely to be TRUE? I. When shareholders contribute capital to a company, earned capital increases because the company has earned the shareholders' investments. II. Revenues and expenses affect the income statement but not the balance sheet. III. Retained earnings articulate across time which means that last period's retained earnings plus current period net income (or loss) is equal to the current period's retained earnings. IV. Revenue is typically recorded as earned when cash is received because that is when the company can measure the revenue objectively

None of the above Recall we discussed the basic structures of the financial statements in M02 and M03. When shareholders contribute capital to a company, contributed, not earned, capital increases. Revenue and expense recognition increases retained earnings on the balance sheet. Revenue and expense recognition increases retained earnings on the balance sheet. Last period's retained earnings plus current period net income (or loss) less any dividends paid, is equal to the current period's retained earnings. Revenue is recorded when it is earned regardless of when cash is received

How would a purchase of inventory on credit affect the income statement?

None of the above The purchase of credit increases both accounts payable and inventory, which are balance sheet accounts. It would, therefore, have no effect on the income statement.

Which of the following are included in current assets?

Prepaid rent Taxes payable is a liability, automobiles is not a current asset but a long-term one, and common stock is an equity

Which of the following is a cash flow from operating activities?

Purchase of merchandise for resale Check LO4 Supplemental Notes

Fizzzle Inc. sold a piece of equipment during the period for $230,000 and recorded a gain of $45,000 on the sale. How should this gain be treated when preparing the operating activities section of the statement of cash flows using the indirect method?

The gain is subtracted from net income in the operating activities section. Review LO4 Supplemental Notes

One rationale for the statement of cash flows is to

reconcile differences between net income and cash receipts and disbursements. Review LO4 Supplemental Notes