Concept explainers
Recording Transactions (in a Journal and T-Accounts); Preparing and Interpreting the
Starbucks is a coffee company—a big coffee company. During a 10-year period, the number of Starbucks locations in China grew from 24 to over 1,000. The following is adapted from Starbucks’s annual report for the year ended October 2, 2016, and dollars are reported in millions.
Assume that the following events occurred in the following quarter, which ended December 31, 2016. Dollars are in millions.
- a. Paid $1,000 cash for additional intangible assets.
- b. Issued additional shares of common stock for $10,000 in cash.
- c. Purchased equipment; paid $4,000 in cash and signed additional long-term loans for $9,500.
- d. Paid $800 cash for accounts payable owed at October 2.
- e. Conducted negotiations to purchase a coffee farm, which is expected to cost $8,400.
Required:
- 1. Calculate Starbucks’s
current ratio at October 2, 2016, prior to the transactions listed above. Based on this calculation and the analysis of Apple’s current ratio in the chapter, indicate which company is in a better position to pay liabilities as they come due in the next year. - 2. Analyze transactions (a)–(e) to determine their effects on the
accounting equation. Use the format shown in the demonstration case. - 3. Record the transaction effects determined in requirement 2 using journal entries.
- 4. Using the October 2, 2016, ending balances (reported above) as the beginning balances for the October–December 2016 quarter, summarize the
journal entry effects from requirement 3. Use T-accounts if this requirement is being completed manually; if you are using the general ledger tool in Connect, the journal entries will have been posted automatically to general ledger accounts that are similar in appearance to Exhibit 2.9. - 5. Explain your response to event (e).
- 6. Prepare a classified balance sheet at December 31, 2016.
- 7. Use your response to requirement 6 to calculate Starbucks’s current ratio after the transactions listed in (a)–(e). Based on this calculation and the calculation in requirement 1, indicate whether the above transactions increase or decrease the company’s ability to pay liabilities as they come due in the next year.
- 8. As of December 31, 2016, has the financing for the investment in assets made by Starbucks primarily come from liabilities or stockholders’ equity?
1.
Ascertain the current ratio of Company S at October 2, 2016 and compare the current ratio of Company S with current ratio of Company A.
Explanation of Solution
Current Ratio: A part of liquidity ratios, current ratio reflects the ability to oblige the short term debts of a company. It is calculated based on the current assets and current liabilities; a company has in an accounting period. A current ratio is a useful tool for analysis of financials of a company.
Calculate the current ratio of Company S and Company A at October 2, 2016as follows:
Company S:
Here,
Current assets = $ 4,760 million
Current liabilities= $4,550 million
Company A:
Current ratio of Company S is 1.05 and Company A is 1.35, so Company S has less current ratio than Company A and this indicates that Company A has better position to repay the liabilities than Company S.
2.
Analyze the given transaction, and explain their effect on the accounting equation.
Explanation of Solution
Accounting equation: Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:
Accounting equation for each transaction is as follows:
Figure (1)
Therefore, the total assets are equal to the liabilities and stockholder’s equity.
3.
Record the journal entries based on requirement 2.
Explanation of Solution
Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.
Rules of Debit and Credit: Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
- Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, and expenses.
Journal entries of Company S are as follows ($ in millions):
a. Intangible assets purchased in cash:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Intangible assets (+A) | 1,000 | |||
Cash (-A) | 1,000 | |||
(To record the purchase of intangible assets in cash) |
Table (1)
- Intangible assets are an assets account and it increases the value of asset by $1,000. Hence, debit the intangible assets account for $1,000.
- Cash is an assets account and it decreases the value of asset by $1,000. Hence, credit the cash account for $1,000.
b. Issuance of common stock:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Cash (+A) | 10,000 | |||
Common stock (+SE) | 10,000 | |||
(To record the issuance of common stock) |
Table (2)
- Cash is an assets account and it increases the value of asset by $10,000. Hence, debit the cash account for $10,000.
- Common stock is a component of stockholder’s equity and it increases the value of stockholder’s equity by $10,000, Hence, credit the common stock account for $10,000.
c. Equipment purchased on account and in cash:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Equipment (+A) | 13,500 | |||
Cash (-A) | 4,000 | |||
Notes payable (+L) | 9,500 | |||
(To record the purchase of equipment on account and in cash) |
Table (3)
- Equipment is an assets account and it increases the value of asset by $13,500. Hence, debit the equipment account for $13,500.
- Cash is an assets account and it decreases the value of asset by $4,000. Hence, credit the cash account for $4,000.
- Notes payable is a liability account, and it increases the value of liabilities by $9,500. Hence, credit the notes payable account for $9,500.
d. Cash borrowed from bank (short term):
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Cash (+A) | 800 | |||
Accounts payable (+L) | 800 | |||
(To record cash borrowed from bank) |
Table (4)
- Cash is an assets account and it increases the value of asset by $800. Hence, debit the cash account for $800.
- Accounts payable is a liability account, and it increases the value of liabilities by $800. Hence, credit the accounts payable for $800.
e. Conducted negotiations to purchase a coffee farm:
For this case, no entry is required, because it is not a business transaction.
4.
Prepare T-account for each account listed in the requirement 2.
Explanation of Solution
T-account: T-account refers to an individual account, where the increases or decreases in the value of specific asset, liability, stockholder’s equity, revenue, and expenditure items are recorded.
This account is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.’ An account consists of the three main components which are as follows:
- (a) The title of the account
- (b) The left or debit side
- (c) The right or credit side
T-accounts of Company S are as follows:
5.
Explain the appropriate response for event (e).
Explanation of Solution
Business transaction: Business transaction is a record of any economic activity, resulting in the change in the value of the assets, the liabilities, and the stockholder’s equities, of a business. Business transaction is also referred to as financial transaction.
Explain the appropriate response for event (e) as follows:
In this case, conducting negotiation to purchase a saw mill is not creating any impact on assets, liabilities and stockholder’s equity of the business, because it is not a business transaction.
6.
Prepare the classified balance sheet of Company S at December 31, 2016.
Explanation of Solution
Classified balance sheet: This is the financial statement of a company which shows the grouping of similar assets and liabilities under subheadings.
Classified balance sheet of Company S is as follows ($ in millions):
Company S | ||
Balance sheet | ||
At December 31, 2016 | ||
Assets | $ | $ |
Current Assets | ||
Cash | 6,330 | |
Short-term Investments | 130 | |
Accounts Receivable | 770 | |
Inventory | 1,380 | |
Prepaid Rent | 350 | |
Total Current Assets | 8,960 | |
Property, Plant, and Equipment | 18,030 | |
Intangible Assets | 6,040 | |
Total Assets | 33,030 | |
Liabilities | ||
Current Liabilities | ||
Accounts Payable | 3,350 | |
Notes Payable (short-term) | 400 | |
Total Current Liabilities | 3,750 | |
Notes Payable (long-term) | 12,700 | |
Total Liabilities | 16,450 | |
Stockholders’ Equity | ||
Common Stock | 10,630 | |
Retained Earnings | 5,950 | |
Total Stockholders’ Equity | 16,580 | |
Total Liabilities and Stockholders’ Equity | 33,030 |
Table (1)
Therefore, the total assets of Company S are $33,030 million, and the total liabilities and stockholders’ equity $33,030 million.
7.
Ascertain the current ratio of Company S based on requirement 6 and indicate whether the given transactions has increased or decreased the company’s ability to pay current liabilities.
Explanation of Solution
Ascertain the current ratio of Company S based on requirement 6 and indicate whether the given transactions has increased or decreased the company’s ability to pay current liabilities as follows:
Calculate the current ratio of Company S as follows (refer requirement 6):
Current ratio of Company S at December 31, 2016 (2.39) is higher than the current ratio at October 2, 2016(1.05). It clearly shows that, the given transaction has increased the company’s ability to pay its current liabilities.
8.
Indicate whether the total assets of Company S were primarily financed by liabilities or stockholder’s equity.
Explanation of Solution
Indicate whether the total assets of Company S were primarily financed by liabilities or stockholder’s equity as follows:
The invested amounts of assets primarily come from stockholder’s equity (common stock and retained earnings) of Company S, because stockholder’s equities (common stock) have financed $16,580,000,000 of Company S’s total assets, whereas liabilities (non-current and current liabilities) have financed only $16,450,000,000.
Want to see more full solutions like this?
Chapter 2 Solutions
Fundamentals Of Financial Accounting
- Grammatico Company has just completed its third year of operations. The income statement is as follows: Selected information from the balance sheet is as follows: Required: Note: Round answers to two decimal places. 1. Compute the times-interest-earned ratio. 2. Compute the debt ratio. 3. CONCEPTUAL CONNECTION Assume that the lower quartile, median, and upper quartile values for debt and times-interest-earned ratios in Grammaticos industry are as follows: How does Grammatico compare with the industrial norms? Does it have too much debt?arrow_forwardUse the following financial information from Akerley Cafe to calculate its gross profit and gross profit margin for 2015 and 2016. Round to two decimal places. 2016 2015 Cost of Sales $133,000 $140,000 Cash $20,000 $21,000 Accounts Receivable $35,000 $45,000 Revenue $200,000 $235,000 Operating Expenses $40,000 $29,000 Net Profit $27,000 $91,000arrow_forwardFinancial Statement Notes: Quarterly DataQuarterly data are presented below for Company A and Company B. One of these companies is Gibson Greetings, Inc., which manufactures and sells greeting cards. The other company is Hon Industries, Inc., which manufactures and sells office furniture. Both companies are on a calendar year basis. (Amounts in Thousands) FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Year Company A Net sales $186,111 $177,537 $203,070 $213,608 $780,326 Gross profit 55,457 53,643 64,024 69,374 242,498 Company B Net sales $84,896 $83,796 $142,137 $235,336 $546,165 Gross profit 53,900 52,983 66,018 104,961 277,862 Requireda. Compute the percent of annual net sales generated each quarter by Company A. Round to the nearest percent.b. Compute the percent of annual net sales generated each quarter by Company B. Round to the nearest percent. FirstQuarter SecondQuarter ThirdQuarter FourthQuarter a. Company A…arrow_forward
- Financial Statement Notes: Quarterly DataQuarterly data are presented below for Company A and Company B. One of these companies is Gibson Greetings, Inc., which manufactures and sells greeting cards. The other company is Hon Industries, Inc., which manufactures and sells office furniture. Both companies are on a calendar year basis. (Amounts in Thousands) FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Year Company A Net sales $186,111 $177,537 $203,070 $213,608 $780,326 Gross profit 55,457 53,643 64,024 69,374 242,498 Company B Net sales $84,896 $83,796 $142,137 $235,336 $546,165 Gross profit 53,900 52,983 66,018 104,961 277,862 Requireda. Compute the percent of annual net sales generated each quarter by Company A. Round to the nearest percent.b. Compute the percent of annual net sales generated each quarter by Company B. Round to the nearest percent. FirstQuarter SecondQuarter ThirdQuarter FourthQuarter a. Company A…arrow_forwardThe following information is taken Aiello Corporation's fiscal 2016 annual report. Selected Balance Sheet Data 2016 2015 Inventories........................ $221,418 $226,893 Accounts Receivable........... $121,333 $122,087 Assume that Aiello Corporation had $1,003,881 sales on credit during fiscal year 2016. What amount did the company collect from credit customers during the year? a. $1,003,881 b. $1,004,635 c. $1,003,127 d. $1,247,301arrow_forward10. Review the select information for Bean Superstore and Legumes Plus (industry competitors), and then complete the following. A. Compute the accounts receivable turnover ratios for each company for 2018 and 2019. B. Compute the number of days' sales in receivables ratios for each company for 2018 and 2019. C. Determine which company is the better investment and why. Round answers to two decimal places. BEAN SUPERSTORE LEGUMES PLUS Comparative Balance Sheet December 31, 2017, 2018, and 2019 Comparative Balance Sheet December 31, 2017, 2018, and 2019 2019 2018 2017 2019 2018 2017 Assets Cash $345,600 67,000 145,830 100,465 $330,460 62,000 178,011 101,202 $300,000 59,000 155,205 103,085 $407,000 85,430 128,080 182,006 $386,450 82,670 40,036 23,400 $356,367 79,230 52,142 111,701 Accounts Receivable Inventory Equipment Total Assets $658,895 $671,673 $617,290 $802,516 $532,556 $599,440 Liabilities Salaries Payable Accounts Payable Notes Payable $ 91,455 $ 90,200 70,000 41,000 $ 88,563…arrow_forward
- Complete the horizontal analysis below. Use the name of the company you belong to in your iLS Activity. Round off your answers to the nearest hundredths. Name: Income Statement for the years ending December 31, 201X and December 31, 201Y 2015 2016 Annual Percentage Growth 2015-2016 Sales 475,000 500,000 1. Cost of Goods Sold 265,000 269,000 2. Gross Profit 210,000 231,000 3. Wages 154,000 163,000 4. Repairs 5,800 4,150 5. Rent 13,000 12,000 6. Taxes 16,940 17,930 7. Office Expenses 1,023 587 8. Total…arrow_forwardCompare Income Statements and Balance Sheets of Competitors a. Following are selected income statements from two pharmaceutical companies, Pfizer and Dr. Reddy's, for their respective 2018 fiscal years. Express each income statement amount as a percentage of sales. Note: Round percentage to one decimal point (for example, round 18.566% to 18.6%). Income Statement ($ millions) Sales Pfizer Dr. Reddy's $46,136 0% $1,876 09 Cost of goods sold 11,248 0% 1,009 0% Gross profit 34,888 0% 867 0% Total expenses Net income 26,841 $8,047 0% 0% 878 $(11) 0% 0% b. Following are selected balance sheets from two pharmaceutical companies, Pfizer and Dr. Reddy's, for their respective 2018 fiscal years. Express each balance sheet amount as a percentage of total assets. Note: Round percentage to one decimal point (for example, round 18.566% to 18.6%). Balance Sheet ($ millions) Pfizer Dr. Reddy's Current assets $42,936 0% $1,448 0% Long-term assets Total assets 109,496 $152,432 0% 1,781 096 0% $3,229 09…arrow_forwardComparing Two Companies in the Same Industry: Under Armour and Columbia Sportswear The following information is available from the financial statements included in Form 10-K for fiscal years 2014 and 2013 for Under Armour, Inc. and Columbia Sportswear Company (in thousands of dollars): Under Armour, Inc. Columbia Sportswear Company Net revenues (Net sales for Under Armour, Inc. & Columbia Sportswear) for the year ended December 31, 2014 $3,084,370 $2,100,590 Accounts receivable, net: December 31, 2014 279,835 344,390 December 31, 2013 209,952 306,878 Required: 1. Calculate the accounts receivable turnover ratios for both companies for the most recent year. Assume all sales are on credit. Round your answers to 2 decimal places. Under Armour fill in the blank 1 times Columbia Sportswear fill in the blank 2 times 2. Calculate the average length of time it takes each company to collect its accounts receivable. Use 360 days and round intermediate…arrow_forward
- Rotorua Products sells agricultural products in the burgeoning Asian market. The company's current assets, current liabilities, and sales over the last five years (Year 5 is the most recent year) are as follows: Sales Cash Accounts receivable, net Inventory Total current assets Current liabilities Sales Current assets: Cash Accounts receivable, net Inventory Total current assets Current liabilities Year 1 100.0 Year 1 $ 4,513,330 $ 86,858 414,137 805,814 $ 1,306,809 100.0 100.0 100.0 100.0 100.0 % Required: 1. Express all of the asset, liability, and sales data in trend percentages. Use Year 1 as the base year. Note: Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3). % % Year 2 $ 4,867,400 $ 97,107 423,798 880,974 $ 1,401,879 $ 318,689 $ 335,942 % % % X Answer is not complete. Year 2 Year 3 $ 5,101,490 $ 88,212 447,360 824,047 $ 1,359,619 $ 324,994 % % % % % % Year 3 % % % % Year 5 Year 4 $5,485,330 $ 5,648,040 % % $ 91,910 507,318 894,402 $…arrow_forwardCompare Income Statements and Balance Sheets of Competitorsa. Following are selected income statement data for two communications companies, Comcast and Verizon, for the year ended December 31, 2018. Express each income statement amount as a percentage of sales.Note: Round percentage to one decimal point (for example, round 18.566% to 18.6%). Income Statement ($ millions) Comcast Verizon Sales $87,892 Answer $121,703 Answer Operating costs 75,498 Answer 108,585 Answer Operating profit 12,394 Answer 13,118 Answer Nonoperating expenses 6,647 Answer 5,802 Answer Net income $5,747 Answer $7,316 Answer b. Following are selected balance sheet data for two communications companies, Comcast and Verizon, for the year ended December 31, 2018. Express each balance sheet amount as a percentage of total assets.Note: Round percentage to one decimal point (for example, round 18.566% to 18.6%). Balance Sheet ($ millions) Comcast Verizon Current assets $20,319 Answer $32,211…arrow_forward
- Financial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningFinancial AccountingAccountingISBN:9781305088436Author:Carl Warren, Jim Reeve, Jonathan DuchacPublisher:Cengage Learning
- Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage LearningManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning