Solution Manual for Financial and Managerial Accounting The Basis for Business Decisions 17th Edition Williams, Haka, Bettner, CarcelloSolution Manual for Financial and Managerial Accounting The Basis for Business Decisions 17th Edition Williams, Hak

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<p>BASIC FINANCIAL STATEMENTS
Brief
Learning
Exercises
Topic
Objectives
Skills
B. Ex. 2.1
Recording transactions
2 - 3
Analysis, communication
B. Ex. 2.2
Recording transactions
2 - 3
Analysis, communication
B. Ex. 2.3
Computing retained earnings
2 - 4
Analysis
B. Ex. 2.4
Computing total liabilities
2 - 4
Analysis
B. Ex. 2.5
Computing net income
2 - 5
Analysis
B. Ex. 2.6
Computing net income
2 - 5
Analysis
B. Ex. 2.7
Computing change in cash
2 - 6
Analysis
B. Ex. 2.8
Alternative forms of equity
2 - 8
Analysis
B. Ex. 2.9
Alternative forms of equity
2 - 8
Analysis
B. Ex. 2.10
Articulation of financial statements
2 - 7
Analysis
Learning
Exercises
Topic
Objectives
Skills
2.1
Real World: American Airlines,
2 - 3
Communication
Boston Redsox
Nature of assets and liabilities
2.2
Preparing a balance sheet
2 - 4
Analysis
2.3
Preparing a balance sheet
2 - 4
Analysis
2.4
2 - 2
Communication, judgment
2.5
Using the accounting equation
2 - 3
Analysis
2.6
Accounting equation
2 - 3
Analysis
2.7
Effects of business transactions
2 - 3
Analysis
2.8
Forms of business organizations
2 - 8
Analysis
2.9
Factors contributing to solvency
2 - 9
Analysis, judgment
2.10
Professional judgment
2 - 2
Communication
2.11
Statement of cash flows
2 - 6
Analysis
2.12
Income statement
2 - 5
Analysis
2.13
Income statement
2 - 5
Analysis
2.14
Statement of cash flows
2 - 6
Analysis
2.15
Window dressing financial statement
2 - 9
Analysis
2.16
Real World: Home Depot
Analysis, communication
Home Depot financial statements
2.17
Real World: McKesson Corporation
2 - 5
Analysis, communication
 
Assessing financial results
2–4 through 
2 - 6
CHAPTER 2
Accounting principles and asset valuation
OVERVIEW OF BRIEF EXERCISES, EXERCISES, AND CRITICAL THINKING
CASES
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Problems
Learning
Sets A, B
Topic
Objectives
Skills
2.1 A,B
2 - 4
Analysis, communication
2.2 A,B
Effects of transactions
2 - 3
Analysis
2.3 A,B
Effects of transactions 
2 - 3
Analysis
2.4 A,B
Effects of transactions 
2 - 3
Analysis
2.5 A,B
Preparing a balance sheet, effects of 
2 - 4
Communication, judgment
transactions 
 
2.6 A,B
Preparing a balance sheet, effects of 
2 - 4
Analysis, communication
transactions 
 
2.7 A,B
Preparing a balance sheet and statement 
2 - 3, 2 - 4, 2 - Analysis, communication
of cash flows, effects of transactions
 
2.8 A,B
Preparing financial statements, effects of 
2- 4 through 
Analysis, communication
of transactions, evaluating solvency
 
2.9 A,B
2 - 4, 2 - 8
2.10 A,B
2 - 2, 2 - 4
Preparing and evaluating a balance sheet
Preparing a balance sheet, discussion of 
GAAP
Preparing a balance sheet, discussion of 
GAAP
Analysis, communication, 
judgment
Analysis, communication, 
judgment
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2.1
Prepare a realistic balance sheet for a 
2 - 4
hypothetical entity
2.2
Real World: Company of student choice
2.3
Using a balance sheet
2 - 4
2.4
Using a statement of cash flows
2 - 6
2.5
Window dressing
2 - 4
2.6
2 - 4
 
(Ethics, fraud & corporate governance)
2.7
2 - 4, 2 - 5
DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASES
Problems (Sets A and B)
2.1 A,B
15   Easy
2.2 A,B
15   Easy
2.3 A,B
15   Medium
2.4 A,B
15   Medium
Locate and evaluate the financial statements of 
a publicly owned company
Critical Thinking Cases
Analysis, communication, 
judgment
Communication, research,  
technology
Analysis, communication, 
research
 
Analysis, communication 
judgment
Analysis, communication, 
judgment
Note:  Additional Internet assignments for this chapter are available in Appendix B.
Memphis Moving Company/Prosperity 
Rocky Mountain Lodge/Tri-State Lodge
Shown below are brief descriptions of each problem and case. These descriptions are accompanied by 
the estimated time (in minutes) required for completion and by a difficulty rating. The time estimates 
assume use of the partially filled-in working papers.
Real World: Public Company Accounting 
Oversight Board
Technology
Real World: Cisco Systems 
(Internet)
Introduction to EDGAR
2 - 4 through  
2 - 6
Judgment
Phillips Truck Rental/MaxxTrucking
Show in tabular form the effects of various business transactions 
upon the accounting equation. (Alternate to Problem 2–3.)
Prepare a balance sheet from a list of balance sheet items in 
random order. Determine the amount of one item as a plug figure. 
Also evaluate the company’s solvency.
Effects of transactions upon the accounting equation are illustrated 
in tabular form. Students are asked to write a sentence or two 
explaining the nature of each transaction.
Maxwell Communications/Delta Corporation
Show in tabular form the effects of various business transactions 
upon the accounting equation. (Problem 2–4 is an alternate.)
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Problems (cont'd)
Here Come the Clowns/Circus World
Alexander Farms, Inc./Maple Valley Farms
Franklin Bakery/Collier Butcher Shop
The Soda Shop/The Sweet Shop
Spencer Playhouse/Old Town Playhouse
Big Screen Scripts/Star Scripts
Critical Thinking Cases
Content of a Balance Sheet
Using Financial Statements
*Omits time required to obtain an annual report.
2.5 A,B
20  Medium
2.6 A,B
20  Medium
Preparation of a balance sheet for a circus—an entity with an unusual variety 
of asset accounts. Also requires students to explain the effects upon this 
balance sheet of a fire that destroys one of the assets. (Problem 2–6 is an 
alternate.)
Prepare a balance sheet for a farm—an entity with a wide variety of assets. 
Also, explain the effects upon this balance sheet of the destruction of one of 
the assets. (Alternate to Problem 2–5.)
2.7 A,B
35  Medium
2.8 A,B
40  Strong
Prepare a balance sheet from an alphabetical listing of accounts, and prepare a 
second balance sheet and a statement of cash flows after some additional 
transactions. Evaluate the company’s relative solvency at each date.
The student is asked to prepare a balance sheet from an alphabetical list of 
accounts and then to prepare a second balance sheet as well as an income 
statement and a statement of cash flows, after several transactions. Evaluate 
the company’s relative solvency at each date.
35  Strong
2.10 A,B
30  Strong
Given an improperly prepared balance sheet, student is asked to prepare a 
corrected balance sheet and to explain the proper valuation of assets, 
liabilities, and owners’ equity. Stresses generally accepted accounting 
principles.
Given a balance sheet and supplementary information concerning the assets 
and liabilities, the student is asked to prepare a corrected balance sheet and to 
explain the violations that exist as to asset valuation and the entity concept. 
Stresses GAAP.
2.9 A,B
30  Medium
2.2
30  Strong*
Students are to obtain an annual report from the library and answer questions 
about the company’s balance sheet, income statement, and statement of cash 
flows. Suitable assignment for groups or individuals.
Students are to prepare a realistic balance sheet for a hypothetical 
business—the nature of which is specified by the instructor. Challenges the 
student to think about the types of assets and liabilities arising in an actual 
business. Suitable assignment either for groups or individuals.
2.1
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Using a Balance Sheet
Using Statements of Cash Flow
on hand.
Ethics and Window Dressing
2.6 Public Company Accounting Oversight Board
30 Easy
Ethics, Fraud & Corporate Governance
Gathering Financial Information
Internet
30  Medium
Students locate the PCAOB and state the mission, identify the members, and 
describe the authority and responsibility of the PCAOB.
2.5
2.3
2.4
2.7
25  Easy
Visit EDGAR, the SEC’s database, and gather financial information about 
Cisco Systems. A user-friendly “meet EDGAR” type of problem.
30  Medium
A tried-and-true case in which students are to evaluate the financial position of 
two similar companies first from the viewpoint of a short-term creditor and 
then from the viewpoint of a buyer of the business. We always  use this one.
35  Medium
Students are presented with abbreviated cash flow information and asked to 
decide which is in a stronger position. An excellent way to show that how a 
company generates its cash is equally important to how much cash it has
Students are to distinguish between legitimate window dressing and fraudulent 
misrepresentation. Allows introduction of ethics, securities laws, and the role 
of independent audits.
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1.
2.
3.
4.
5.
6.
The basic accounting equation is assets = liabilities + owners’ equity. Assets are resources 
owned by the company that are used in carrying out its business activities. Liabilities are 
debts owed by the enterprise, and owners’ equity is the interest of the owners in the 
enterprise’s assets.
The going concern assumption states that in the absence of evidence to the contrary (i.e., 
bankruptcy proceedings), an enterprise is expected to continue to operate in the foreseeable 
future. This means, for example, that it will continue to use the assets it has in its financial 
statements for the purpose for which they were acquired. Under the going concern 
assumption, all elements in the financial statements are based on an assumption that the 
business will continue for the foreseeable future.
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
Many of these questions are well suited to classroom discussions. These discussions can stimulate 
students’ interest, help develop verbal skills, and provide instructors with an opportunity to introduce 
ideas and situations not discussed in the text. If class size permits, we also encourage instructors to 
review and evaluate selected written assignments throughout the course.
The basic purpose of accounting  is to provide decision makers with information useful in 
making economic decisions.
A knowledge of accounting terms and concepts is useful to persons other than professional 
accountants because nearly everyone working in business, government, or the professions 
will encounter these terms and concepts. Supervisors and managers at every level use 
financial statements, budgets, or other forms of accounting reports. Investment in securities 
or real estate also calls for the understanding and use of accounting information. In every 
election, propositions on the ballot and in the platforms of candidates can be much better 
understood by voters who are familiar with accounting. Accounting information is also 
useful to individuals in handling their personal financial affairs. In short, all economic 
activity is supported by accounting information.
Revenues result from transactions in which goods or services are transferred (i.e., sold) to 
customers. Expenses are costs associated with earning revenues. Revenues result in positive 
cash flows, while expenses result in negative cash flows. An enterprise’s net income is 
determined as the excess of revenues over expenses for a period of time. If expenses exceed 
revenues, however, the difference is called a net loss.
Business transactions affect a company’s financial position, and as a result, they change the 
statement of financial position or balance sheet. The other financial statements—the income 
statement and the statement of cash flows—are detailed expansions of certain aspects of the 
statement of financial position and help explain in greater detail how the company’s 
financial position changed over time.
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7.
8. a.
b.
9.
10.
11.
12. Adequate disclosure refers to the requirement that financial statements, including
accompanying notes, must include information necessary for reasonably informed users of 
financial statements to understand the company’s financial activities. This requirement is met, 
in part, by the addition of notes to the financial statements. Financial statement notes include 
both quantitative and qualitative information that is not included in the body of the financial 
statements.
Operating activities—Cash provided by and used in revenue and expense transactions.
Investing activities—Cash provided by and used as a result of investments in assets, such as 
machinery, equipment, land, and buildings.
Financial statements—the balance sheet, income statement, statement of cash flows—are all 
based on the same underlying transactions. They reflect different aspects of the enterprise’s 
activities. Their relationship is referred to as “articulation.” For example, the revenues and 
expenses in the income statement result from changes in the assets and liabilities in the 
balance sheet and their cash effects are presented in the operating activities section of the 
statement of cash flows.
Financing activities—Cash provided by and used in debt and equity financing, such as 
borrowing and repaying loans, and new capital received from investors and dividends paid to 
the enterprise’s owners.
Positive cash flows means that cash increases. Negative cash flows means that cash decreases. 
Generally, revenues result in positive cash flows—either at the time of the revenue transaction, 
earlier, or later. Expenses result in negative cash flows—either at the time the expense is 
incurred, earlier, or later.
The three categories and the information included in each are:
No, a business transaction could not affect only a single asset. There must be an offsetting
change elsewhere in the accounting equation. If the transaction increases an asset, for
example, it must reduce another asset, increase a liability, or increase owners’ equity (or some 
combination of these). On the other hand, if the transaction decreases an asset, it must increase 
another asset, decrease a liability, or decrease owners’ equity (or some combination of these).
An example of a transaction that would cause one asset to increase and another asset to 
decrease without any effect on the liabilities or owners’ equity is the receipt of cash in 
collection of an account receivable. Another common example is the payment of cash to 
buy land, a building, office equipment, or other assets.
An example of a transaction that would cause both total assets and total liabilities to 
increase without any effect on the owners’ equity is the purchase of an asset on credit. The 
acquisition of the asset could be entirely on credit or could involve a partial cash payment 
with the balance on credit. Another example is an increase in cash as a result of borrowing 
from a bank.
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13.
14.
15.
A strong income statement is one that has significantly more dollars of revenue than expenses, 
resulting in net income that is a relatively high percentage of the revenue figure. A trend of 
relatively high income numbers over several accounting periods signals a particularly strong 
income situation.
A strong statement of cash flows is one that shows significant amounts of cash generated from 
operating activities. This means that the enterprise is generating cash from its ongoing 
activities and is not required to rely heavily on debt and equity financing, or on the sale of its 
major assets, to finance its daily operations.  A trend of relatively high cash flows provided by 
operations numbers over several accounting periods signals a particularly strong cash flow 
situation. 
The term “window dressing” refers to enhancing the appearance of the enterprise’s financial 
statements by taking certain steps near the end of the financial reporting period. While some 
steps that may be taken, or delayed, are appropriate, care must be taken that steps taken are not 
unethical or illegal.
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B. Ex. 2.1
B. Ex. 2.2
B. Ex. 2.3
B. Ex. 2.4
B. Ex. 2.5
B. Ex. 2.6
B. Ex. 2.7
Increases in cash:
Revenues
$100,000
Sale of land
10,000
Borrowing from bank
15,000
$125,000
Decreases in cash:
Expenses
56,000
Purchase of truck
25,000
(81,000)
Net increase in cash
$44,000
B. Ex. 2.8
Joe Solway, Capital
$25,000
Tom Solway, Capital
25,000
$50,000
B. Ex. 2.9
Capital stock
$40,000
Retained earnings
10,000
$50,000
$70,000 (total equity) - $50,000 (capital stock) = $20,000 (retained earnings)
SOLUTIONS TO BRIEF EXERCISES
Walters Company's assets (machinery) will increase by $20,000. The company's liabilities will 
also increase by $20,000 to include the new obligation the company has assumed.
Foster Inc.'s assets will increase by a net amount of $30,000. Cash will decrease by $5,000 and 
the truck account will increase by $35,000, a net increase of $30,000. The company's liabilities 
will also increase by $30,000 to reflect the new obligation that has been assumed.
$155,000 (assets) - $85,000 (liabilities) = $70,000 (total equity)
$135,000 (revenues) - $50,000 (expenses) = $85,000 net income
Note: The year-end cash balance of $35,000 does not affect the amount of net income.
Yes, the company has liabilities because its assets exceed its capital stock and its retained 
earnings.       $780,000 (assets - [$500,000 + 150,000](equity) = $130,000 (liabilities)
$300,000 (revenues) - $205,000 (expenses) = $95,000 (net income)
Note: The purchase of land for $55,000 does not affect net income.
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B. Ex. 2.10
50,000
$          
Add:
20,000
          
25,000
           
95,000
$          
Net income for 2015……………………………
Balance, December 31, 2015…………………………………
The end-of-year balance of owner’s equity in the balance sheet is $95,000. 
This amount articulates with the amount of net income in the income 
statement because net income is added to the amount of beginning owner’s 
equity, plus additional investment, to determine the ending balance that 
appears in the December 31 statement of financial position. The 
accounting equation stays in balance because the amount of net income is 
reflected in changes in the balances of various assets and liabilities that are 
also presented in the balance sheet.
Ben Washington, owner’s equity:
Balance, January 1, 2015……………………………………
Investment during 2015…………………………
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Ex. 2.1
a.
1.
2.
b.
1.
2.
Liabilities:
$79,000 
$288,000 
70,000
36,000
14,000
$324,000 
165,000
Owners’ equity:
80,000
92,000
70,000
62,000
$478,000 
$478,000 
    Capital stock……………………..
SOLUTIONS TO EXERCISES
Assets are economic resources owned by the business entity.
Among the assets of American Airlines we might expect to find
investments, accounts receivable (say, from travel agents), fuel (in
storage), maintenance supplies, aircraft, and various types of equipment.
The company also owns land and buildings—as, for example, its corporate 
headquarters.
Among the assets of a professional sports team are investments (in stocks and 
bonds), notes receivable (often from players), training equipment, supplies, and 
office furniture. (The balance sheet of a professional sports team may not 
include land or buildings, as they generally do not own the stadiums in which 
they play.)
Liabilities & Owners' Equity
   Notes payable …………………….
   Accounts payable …………………
         Total liabilities………………..
Assets
Cash ……………………….
Accounts receivable ………
Supplies ……………………
Automobiles ………………
Building …………………..
Land …………………..
Total ………………………
Total…………………………………
   Retained earnings………………..
Note to instructor:  You may wish to expand this solution to include intangible assets, such as the 
team’s league franchise, and player contracts, the right to receive the future services of a given 
player. (Player contracts only appear as an asset if they have a cost—that is, if they were 
purchased from other teams. Advance payments to players usually are shown as prepaid 
expenses.) We address intangible assets in Chapter 9, but the concept is consistent with the 
discussion of assets in Chapter 2.
Liabilities are existing debts and other obligations of the entity.
Among the liabilities of American Airlines, we might expect to find accounts 
payable, notes payable (or mortgages or bonds payable) stemming from 
purchases of aircraft, salaries payable, interest payable, rent payable (for space 
in airports), and income taxes payable.
The balance sheet of a professional sports team might include accounts payable, 
rent payable (for the stadium), salaries payable, interest payable, and income 
taxes payable.
Note to instructor:  In a classroom discussion, you might want to point out that both an airline 
and a professional sports team may have liabilities for unearned revenue. The airline sells many 
tickets in advance, thus incurring an obligation to render services (flights) or to refund the 
customers’ money. A sports team has a similar obligation with respect to advance sales of tickets, 
particularly season tickets. We discuss unearned revenue in Chapter 4, but the concept can be 
introduced earlier at the instructor’s discretion.
Ex. 2.2
WILLIS TRANSPORTATION SERVICE
Balance Sheet
February 28, 2015
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$36,300 
Liabilities:
56,700
   Notes payable ………………………… $207,000 
12,400
   Accounts payable ………………………
43,800
210,000
$250,800 
90,000
Owners’ equity:
   Capital stock ……………………………
88,000
66,600
$405,400 
$405,400 
Ex. 2.4
a.
b.
c.
Ex. 2.5
a.
b.
c.
The amount of retained earnings is calculated as the difference between total assets 
and liabilities plus capital stock: $405,400 – ($250,800 + $88,000) = $66,600
The supplies should be presented at $1,400 in World-Wide’s balance sheet. 
Presenting the supplies at their estimated liquidation value  violates the assumption 
that World-Wide is a going concern,  and will use these supplies in normal business 
operations, rather than sell them on the open market. The $500 amount also 
violates the objectivity principle,  as it is largely a matter of personal opinion.
$293,000: Assets $635,000  liabilities $342,000 = owners’ equity $293,000
$1,172,500: Liabilities $562,500 + owners’ equity $610,000 = assets $1,172,500
$120,300: Assets $307,500  owners’ equity $187,200 = liabilities $120,300
The presentation of the two land parcels at a combined value of $340,000 in the 
2015 balance sheet conforms to generally accepted accounting principles. This 
treatment illustrates both the cost principle  and the stable-dollar assumption.
The presentation of the computer system at $14,000 in the December 31, 2015 
balance sheet conforms to generally accepted accounting principles, as this is the 
cost of the system, and at the balance sheet date, it was an asset  owned by the 
company. The retail value of $20,000 is not presented in the balance sheet,  as his 
amount is not the cost incurred by the entity, nor is it an objective measurement.
However, the company’s failure to disclose the loss of the equipment subsequent to 
the balance sheet date may violate the principle of adequate disclosure.  To properly 
interpret the company’s balance sheet, users may need to be aware that this asset 
no longer exists. Several issues must be considered in deciding whether or not 
disclosure of the burglary loss is necessary. For example, was the asset insured? 
And is a $14,000 asset significant (material) in relation to the assets and operations 
of this business? Is this amount large enough that it might impact investors’ and 
creditors’ decisions regarding the company?
Balance Sheet
December 31, 2011
Total………………………………………
   Retained earnings ……………………
Total …………………………
     Total liabilities…………………………
Liabilities & Owners' Equity
Cash …………………………
Ex. 2.3
KINER COMPANY
Assets
Accounts receivable …………
Office Equipment ……………
Building ……………………..
Land…………….
 
 
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Ex. 2.6
Assets
=
Liabilities
+
Owners’ 
I
I
NE
NE*
NE
NE
D
D
NE
D
D
NE
I
NE
I
I
I
NE
I
NE
I
NE*
NE
NE
NE*
NE
NE
Ex. 2.7
a.
b.
c.
d.
e.
Ex. 2.8
a.
 $        390,000 
 $        240,000 
           150,000 
 $        390,000 
 $        270,000 
           120,000 
 $        390,000 
          Retained earnings ……………………………………………………
               Total stockholders' equity ………………………………………
*Capital stock = 27 x $10,000 = $270,000. Retained earnings = $390,000 
$270,000 capital stock = $120,000.
               Total …………………………………………………………….
         *Yato’s capital = $390,000  Spencer's capital, $240,000 = $150,000.
(3)  Stockholders' equity:
          Capital Stock …………………………………………………………
(2)  Partners' equity:
f
g
h
i
Note to instructor:  These are examples, but many others exist.
(1)  Owner's equity
Transaction
a
b
c
d
e
          Johanna Spencer, capital ……………………………………………
          Mikki Yato, capital …………………………………………………
*Could be I/D offsetting
The purchase of office equipment (or any other asset) on credit will cause an increase 
in the asset (office equipment) and an increase in a liability.
The cash payment of an account payable or note payable will cause a decrease in the 
asset cash and a decrease in the liability paid.
The collection of an account receivable will cause an increase in one asset (cash) and 
a decrease in another asset (accounts receivable). Other examples include the 
purchase of land for cash, and the sale of land for cash.
The investment of cash in the business by the owners will cause an increase in an 
asset (cash) and an increase in the owners’ equity.
The purchase of an automobile (or other asset) paying part of the cost in cash and 
promising to pay the remainder at a later time would cause an increase in one asset 
(automobile), a decrease in another asset (cash), and an increase in a liability by the 
amount of the unpaid portion.
          Johanna Spencer, capital ………………………………………….
        *$850,000 in assets  $460,000 in liabilities = $390,000.
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b.
Ex. 2.9
a.
b.
c.
d.
Ex. 2.10
a.
b.
The situations encountered in the practice of accounting and auditing are too 
complex and too varied for all specific answers to be set forth in a body of official 
rules. Therefore, individual accountants must resolve many situations based upon 
their general knowledge of accounting, their experience, and their ethical 
standards—in short, their professional judgment.
Accountants must rely on their professional judgment in such matters as 
determining (three required) (1) how to record an unusual transaction that is not 
discussed in accounting literature, (2) whether or not a specific situation requires 
disclosure, (3) what information will be most useful to specific decision makers, (4) 
how an accounting system should be designed to operate most efficiently, (5) the 
audit procedures necessary in a given situation, (6) what constitutes a fair 
presentation of financial information, (7) whether specific actions are ethical and 
are in keeping with the accountants’ responsibilities to serve the public interests.
Accounts payable is a liability that requires payment, usually in the near future and 
usually by paying cash.  Thus, existing accounts payable detract  from liquidity.
Accounts receivable are assets that will shortly convert into cash as payments are 
received from customers. Therefore, they contribute to the company’s liquidity.
The capital stock account is the owners’ equity in the business. It represents 
amounts originally invested in the business by the owners, but says nothing about 
the form in which the company now holds these resources—nor even whether the 
resources are still on hand. Thus, the capital stock account has no direct effect  upon 
liquidity. On the other hand, the amount of the owners’ equity, related to the 
amount of the liabilities is an important factor in evaluating liquidity.
Yes; the form of Spencer's organization is relevant to a lender. If the company is 
not incorporated, the owner or owners are personally liable  for the debts of the 
business organization. Thus, if the business is organized as a sole proprietorship, it 
is actually Spencer’s personal debt-paying ability that determines the collectibility 
of loans to the business. If the business is a partnership, all of the partners are 
personally liable for the company’s debts.
On the other hand, if Spencer is organized as a corporation, a lender may look only 
to the corporate entity for payment.
Note to instructor:  You may wish to point out that some lenders would not make sizable loans to a 
small corporation unless one or more of the stockholders personally guaranteed  the loan. This is 
accomplished by having the stockholder(s) cosign the note.
Cash is the most liquid of all assets. In fact, companies must use cash in paying most 
bills. Therefore, cash contributes more to a company’s liquidity than any other 
asset.
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Cash received from revenues …………………………………
Cash paid for expenses ………………………………………
Net cash provided by operating activities …………………… 
 
4,400
        
(2,500)
       
Cash flows from financing activities:
Cash received from sale of capital stock ……………………
Cash used to repay bank loans ………………………………
Net cash provided by financing activities …………………… 
4,500
6,400
$      
Cash balance, October 1, 2011 …………………………………  
7,450
        
13,850
$    
 $      9,850 
Expenses ………………………………………………………………………..          5,465 
 $      4,385 
 $    17,000 
         7,800 
 $      9,200 
     Investment by stockholders
     Loan from bank
     Payments to long-term creditors
     Purchase of land
The following four items represent cash flows, but are not revenues or expenses that 
are in the income statement:
Income Statement
For the Month Ended August 31, 2015
Service revenues ……………………………………���…………………………
(3,000)
$      
Net income ………………………………………………………………………
PRESTWICK COMPANY
Expenses …………………………………………………………………………
Revenues …………………………………………………………………………
Net income ………………………………………………………………………
Income Statement
Ex. 2.11
WELLER COMPANY
Statement of Cash Flows
For the Month Ended October 31, 2015
Ex. 2.13
Ex. 2.12
JIMINEZ, INC.
Cash paid for equipment ……………………………………………….
For the Month Ended March 31, 2015
The cash received from bank loans is a positive cash flow—financing activity—in the 
statement of cash flows, but is not included in the income statement. Dividends paid to 
stockholders are a negative cash flow—financing activity—in the statement of cash 
flows, but are not included in the income statement.
Cash flows from operating activities:
12,000
$      
(7,600)
$      
Increase in cash ……………………………………………………
Cash flows from investing activities:
Cash balance, October 31, 2011 …………………………………
7,500
$        
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17,000
$    
(7,800)
       
 
         9,200 
     (16,000)
15,000
$    
5,000
        
(11,700)
     
         8,300 
 
1,500
$      
 
7,200
        
 
8,700
        
Cash flows from financing activities:
Cash balance, August 1, 2015 …………���………………………
Cash balance, August 31, 2015 ……………………………………
Statement of Cash Flows
For the Month Ended August 31, 2015
 
Increase in cash
Cash received from investment by stockholders ……………
Cash paid to long-term creditors ……………………………
Cash received from bank loan ……………………………
Ex. 2.14
Cash received from revenues …………………………………
Cash paid for expenses ………………………………………
Net cash provided by operating activities ……………………
Cash paid for purchase of land ………………………………
Cash flows from operating activities:
Cash flows from investing activities:
PRESTWICK COMPANY
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Ex. 2.15
Steps to Window Dress
IS—No impact
BS—Higher cash balance
BS—Higher cash and liability balances
Impact on Financial Statements*
BS—Higher cash balance
IS—No impact
SCF—Higher cash from operating activities
SCF—Higher cash flow from financing activities
SCF—Lower cash used in investing activities
BS—Reduced cash and liability balances
Delay cash payment of expenses 
at year-end (assume expense 
already incurred)
Accelerate payment of liabilities 
at year-end
SCF—Lower cash balance
Delay purchase of equipment (or 
other noncurrent asset)
BS—Higher receivables and owners’ equity 
IS—No impact
Note to instructor:  Many examples of steps to improve the financial statements could 
be cited. The ones listed below are those that the authors believe are most likely to be 
identified by students.
SCF—No impact (assuming receivables not 
Acceleration of credit sales at 
year-end
IS—No impact
SCF—Higher cash flow from financing activities
IS—No impact
        balances
Year-end borrowing
BS—Higher cash and owners’ equity balances
*BS = Balance sheet; IS = Income statement; SCF = Statement of cash flows
Year-end investment by owner
IS—Higher sales and net income
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Ex. 2.16
a.
b.
End
Beginning
c.
debt ($9,475 million), followed by accounts payable ($5,376 million).
Ex. 2.17
Net income as a percentage of revenue for each year is as follows:
2010: $1,263/$108,702 = 1.16%
2011: $1,202/$112,084 = 1.07%
Home Depot reports a net income (earnings) of $4,535 million for the year ended 
February 3, 2013.
Cash balances at the beginning and end of the year were:
$2,494 million
$1,987 million
The trend is variable.  In all three years, the percentage of net income to revenues is slightly 
above 1%.  Despite this somewhat negative trend in the percentage of net income to revenue, the 
absolute dollar amounts of net income are quite large, and the most current year (2012) is a 
significant improvment over 2011.  Revenues have grown steadily over the period, which is a 
positive sign.  It declines in 2011, then returns in 2012 to almost the same percentage as in 2010.
The three largest causes of decreases in cash during the year were capital 
expenditures ($1,312 million), repurchases of common stock ($3,984 million), and 
cash dividends paid to stockholders ($1,743 million).
2012:   $1,403/$122,734 = 1.14%
The largest asset is property and equipment ($38,491 million - $14,422 million: 
$24,069 million) followed by merchandise inventory ($10,710 million).  The 
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a.
Liabilities & Owners' Equity
Cash
31,400
$           
Liabilities:
Accounts receivable
10,600
             
   Accounts payable
54,800
$            
Furnishings
58,700
             
   Salaries payable
33,500
              
Equipment
39,200
             
   Interest payable
12,000
              
Snowmobiles
15,400
             
   Notes payable
620,000
            
Buildings
500,000
           
720,300
$          
Land
425,000
           
Owners' equity:
   Capital stock
135,000
            
   Retained earnings (1)
225,000
            
Total
1,080,300
$      
Total
1,080,300
$       
(1) Computed as total assets, $1,080,300, less total liabilities, $720,300, less capital stock, 
$ 135,000.
b.
SOLUTIONS TO PROBLEMS SET A
PROBLEM 2.1A
ROCKY MOUNTAIN LODGE
15 Minutes, Easy
Note to instructor:  Students were asked to base their answers to part b  on the balance sheet alone. 
Students may correctly point out that a balance sheet does not indicate the rate at which cash 
flows into a business. Perhaps the company can generate enough cash from daily operations to pay 
its debts.  A recent statement of cash flows would be useful in making a more complete analysis of 
the company's financial position.
Assets
ROCKY MOUNTAIN LODGE
Balance Sheet
December 31, 2015
The balance sheet indicates that Rocky Mountain Lodge is in a weak financial position.
The highly liquid assets—cash and receivables—total only $42,000, but the company has
$100,300 of debts due in the near future (accounts payable, salaries payable, and interest
payable).
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15 Minutes, Easy
a.
b.
c.
d.
e.
f.
PROBLEM 2.2A
$15,000 cash was received from the sale of capital stock.
Purchased equipment on account for $7,500.
MEMPHIS MOVING COMPANY
Purchased equipment at a cost of $13,500; paid $3,500 cash as down payment and incurred a 
liability (account payable) for the remaining $10,000.
Paid $14,500 of accounts payable.
Received $900 cash from collection of accounts receivable.
Purchased equipment for cash at a cost of $3,200.
Description of transactions:
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15 Minutes, Medium
Owners' 
                              Assets
=
Equity
Office
Notes
Accounts
Capital
         Cash    +   Equipment   +    Building  +
 Land =
    Payable   +
   Payable   +
Stock
December 31 balances
37,000
$          
51,250
$         
125,000
$       
95,000
$         
80,000
$         
28,250
$         
200,000
$      
(1)
35,000
           
35,000
         
Balances
72,000
$          
51,250
$         
125,000
$       
95,000
$         
80,000
$         
28,250
$         
235,000
$      
(2)
(22,500)
          
55,000
         
35,000
67,500
          
Balances
49,500
$          
51,250
$         
180,000
$       
130,000
$       
147,500
$       
28,250
$         
235,000
$      
(3)
 
9,500
 
9,500
           
Balances
49,500
$          
60,750
$         
180,000
$       
130,000
$       
147,500
$       
37,750
$         
235,000
$      
(4)
20,000
           
20,000
          
 
Balances
69,500
$          
60,750
$         
180,000
$       
130,000
$       
167,500
$       
37,750
$         
235,000
$      
(5)
(22,250)
$        
 
(22,250)
$       
Balances
47,250
$          
60,750
$          
180,000
$        
130,000
$        
167,500
$        
15,500
$          
235,000
$       
 
 
MAXWELL COMMUNICATIONS
                    Liabilities        +
PROBLEM 2.3A
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15 Minutes, Medium
Owners' 
                              Assets
=
Equity
Accounts
Office
Notes
Accounts
Capital
         Cash    +  Receivable +  Equipment   +        Trucks =      Payable  +
   Payable   +
Stock
December 31 balances
9,500
$          
13,900
$         
3,800
$          
68,000
$         
20,000
$         
10,200
$         
65,000
$           
(1)
(2,700)
            
2,700
           
Balances
6,800
$          
13,900
$         
6,500
$          
68,000
$         
20,000
$         
10,200
$         
65,000
$           
(2)
4,000
            
(4,000)
          
 
Balances
10,800
$          
9,900
$          
6,500
$          
68,000
$         
20,000
$         
10,200
$         
65,000
$           
(3)
(3,200)
            
 
(3,200)
          
Balances
7,600
$          
9,900
$          
6,500
$          
68,000
$         
20,000
$         
7,000
$          
65,000
$           
(4)
10,000
           
10,000
          
 
Balances
17,600
$          
9,900
$          
6,500
$          
68,000
$         
30,000
$         
7,000
$          
65,000
$           
(5)
(15,000)
          
30,500
         
15,500
          
Balances
2,600
$          
9,900
$          
6,500
$          
98,500
$         
45,500
$         
7,000
$          
65,000
$           
(6)
85,000
           
85,000
            
Balances
87,600
$          
9,900
$          
6,500
$          
98,500
$         
45,500
$         
7,000
$          
150,000
$         
PHILLIPS TRUCK RENTAL
                    Liabilities        +
PROBLEM 2.4A
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20 Minutes, Medium
a.
Liabilities & Owners' Equity
Cash *
22,520
$           
Liabilities:
Notes receivable
9,500
               
   Notes payable
180,000
$          
Accounts receivable
7,450
               
   Accounts payable
26,100
              
Animals
189,060
           
   Salaries payable
9,750
                
Cages
24,630
             
         Total liabilities
215,850
$          
Costumes
31,500
             
Owners' equity:
89,580
             
   Capital stock 
300,000
            
Tents
63,000
             
   Retained earnings
27,230
              
Trucks & wagons
105,840
           
 
 
Total
$543,080
Total
$543,080
 
*
b.
 
PROBLEM 2.5A
HERE COME THE CLOWNS!
The loss of an asset, Tents, from a fire would require a revised balance sheet that reflects a decrease 
in total assets. When total assets are decreased, the other balance sheet total (that is, the total of 
liabilities and owners’ equity) must also decrease.  Since there is no change in liabilities as a result of 
the destruction of an asset, the decrease on the right-hand side of the balance sheet must be in owners' 
equity---specifically, the retained earnings account.  The amount of the decrease in the assets Tents, 
in Retained earnings, and in both balance sheet totals, is $14,300.
HERE COME THE CLOWNS!
Balance Sheet
Props and equipment
June 30, 2015
Assets
Total liabilities and owners' equity, $543,080, minus total of all other assets, $520,560 ($9,500 + 
$7,450 + $189,060 + $24,630 + $31,500 + $89,580 + $63,000 + $105,840).
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20 Minutes, Medium
a.
Liabilities & Owners' Equity
Cash
16,710
$           
Liabilities:
Accounts receivable
22,365
             
   Notes payable
330,000
$          
Barns and sheds
78,300
             
   Accounts payable
77,095
              
Citrus trees
76,650
             
   Property taxes payable
9,135
                
Livestock
120,780
           
   Wages payable
5,820
                
20,125
             
         Total liabilities
422,050
$          
Farm machinery
42,970
             
Owners' equity:
Fences & gates
33,570
             
   Capital stock 
290,000
            
Land
490,000
   Retained earnings *
189,420
            
Total
901,470
$         
Total
901,470
$          
 
b.
PROBLEM 2.6A
ALEXANDER FARMS, INC.
September 30, 2015
Assets
*Total assets, $901,470, minus total liabilities, $422,050, less capital stock, $290,000.
The loss of an asset, Barns and Sheds, from a tornado would cause a decrease in total assets. When 
total assets are decreased, the balance sheet total of liabilities and owners’ equity must also decrease. 
Since there is no change in liabilities as a result of the destruction of an asset, the decrease on the 
right-hand side of the balance sheet must be in the retained earnings account. The amount of the 
decrease in Barns and Sheds, in the owners’ equity, and in both balance sheet totals, is $14,000.
ALEXANDER FARMS, INC.
Balance Sheet
Irrigation system
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a.
Liabilities & Owners' Equity
Cash
6,940
$             
Liabilities:
Accounts receivable
11,260
             
   Notes payable
74,900
$            
Supplies
7,000
               
   Accounts payable
16,200
              
44,500
             
   Salaries payable
8,900
                
Building
84,000
             
         Total liabilities
100,000
$          
Land
67,000
Owners' equity:
 
 
   Capital stock 
80,000
              
 
 
   Retained earnings *
40,700
              
Total
220,700
$         
Total
220,700
$          
 
b.
Liabilities & Owners' Equity
Cash
14,490
$           
Liabilities:
Accounts receivable
11,260
             
   Notes payable
74,900
$            
Supplies
8,250
               
   Accounts payable
7,200
                
51,700
            
  Salaries payable
8,900
                
Building
84,000
             
         Total liabilities
91,000
$            
67,000
             
Owners' equity:
 
 
   Capital stock 
105,000
            
 
 
  Retained earnings
40,700
              
Total
236,700
$        
Total
236,700
$          
 
PROBLEM 2.7A
FRANKLIN BAKERY
35 Minutes, Medium
FRANKLIN BAKERY
Balance Sheet
Equipment & fixtures
August 1, 2015
Assets
FRANKLIN BAKERY
Balance Sheet
August 3, 2015
*Retained earnings ($40,700) = Total assets ($220,700), less total liabilities ($100,000) and capital stock 
($80,000).
Assets
Land
Equipment & fixtures
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Cash flows from operating activities:
 
(16,200)
$             
 
(1,250)
                 
 
 
  Cash used in operating activities:
 
(17,450)
$            
 None
 
 
 Sale of capital stock
 
25,000
$             
 
 
Increase in cash
7,550
$               
Cash balance, August 1, 2015
6,940
                 
Cash balance, August 3, 2015
14,490
$             
 
 
 
c.
Note to instructor:  The analysis of financial position strength in part c  is based solely upon the balance 
sheets at August 1 and August 3.  Students may raise the issue regarding necessity of information about 
operations, and the rate at which cash flows into the business, etc.  In this problem, the improvement in 
financial position results solely from the sale of capital stock.
Statement of Cash Flows
 
For the Period August 1-3, 2015
Franklin Bakery is in a stronger financial position on August 3 than it was on August 1.
Cash payment of accounts payable
Cash purchase of supplies
Cash flows from financing activities:
Cash flows from investing activities:
PROBLEM 2.7A
FRANKLIN BAKERY (concluded)
FRANKLIN BAKERY
On August 1, the highly liquid assets (cash and accounts receivable) total only $18,200, but the 
company has $25,100 in debts due in the near future (accounts payable plus salaries payable).
On August 3, after additional infusion of cash from the sale of stock, the liquid assets total $25,750, 
and debts due in the near future amount to $16,100.
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a.
Liabilities & Owners' Equity
Cash
7,400
$             
Liabilities:
 
Accounts receivable
1,250
               
   Notes payable *
70,000
$            
Supplies
3,440
               
   Accounts payable
8,500
                
20,000
             
         Total liabilities
78,500
$            
Building
45,500
             
Owners' equity:
Land
55,000
   Capital stock 
50,000
              
 
 
   Retained earnings
4,090
                
Total
132,590
$         
Total
132,590
$          
b.
Liabilities & Owners' Equity
Cash
29,400
$           
Liabilities:
Accounts receivable
1,250
               
   Notes payable
70,000
$            
Supplies
4,440
               
   Accounts payable
18,000
              
Furniture and fixtures
38,000
             
         Total liabilities
88,000
$            
Building
45,500
             
Owners' equity:
Land
55,000
   Capital stock 
80,000
              
 
 
  Retained earnings
5,590
                
Total
173,590
$        
Total
173,590
$          
5,500
$              
(4,000)
               
1,500
$              
 
  
 
 
Balance Sheet
October 6, 2015
Assets
Expenses
THE SODA SHOP
Balance Sheet
Furniture and fixtures
September 30, 2015
Assets
PROBLEM 2.8A
THE SODA SHOP
40 Minutes, Strong
THE SODA SHOP
*Total assets, $132,590 less owners’ equity, $54,090 less accounts payable, $8,500, equals notes payable.
Net income
THE SODA SHOP
Income Statement
For the Period October 1-6, 2015
Revenues
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Cash flows from operating activities:
 
5,500
$                
Cash paid for expenses
(4,000)
                 
Cash paid for accounts payable
(8,500)
                 
 
(1,000)
                 
 
 
 
(8,000)
$              
 None
 
 
 
30,000
$             
 
 
Increase in cash
22,000
$             
Cash balance, October 1, 2015
7,400
                 
Cash balance, October 6, 2015
29,400
$             
 
 
 
c.
PROBLEM 2.8A
THE SODA SHOP (concluded)
THE SODA SHOP
The Soda Shop is in a stronger  financial position on October 6 than on September 30. On September 
30, the company had highly liquid assets (cash and accounts receivable) of $8,650, which barely 
exceeded the $8,500 in liabilities (accounts payable) due in the near future.  On October 6, after the 
additional investment of cash by stockholders, the company's cash alone exceeded its short-term 
obligations.
Statement of Cash Flows
 
For the Period October 1-6, 2015
Cash received from revenues
Cash paid for supplies
Cash flows from financing activities:
Cash flows from investing activities:
     Cash used in operating activities
Cash received from sale of capital stock
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Education.
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a.
Liabilities & Owner's Equity
Cash
16,900
$           
Liabilities:
Accounts receivable
7,200
               
   Notes payable
15,000
$            
Props and costumes
18,000
             
   Accounts payable
3,900
                
Lighting equipment
9,400
              
  Salaries payable
4,200
$              
 
 
         Total liabilities
23,100
$            
 
Owner's equity:
 
 
  Helen Berkeley, capital
28,400
              
Total
51,500
$          
Total
51,500
$            
b. (1)
(2)
(3)
(4)
(5)
(6)
(7)
As the automobile is not used in the business, it appears to be Anita Spencer’s personal asset 
rather than an asset of the business entity. Therefore, it should not be included in the balance 
sheet of the business. (Note: The advertised sales price of a similar automobile is not an 
appropriate valuation figure even if the automobile were to be included.)
The accounts payable should be limited to the debts of the business, $3,900, and should not 
include Anita Spencer’s personal liabilities.
Only the amount receivable from Artistic Tours ($7,200)  should be included in the company’s 
accounts receivable as of September 30. The amounts expected from future tickets sales do not 
relate to completed transactions and are not yet assets of the business.
The props and costumes should be shown in the balance sheet at their cost, $18,000 , not at just
the portion of the cost that was paid in cash. The $15,000 note payable is a debt of the business
arising from a completed purchase transaction. Therefore, it should be included among the
company’s liabilities. The date at which this liability must be paid is not relevant.
The theater building is not owned by Spencer Playhouse. Therefore, it is not an asset of this 
business entity and should not appear in the balance sheet.
The lighting equipment is an asset of the business and should be presented in the balance sheet at 
its cost, $9,400.
The cash in Anita Spencer's personal savings account is not an asset of the business entity 
Spencer
Playhouse. Therefore, it should not appear in the balance sheet of the business. The money on
deposit in the business bank account ($15,000) and in the company safe ($1,900) constitute cash
owned by the business. It is not necessary to state separately in the balance sheet amounts of
cash at different locations; thus, the cash owned by the business at September 30 totals
$16,900.
PROBLEM 2.9A
SPENCER PLAYHOUSE
35 Minutes, Strong
SPENCER PLAYHOUSE
Balance Sheet
 
September 30, 2015
Assets
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Education.
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(8)
(9)
PROBLEM 2.9A
Owner’s equity is not valued at either the original amount invested or at the estimated market 
value of the business. In fact, owner’s equity cannot be valued independently of the amounts 
assigned to assets and liabilities. Rather, it is a residual figure—the excess of total assets over 
total liabilities.  (If liabilities exceed assets, owner's equity would be a negative amount.)  Thus, 
the amount of Anita Spencer's capital is determined by subtracting the corrected figure for total 
liabilities ($23,100) from the corrected amount of total assets ($51,500).  This indicates owner's 
equity of $28,400.
The amount owed to stagehands for work done through September 30 is the result of completed
transactions and should be included among the liabilities of the business. Even if agreement has
been reached with Mario Dane for him to perform in a future play, he has not yet performed
and therefore, is not yet owed any money.  Thus, this $25,000 is not yet a liability of the
business.
SPENCER PLAYHOUSE (concluded)
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a.
Liabilities & Owner's Equity
Cash
3,940
$             
Liabilities:
Notes receivable
2,200
               
   Notes payable
73,500
$            
Accounts receivable
2,450
               
   Accounts payable
32,700
              
Office Furniture*
12,825
         Total liabilities
106,200
$          
Building
54,320
             
Owner's equity:
39,000
             
   Capital stock
5,000
                
 
 
  Retained earnings *
3,535
                
Total
114,735
$        
Total
114,735
$          
* $8,850 + $6,500 - $2,525.
* Total assets ($114,735), Less (Total Liabilities, $106,200, + Capital Stock, $5,000)
b. (1)
(2)
(3)
(4)
(5)
(6)
(7) The accounts payable should be limited to the debts of the business, $32,700, and should not 
include Pippin’s personal liabilities.
The proper valuation for the land is its historical cost of $39,000, the amount established by the 
transaction in which the land was purchased. Although the land may have a current fair value in 
excess of its cost, the offer by the friend to buy the land if Pippin would move the building 
appears to be mere conversation rather than solid, verifiable evidence of the fair value of the 
land.  The "cost principle," although less than perfect, produces far more reliable financial 
statements than would result if the owners could "pull figures out of the air" in recording asset 
values.
The $22,400 described as “Other assets” is not an asset, because there is no valid legal claim or 
any reasonable expectation of recovering the income taxes paid. Also, the payment of federal 
income taxes by Pippin was not a business transaction by Big Screen Scripts.  If a refund were 
obtained from the government, it would come to Pippin personally, not to the business entity.
The cash in Pippin’s personal savings account is not an asset of the business entity Big Screen 
Scripts and should not appear in the balance sheet of the business. The money on deposit in the 
business bank account ($3,400) and in the company safe ($540) constitute cash owned by the 
business.  Thus, the cash owned by the business at November 30 is $3,940.
The year-old IOU from a poker game does not qualify as a business asset for two reasons. Most 
importantly, it does not belong to the business entity. Also, it appears to be uncollectible. Even if 
the IOU were an asset of Big Screen Scripts, a receivable that cannot be collected is not viewed 
as an asset, as it represents no future economic benefit.
The total amount to be included in “Office furniture” for the rug is $9,400, the total cost, 
regardless of whether this amount was paid in cash. Consequently, “Office furniture” should be 
increased by $6,500. The $6,500 liability arising from the purchase of the rug came into 
existence prior to the balance sheet date and must be added to the "Notes payable"  amount.
The computer is no longer owned by Big Screen Scripts and therefore cannot be included in the 
assets. To do so would cause an overstatement of both assets and owner's equity. The “Office 
furniture” amount must be reduced by $2,525.
PROBLEM 2.10A
BIG SCREEN SCRIPTS
30 Minutes, Strong
BIG SCREEN SCRIPTS
Balance Sheet
Land
November 30, 2015
Assets
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a.
Liabilities & Owners' Equity
Cash
9,100
$             
Liabilities:
Accounts receivable
3,300
               
   Accounts payable
27,400
$            
Furnishings
22,600
             
   Salaries payable
13,200
              
Equipment
9,000
               
   Interest payable
4,000
                
Building
430,000
           
   Notes payable
217,000
            
Land
140,000
           
261,600
$          
 
 
Owners' equity:
   Capital stock (1)
127,000
            
   Retained earnings
225,400
            
Total
614,000
$         
Total
614,000
$          
(1) Computed as total assets, $614,000, less total liabilities, $261,600, less retained earnings,
$225,400
 
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