EX 2-24 horizontal analysis of income statement

The following data (in millions) were taken from the financial statements of Walmart Stores, Inc:

Recent Year Prior Year Revenue $446,950 $421,849 Operating expenses  420,392 396,307 Operating income $  26,558 $  25,542

a. For Walmart Stores, Inc., determine the amount of change in millions and the percent of change (round to one decimal place) from the prior year to the recent year for:

1. Revenue

2. Operating expenses

3. Operating income

b. Comment on the results of your horizontal analysis in part (a).

c. Based upon Exercise 2-23, compare and comment on the operating results of Target and Walmart for the recent year.

Answer:

a. 

1. Revenue: 

$25,101 million increase ($446,950 – $421,849) 

6.0% increase ($25,101 ÷ $421,849) 

2. Operating expenses: 

$24,085 million increase ($420,392 – $396,307) 

6.1% increase ($24,085 ÷ $396,307) 

3. Operating income: 

$1,016 million increase ($26,558 – $25,542) 

4.0% increase ($1,016 ÷ $25,542) 

b. During the recent year, revenue increased by 6.0%, while operating expenses increased by 6.1%. As a result, operating income increased by 4.0% 

from the prior year. 

c. Because of the size differences between Target and Walmart (Walmart has more than 6 times the revenue), it is best to compare the two companies on the basis of percent changes from the prior year. Walmart's revenues increased by 6.0% while Target's revenues increased by only 3.7%. The expenses of both companies increased by approximately the same percent as revenues, which indicates no major change in operations for either company. Walmart's operating income increased by 4.0% while Target's operating income increased by only 1.3%. Overall, it appears that Walmart had a better operating performance in the past year than Target. 

EX 2-23 horizontal analysis of income statement

The following data (in millions) are taken from the financial statements of Target Corporation:

Recent Year Prior Year Revenue $69,865 $67,390 Operating expenses  64,543 62,138 Operating income $  5,322 $  5,252

a. For Target Corporation, determine the amount of change in millions and the percent of change (round to one decimal place) from the prior year to the recent year for:

1. Revenue

2. Operating expenses

3. Operating income

b. What conclusions can you draw from your analysis of the revenue and the total operating expenses?

Answer:

a. 

1. Revenue: 

$2,475 million increase ($69,865 – $67,390) 

3.7% increase ($2,475 ÷ $67,390) 

2. Operating expenses: 

$2,405 million increase ($64,543 – $62,138) 

3.9% increase ($2,405 ÷ $62,138) 

3. Operating income: 

$70 million increase ($5,322 – $5,252) 

1.3% increase ($70 ÷ $5,252) 

b. During the recent year, revenue increased by 3.7%, while operating expenses increased by 3.9%. As a result, operating income increased by 1.3%, from the prior year. 

EX 2-22 Entries to correct errors

The following errors took place in journalizing and posting transactions:

a. Cash of $8,800 received on account was recorded as a debit to Fees Earned and a credit to Cash.

b. A $1,760 purchase of supplies for cash was recorded as a debit to Supplies Expense and a credit to Accounts Payable.

Journalize the entries to correct the errors. Omit explanations.

Answer:

a. 

b. 

Supplies 1,760 

Cash 1,760 

* The first entry reverses the original entry. The second entry is the entry that should 

have been made initially. 

EX 2-21 Entries to correct errors

The following errors took place in journalizing and posting transactions:

a. Insurance of $18,000 paid for the current year was recorded as a debit to Insurance Expense and a credit to Prepaid Insurance.

b. Dividends of $10,000 were recorded as a debit to Wages Expense and a credit to Cash.

Journalize the entries to correct the errors. Omit explanations.

Answer:

a. The correction could be made with one or two entries as shown below. 

Prepaid Insurance 36,000 

Insurance Expense 18,000 

Cash 18,000 

or (reverses original entry) 

Prepaid Insurance 18,000 

Insurance Expense 18,000 

Prepaid Insurance 18,000 

Cash 18,000 

b. 

Dividends 10,000 

Wages Expense 10,000 

EX 2-20 Errors in trial balance

Identify the errors in the following trial balance. All accounts have normal balances.

Mascot Co. Unadjusted Trial balance For the Month Ending july 31, 2016 Debit balances Credit   balances Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000 Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,600 Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000 Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375,000 Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,300 Salaries Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500 Common Stock  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 Retained Earnings  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197,200 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,000 Service Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 682,000 Salary Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396,800 Advertising Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,000 Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,600 1,189,300 1,189,300

Answer:

1. The Debit column total is added incorrectly. The sum is $890,700 rather than 

$1,189,300. 

2. The trial balance should be dated “July 31, 2016,” not “For the Month 

Ending July 31, 2016.” 

3. The Accounts Receivable balance should be in the Debit column. 

4. The Accounts Payable balance should be in the Credit column. 

5. The Dividends balance should be in the Debit column. 

6. The Advertising Expense balance should be in the Debit column. 

A corrected trial balance would be as follows: 

MASCOT CO. 

Unadjusted Trial Balance 

July 31, 2016 

Debit 

Balances 

Credit 

Balances 

Cash 36,000 

Accounts Receivable 112,600 

Prepaid Insurance 18,000 

Equipment 375,000 

Accounts Payable 53,300 

Salaries Payable 7,500 

Common Stock 100,000 

Retained Earnings 197,200 

Dividends 17,000 

Service Revenue 682,000 

Salary Expense 396,800 

Advertising Expense 73,000 

Miscellaneous Expense 11,600 

1,040,000 1,040,000 

EX 2-19 Effect of errors on trial balance

The following errors occurred in posting from a two-column journal:

1. A credit of $6,000 to Accounts Payable was not posted.

2. An entry debiting Accounts Receivable and crediting Fees Earned for $5,300 was not posted.

3. A debit of $2,700 to Accounts Payable was posted as a credit.

4. A debit of $480 to Supplies was posted twice.

5. A debit of $3,600 to Cash was posted to Miscellaneous Expense.

6. A credit of $780 to Cash was posted as $870.

7. A debit of $12,620 to Wages Expense was posted as $12,260.

Considering each case individually (i.e., assuming that no other errors had occurred), indicate: (a) by “yes” or “no” whether the trial balance would be out of balance; (b) if answer to (a) is “yes,” the amount by which the trial balance totals would differ; and (c) whether the Debit or Credit column of the trial balance would have the larger total. Answers should be presented in the following form, with error (1) given as an example:

(a) (b) (c) Error Out of balance Difference Larger Total 1. yes $6,000 debit

Answer:

EX 2-18 Errors in trial balance

The following preliminary unadjusted trial balanceof Ranger Co., a sports ticket agency, does not balance:

Ranger Co. Unadjusted Trial balance August 31, 2016 Debit balances Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,600 Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,750 Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,000 Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,100 Unearned Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,800 Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,000 Service Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385,000 Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213,000 Advertising Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,350 Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18,400 273,700 668,300

When the ledger and other records are reviewed, you discover the following: (1) the debits and credits in the cash account total $77,600 and $62,100, respectively; (2) a billing of $9,000 to a customer on account was not posted to the accounts receivable account; (3) a payment of $4,500 made to a creditor on account was not posted to the accounts payable account; (4) the balance of the unearned rent account is $5,400; (5) the correct balance of the equipment account is $190,000; and (6) each account has a normal balance.

Prepare a corrected unadjusted trial balance.

Answer:

RANGER CO. 

Unadjusted Trial Balance 

August 31, 2016 

Debit 

Balances 

Credit 

Balances 

Cash 15,500 

Accounts Receivable 46,750 

Prepaid Insurance 12,000 

Equipment 190,000 

Accounts Payable 24,600 

Unearned Rent 5,400 

Common Stock 40,000 

Retained Earnings 70,000 

Dividends 13,000 

Service Revenue 385,000 

Wages Expense 213,000 

Advertising Expense 16,350 

Miscellaneous Expense 18,400 

525,000 525,000 

EX 2-17 Effect of errors on trial balance

Indicate which of the following errors, each considered individually, would cause the trial balance totals to be unequal:

a. A fee of $21,000 earned and due from a client was not debited to Accounts Receivable or credited to a revenue account, because the cash had not been received.

b. A receipt of $11,300 from an account receivable was journalized and posted as a debit of $11,300 to Cash and a credit of $11,300 to Fees Earned.

c. A payment of $4,950 to a creditor was posted as a debit of $4,950 to Accounts Payable and a debit of $4,950 to Cash.

d. A payment of $5,000 for equipment purchased was posted as a debit of $500 to Equipment and a credit of $500 to Cash.

e. Payment of a cash dividends of $19,000 was journalized and posted as a debit of $1,900 to Salary Expense and a credit of $19,000 to Cash.

Indicate which of the preceding errors would require a correcting entry.

Answer:

Inequality of trial balance totals would be caused by errors described in (c) and (e). For (c), the debit total would exceed the credit total by $9,900 ($4,950 + $4,950). For (e), the credit total would exceed the debit total by $17,100 ($19,000 – $1,900). 

Errors (b), (c), (d), and (e) would require correcting entries. Although it is not a correcting entry, the entry that was not made in (a) should also be entered in the journal. 

EX 2-16 Trial balance

The accounts in the ledger of Hickory Furniture Company as of December 31, 2016, are listed in alphabetical order as follows. All accounts have normal balances. The balance of the cash account has been intentionally omitted.

Accounts Payable $  42,770 

Notes Payable $ 50,000

Accounts Receivable 116,900 

Prepaid Insurance 21,600

Cash ? 

Rent Expense 48,000

Common Stock 15,000 

Retained Earnings 60,000

Dividends 24,000 

Supplies 4,275

Fees Earned 745,230 

Supplies Expense 6,255

Insurance Expense 3,600 

Unearned Rent 12,000

Land 50,000 

Utilities Expense 26,850

Miscellaneous Expense 9,500 

Wages Expense 580,700

Prepare an unadjusted trial balance, listing the accounts in their normal order and inserting the missing figure for cash.

Answer:

HICKORY FURNITURE COMPANY 

Unadjusted Trial Balance 

December 31, 2016 

Cash* 33,320 

Accounts Receivable 116,900 

Supplies 4,275 

Prepaid insurance 21,600 

Land 50,000 

Accounts Payable 42,770 

Unearned Rent 12,000 

Notes Payable 50,000 

Common Stock 15,000 

Retained Earnings 60,000 

Dividends 24,000 

Fees Earned 745,230 

Wages Expense 580,700 

Rent Expense 48,000 

Utilities Expense 26,850 

Supplies Expense 6,255 

Insurance Expense 3,600 

Miscellaneous Expense 9,500 

*$33,320 = $925,000 – $9,500 – $3,600 – $6,255 – $26,850 – $48,000 – $580,700 – $24,000 

– $50,000 – $21,600 – $4,275 – $116,900 

EX 2-15 Trial balance

Based upon the data presented in Exercise 2-13, (a) prepare an unadjusted trial balance, listing the accounts in their proper order. (b) Based upon the unadjusted trial balance, determine the net income or net loss. 

Answer:

a. 

WYOMING TOURS CO. 

Unadjusted Trial Balance 

June 30, 2016 

Debit 

Balances 

Credit 

Balances 

Cash 28,850 

Accounts Receivable 5,100 

Supplies 1,400 

Equipment 14,500 

Accounts Payable 5,000 

Common Stock 40,000 

Dividends 3,000 

Service Revenue 13,800 

Operating Expenses 5,950 

58,800 58,800 

b. Net income, $7,850 ($13,800 – $5,950) 

EX 2-14 journal entries

Based upon the T accounts in Exercise 2-13, prepare the nine journal entries from which the postings were made. Journal entry explanations may be omitted.

Answer:

(1) 

(2) 

(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

(9) 

Cash 40,000 

Common Stock 40,000 

Supplies 2,500 

Cash 2,500 

Equipment 14,500 

Accounts Payable 10,500 

Cash 4,000 

Operating Expenses 4,850 

Cash 4,850 

Accounts Receivable 13,800 

Service Revenue 13,800 

Accounts Payable 5,500 

Cash 5,500 

Cash 8,700 

Accounts Receivable 8,700 

Operating Expenses 1,100 

Supplies 1,100 

Dividends 3,000 

Cash 3,000 

EX 2-13 identifying transactions

Wyoming Tours Co. is a travel agency. The nine transactions recorded by Wyoming Tours during June 2016, its first month of operations, are indicated in the following T accounts:

Cash Equipment Dividends (1) 40,000 (2) 2,500 (3) 14,500 (9) 3,000 (7) 8,700 (3) 4,000 (4) 4,850 (6) 5,500 (9) 3,000 Accounts Receivable Accounts Payable Service Revenue (5) 13,800 (7) 8,700 (6) 5,500 (3) 10,500 (5) 13,800 Supplies Common Stock Operating Expenses (2) 2,500 (8) 1,100 (1) 40,000 (4) 4,850 (8) 1,100

Indicate for each debit and each credit: (a) whether an asset, liability, stockholders’ equity, dividend, revenue, or expense account was affected and (b) whether the account was increased (+) or decreased (–). Present your answers in the following form, with transaction (1) given as an example:

Account Debited Account Credited Transaction Type Effect Type Effect (1) asset + stockholders’ equity +

Answer:

a. and b. 

Account Debited Account Credited 

Transaction Type 

Effect Type Effect 

(1) 

(2) 

(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

(9) 

  

asset + stockholders’ equity + 

asset + asset – 

asset + asset – 

liability + 

expense + asset – 

asset + revenue + 

liability – asset – 

asset + asset – 

expense + asset – 

dividend + asset – 

EX 2-12 Retained earnings account balance

As of January 1, Retained Earnings had a credit balance of $314,000. During the year, dividends totaled $10,000, and the business incurred a net loss of $320,000.

a. Compute the balance of Retained Earnings as of the end of the year.

b. Assuming that there have been no recording errors, will the balance sheet prepared at December 31 balance? Explain.

Answer:

a. Debit (negative) balance of $16,000 ($314,000 – $10,000 – $320,000). This negative balance means that the liabilities of Waters' business exceed the assets. 

b. Yes. The balance sheet prepared at December 31 will balance, with Retained Earnings being reported in the stockholders’ equity section as a debit 

EX 2-11 Account balances

a. During February, $186,500 was paid to creditors on account, and purchases on account were $201,400. Assuming the February 28 balance of Accounts Payable was $59,900, determine the account balance on February 1.

b. On October 1, the accounts receivable account balance was $115,800. During October, $449,600 was collected from customers on account. Assuming the October 31 balance was $130,770 determine the fees billed to customers on account during October.

c. On April 1, the cash account balance was $46,220. During April, cash receipts totaled $248,600 and the April 30 balance was $56,770. Determine the cash payments made during April.

Answer:

a. Accounts Payable 186,500

X=45,000

EX 2-10 Cash account balance

During the month, Warwick Co. received $515,000 in cash and paid out $375,000 in cash.

a. Do the data indicate that Warwick Co. had net income of $140,000 during the month? Explain.

b. If the balance of the cash account is $200,000 at the end of the month, what was the cash balance at the beginning of the month?

Answer:

a. The increase of $140,000 ($515,000 – $375,000) in the cash account does not indicate net income of that amount. Net income is the net change in all assets and liabilities from operating (revenue and expense) transactions. 

b. $60,000 ($200,000 – $140,000) 

EX 2-9 Transactions and T accounts

The following selected transactions were completed during August of the current year:

1. Billed customers for fees earned, $73,900.

2. Purchased supplies on account, $1,960.

3. Received cash from customers on account, $62,770.

4. Paid creditors on account, $820.

a. Journalize these transactions in a two-column journal, using the appropriate number to identify the transactions. Journal entry explanations may be omitted.

b. Post the entries prepared in (a) to the following T accounts: Cash, Supplies, Accounts Receivable, Accounts Payable, Fees Earned. To the left of each amount posted in the accounts, place the appropriate number to identify the transactions.

c. Assume that the unadjusted trial balance on August 31 shows a credit balance for Accounts Receivable. Does this credit balance mean an error has occurred?

Answer:

a. (1) (2) (3)  (4)  Accounts Receivable 73,900 Fees Earned 73,900 

Supplies 1,960 Accounts Payable 1,960 

Cash 62,770 Accounts Receivable 62,770 

Accounts Payable 820 Cash 820 b. Cash Accounts Payable (3) 62,770 (4) 820 (4) 820 (2) 1,960  Supplies (2) 1,960 (1) 73,900 Accounts Receivable (1) 73,900 (3) 62,770 

c. No, an error may not have necessarily occurred. A credit balance 

in Accounts Receivable could occur if a customer overpaid his or 

her account. Regardless, the credit balance should be investigated to 

verify that an error has not occurred. 

EX 2-8 journalizing and posting

On January 7, 2016, Captec Company purchased $4,175 of supplies on account. In Captec Company’s chart of accounts, the supplies account is No. 15, and the accounts payable account is No. 21.

a. Journalize the January 7, 2016, transaction on page 33 of Captec Company’s two-column journal. Include an explanation of the entry.

b. Prepare a four-column account for Supplies. Enter a debit balance of $2,200 as of January 1, 2016. Place a check mark () in the Posting Reference column.

c. Prepare a four-column account for Accounts Payable. Enter a credit balance of $18,430 as of January 1, 2016. Place a check mark () in the Posting Reference column.

d. Post the January 7, 2016, transaction to the accounts.

e. Do the rules of debit and credit apply to all companies?

Answer:

a. 

JOURNAL Page 33 

Date 

Description 

Post. 

Ref. 

2016 

Jan. 7 Supplies 15 4,175 

Accounts Payable 21 4,175 

Purchased supplies on account. 

b., c., d. 

Account: Supplies Account No. 15 

Account: 

Accounts Payable 

  

Date 

Item 

Post. 

Ref. 

Debit 

Credit 

2016 

Jan. 1 Balance ü 18,430 

7 33 4,175 22,605 

e. Yes, the rules of debit and credit apply to all companies.