CP11.

1. It sells its own brand of high quality, on-trend clothing, accessories, and personal
care products targeting 15 to 25 year-old customers.
2. The companys most recent fiscal year ended on January 28, 2012.
3. a. Balance Sheets2 years
b. Income Statements3 years
c. Cash Flow Statements3 years
4. Yes, it is audited by independent CPAs, as indicated by the Report of Independent
Registered Public Accounting Firm on page 69 of the annual report.
5. Its total assets increased from $1,879,998,000 to $1,950,802,000. The instructor
should note that the reported numbers are in thousands.
6. As of January 28, 2012, the company had $378,426,000 in inventory.
7. Assets
= Liabilities*
$1,950,802,000 = $533,951,000

+ Stockholders Equity
+ $1,416,851,000

*Liabilities are determined by either adding current ($405,401,000) and long term
liabilities ($128,550,000) or by solving the accounting equation: Assets
($1,950,802,000) = Liabilities + Stockholders Equity ($1,416,851,000)
CP13.
1. American Eagle Outfitters had total assets of $1,950,802,000 at the end of the most
recent year, whereas Urban Outfitters had total assets of $1,483,708,000. Clearly
American Eagle Outfitters is the larger of the two companies in terms of total assets
at the end of the most recent year.
2. Urban Outfitters had net sales of $2,473,801,000 in the most recent year, while
American Eagle Outfitters had greater net sales in the amount of $3,159,818,000.
Again, American Eagle Outfitters is the larger of the two companies in terms of net
sales.
3. In the most recent year, Urban Outfitters had a decrease in total assets of
($1,483,708,000-$1,794,321,000)/($1,794,321,000) = -17.3%, while American Eagle
Outfitters had growth in total assets of ($1,950,802,000 $1,879,998,000)/($1,879,998,000) = 3.8%.

Similarly, Urban Outfitters had growth in net sales of ($2,473,801,000 $2,274,102,000)/($2,274,102,000) = 8.8%, while American Eagle Outfitters had lower
growth in net sales of ($3,159,818,000 - $2,967,559,000)/($2,967,559,000) = 6.5%.

Urban Outfitters is growing faster in sales, but American Eagle grew in total assets
while Urban Outfitters declined.

E213.
Req. 1
Assets $

10,500

= Liabilities $

3,000

+ Stockholders Equity $

7,500

Req. 2
Cash
Beg. 5,000
(a)
4,000
(b)
1,500
(c)
1,500
800 (d)
End. 11,200

Short-Term Investments
Beg. 2,500
1,500 (b)

Property & Equipment

Beg. 3,000
1,500 (c)

End.

End.

Short-Term
Notes Payable
2,200 Beg.

Additional Paid-in Capital

4,000 Beg.

500
Req. 3
Assets $

13,700

1,500

Long-Term
Notes Payable
800 Beg.
4,000 (a)
4,800 End.

2,200 End.
Common Stock
500 Beg.

1,000

4,000
= Liabilities $

7,000

Retained Earnings
3,000 Beg.
(d)
800
2,200

+ Stockholders Equity $

6,700

Req. 4
Current
Ratio

Current Assets
Current Liabilities

$11,200+$1,000
$2,200

$12,200 = 5.55
$2,200

This ratio indicates that, for every $1 of current liabilities, Higgins maintains $5.55 of
current assets. Higgins ratio is higher than the industry average of 1.50, indicating that
Higgins maintains a lower level of short-term debt and has higher liquidity. However,
maintaining such a high current ratio also suggests that the company may not be using
its resources efficiently. Increasing short-term obligations would lower Higgins current
ratio, but this strategy alone would not help its efficiency. Higgins should consider
investing more of its cash in order to generate future returns.

P22.
Req. 1
East Hill Home Healthcare Services was organized as a corporation. Only a
corporation issues shares of capital stock to its owners in exchange for their investment,
as in transaction (a).
Req. 2 (On next page)
Req. 3
The transaction between the two stockholders (Event e) was not included in the
tabulation. Since the transaction in (e) occurs between the owners, there is no effect on
the business due to the separate-entity assumption.
Req. 4
(a)

Total assets = $111,500 + $18,000 + $5,000 + $510,500 + $160,000 + $65,000

= $870,000

(b)

Total liabilities = $100,000 + $180,000

= $280,000

(c)

Total stockholders equity = Total assets Total liabilities

= $870,000 $280,000 = $590,000

(d)

Cash balance = $50,000 + $90,000 $9,000 + $3,500 $18,000 $5,000

= $111,500

(e)

Total current assets = Cash $111,500 + Short-Term Investments $18,000 + Notes

Receivable $5,000 = $134,500

Req. 5
Current
Ratio

Current Assets
Current Liabilities

= $111,500+$18,000+$5,000 = $134,500 = 1.35

$100,000
100,000

This suggests that for every $1 in current liabilities, East Hill maintains $1.35 in current
assets. The ratio suggests that East Hill is likely maintaining adequate liquidity and
using resources efficiently.
4

P22. (continued)
Req. 2
Assets

Cash

Short-Term
Notes
Investments Receivable

Liabilities

ST Notes LT Notes
Land Buildings Equipment
Payable Payable
500,000 100,000
50,000 = 100,000
100,000

Beg.

50,000

(a)

+90,000

(b)

9,000

+14,000

(c)

+3,500

3,500

(d)

18,000

=
+60,000

+18,000

Stockholders' Equity
Additional
Paid-in Retained
Common
Capital
Stock
Earnings
20,000
80,000 400,000
+9,000

+15,000 =

+81,000

+80,000

=
=

(e) No effect
(f)

5,000
+111,500

+5,000
+18,000

+5,000 +510,500 +160,000

$870,000

=
+65,000 = +100,000

+180,000

$280,000

+29,000

+161,000 +400,000

$590,000

CP23.
1.

Industry
Average
2.67

American Eagle
Outfitters
3.18

Urban
Outfitters
2.56

Current Ratio =

American Eagle Outfitters current ratio of 3.18 is higher than the industry
average, but Urban Outfitters current ratio of 2.56 is slightly below the
industry average of 2.67. For the year ended January 31, 2012, Urban
Outfitters reduced its amount of current assets from the prior year while
increasing its current liabilities.
Many retailers, such as American Eagle Outfitters, choose to rent space
rather than purchase buildings for stores. Acquiring buildings often requires
borrowing long-term (mortgages). Thus, the choice of renting or purchasing
buildings does not have an effect on the numerator or denominator of the
current ratio.
2. As indicated in the financing activities section of each companys statement of
cash flows, during the most recent year, American Eagle Outfitters spent
$2,189,000 repurchasing common stock from employees and $15,160,000
repurchasing common stock from investors. Urban Outfitters spent
$545,478,000 repurchasing shares.
3. As indicated in the statement of cash flows, American Eagle Outfitters paid
$85,592,000 in dividends. Urban Outfitters did not pay any dividends during
the year. Refer to the financing activities section of the statement of cash
flows.
2. American Eagle reports Property and equipment, at cost, net of accumulated
depreciation and Urban Outfitters reports Property and equipment, net.
Details of the amount of land, building, and equipment are reported by each in
the notes to the financial statements. Other companies sometimes choose to
report these assets separately on the balance sheet, for example in accounts
such as: Land, Buildings and building improvements, Furniture, fixtures
and equipment, and Rental property and equipment.

E33.
Activity
a.

Revenue Account
Affected
None

Amount of Revenue
Earned in September
No revenue earned in September; earnings
process is not yet complete.

b.

Interest revenue

$12.50
(= $1,500 x 10% x 1 month/12 months)

c.

Sales revenue

$19,500

d.

None

No transaction has occurred; exchange of

promises only.

e.

Sales revenue

$15,000
(= 1,000 shirts x $15 per shirt)
Revenue earned when goods are delivered.

f.

None

Payment related to revenue recorded previously

in (e) above.

g.

None

No revenue earned in September; earnings

process is not yet complete.

h.

None

No revenue is earned; the issuance of stock is a

financing activity.

i.

None

No revenue earned in September; earnings

process is not yet complete.

j.

Ticket sales revenue

$3,900,000
(= $19,500,000 5 games)

k.

None

No revenue earned in September; earnings

process is not yet complete.

l.

Sales revenue

m.

Sales revenue

$9,600
$300

P33.
Req. 1

Req. 2

Assets

Balance Sheet
Income Statement
Stockholders
Net
Liabilities
Equity
Revenues Expenses Income

Stmt of
Cash
Flows

a.

+/

NE

NE

NE

NE

b.

+/

NE

NE

NE

NE

NE

c.

NE

d.

NE

NE

e.

NE

NE

NE*

f.

NE

NE

NE

NE

g.

NE

NE

h.

NE

NE

* Cash is not affected in this transaction.

CP33.
1. American Eagle Outfitters calls its income statement the Consolidated
Statements of Operations. Urban Outfitters calls its income statement the
Consolidated Statements of Income. Consolidated implies that the
statements of two or more companies (usually the company and its
majority-owned subsidiaries) have been combined into a single statement
for presentation.
2. Urban Outfitters had the higher net income of $185,251 for the year ended
January 31, 2012, compared to American Eagle Outfitters net income of
$151,705 for the same year (all dollars in thousands).
3. Dollars in thousands:
For Fiscal Year
2011
American Eagle
Outfitters
Urban Outfitters

Net
Income

Net Sales (or

Operating)
Revenues

Net Profit Margin

Ratio

$151,705

$3,159,818

0.048 or 4.8%

$185,251

$2,473,801

0.075 or 7.5%

Urban Outfitters appears to be managing revenues and expenses more

effectively because it is able to generate a higher net income for every dollar
of sales.
4. Comparison to industry:

Net Profit Margin Ratio =

Industry
Average
.054 or
5.4%

American Eagle
Outfitters
.048 or
4.8%

Urban
Outfitters
.075 or
7.5%

American Eagle Outfitters ratio of 4.8 percent suggests that it is less effective
at generating sales and/or controlling costs than the average company in the
industry (5.4 percent average). On the other hand, Urban Outfitters is more
effective with a net profit margin ratio of 7.5 percent.

5. Dollars in thousands:

Operating
cash flows

Operating
cash flows

2012

2011

$239,256

$402,594

2012

2011

$282,702 $385,113

American Eagle Outfitters

% Change
2011
2010
(40.57%)

$402,594 $400,326

Urban Outfitters
% Change
2011
(26.59%)

10

2010

$385,113 $325,394

% Change
0.57%

% Change
18.35%

E47.
Req. 1
a.
b.
c.
d.
e.
f.
g.

Accrued revenue
Deferred expense
Accrued expense
Deferred revenue
Deferred expense
Deferred expense
Accrued expense

Req. 2
Computations
a.
Accounts receivable (+A) .............................................
3,300
Service revenue (+R, +SE) ................................ 3,300

Given

b.

1,650
Advertising expense (+E, SE) ....................................
Prepaid advertising (A) ..................................... 1,650

$2,200 x 9/12 =
$1,650 used

c.

5,500
Interest expense (+E, SE) ..........................................
Interest payable (+L) .......................................... 5,500

$300,000 x 0.11
x 2/12 (since last
payment) = $5,500
incurred

d.

750
Unearned storage revenue (L) ...................................
Storage revenue (+R, +SE) ................................ 750

$4,500 x 1/6 =
$750 earned

e.

18,000
Depreciation expense (+E, SE) ..................................
18,000
Accumulated depreciation (+XA, A)

Given

f.

48,500
Supplies expense (+E, SE) ........................................
Supplies (A) ......................................................48,500

$18,900 +
$45,200 $15,600
= $48,500 used

g.

5,600
Wages expense (+E, SE) ...........................................
Wages payable (+L) ........................................... 5,600

Given

11

E49.
Balance Sheet
Stockholders
Liabilities
Equity

Income Statement
Revenues Expenses

Net
Income

Transaction

Assets

(a)

+3,300

NE

+3,300

+3,300

NE

+3,300

(b)

1,650

NE

1,650

NE

+1,650

1,650

(c)

NE

+5,500

5,500

NE

+5,500

5,500

(d)

NE

750

+750

+750

NE

+750

(e)

18,000

NE

18,000

NE

+18,000

18,000

(f)

48,500

NE

48,500

NE

+48,500

48,500

(g)

NE

+5,600

5,600

NE

+5,600

5,600

CP43.
1. American Eagle Outfitters reported an advertising expense of $73.1 million for
the most recent year (Note 2 under Advertising Costs). Urban Outfitters
reported $71.7 million of advertising costs for the year. (See Note 2 under
Advertising).
2.
Year
Ended
2012
2011
2010

American Eagle Outfitters

Advertising
Expense /
Net Sales
73,100 / 3,159,818
2.3%
64,900 / 2,967,559
2.2%
60,900 / 2,940,269
2.1%

Urban Outfitters
Advertising
Expense /
Net Sales
71,684 / 2,473,801
2.9%
58,336 / 2,274,102
2.6%
46,827 / 1,937,815
2.4%

Urban Outfitters incurred the higher percentage in all three years. Both firms
increased advertising expense each year, and both firms also increased
advertising expense as a percentage of sales each year.
3.
Advertising/Sales =

Industry
Average
5.55%

American Eagle
Outfitters
2.3%

Urban
Outfitters
2.9%

Both American Eagle and Urban Outfitters are spending less on advertising
as a percentage of sales than the average company in the industry. This
might imply that they are more effective at generating fewer sales per dollar
spent on advertising. Another interpretation is that they are weak in
supporting their brand, and sales will eventually decrease as their brands lose
value.

12

4. Both accounting policies are similar indicating that advertising costs are
expensed when the marketing campaigns become publicly available. Urban
Outfitters capitalizes expenses associated with direct-to-consumer advertising
(catalogs) and amortizes these expenses over the expected period of future
benefits. (The policies are disclosed in note 2 in both annual reports).

5. Year
Ended

American Eagle
Outfitters

Urban
Outfitters
$2,473,801 = 1.530
$1,616,514.5

2012: Total Asset =

Turnover

Sales
Average
Total Assets

$3,159,818 = 1.650
$1,915,400

2011: Total Asset =

Turnover

Sales
Average
Total Assets

$2,967,559 = 1.477
$2,009,073

$2,274,102
$1,715,207

= 1.326

2010: Total Asset =

Turnover

Sales
Average
Total Assets

$2,940,269 = 1.434
$2,050,912

$1,937,815
$1,482,551

= 1.307

Both companies increased their total asset turnover ratios over time,
suggesting more efficient management of assets to generate revenues. In
each year, American Eagle Outfitters has a higher turnover ratio than
Urban Outfitters, suggesting more efficiency in asset utilization.
6.
Total Asset
Turnover Ratio =
(for fiscal year
ended 2012)

Industry
Average

American Eagle
Outfitters

Urban
Outfitters

1.750

1.650

1.530

Both companies, American Eagle Outfitters and Urban Outfitters, have

lower Total Asset Turnover ratios than the average company in their
industry. This suggests both companies are less effective at utilizing total
assets to generate sales. This ratio is affected by growth strategies in
which companies invest in additional property and equipment or other
assets, but the new assets are not yet generating sales levels of
established stores.

13