Università Bocconi | Financial Reporting and Analysis (20214)

Question 1 (Financial Statements)

Obtain a copy of the 2018 financial statements of Citi Trends, Inc., an urban fashion retailer.
Unless otherwise noted, all questions below relate to the company’s fiscal year 2018, which
ends on February 2, 2019.

a. Show the accounting equation numerically. Define, in no more than two sentences, what
the numbers on the left and right side of the equation mean.
b. Identify the asset with the highest value on the balance sheet. Explain, in one sentence,
whether and why one can conclude that this asset is the company’s most valuable
resource.
c. Group the owners’ equity line items into the two main conceptual categories of equity.
Define each component in your own words, in no more than one sentence each.
d. State the company’s net income figure and identify all financial statements that show this
amount.
e. Demonstrate, via numerical reconciliation, how the company’s net income connects to the
balance sheet. (This connection is also known as articulation.) Explain, in no more than
two sentences, whether and why income statement and balance sheet alone are sufficient
to perform this reconciliation.
f. Identify the three main types of cash flows and provide a numerical reconciliation
between these three amounts and the balance sheet.
 Università Bocconi | Financial Reporting and Analysis (20214)

Question 2 (Balance Sheet)

As of 12/31/2002, the balance sheet of Amazon.com shows total assets of $1,990 million,
total liabilities of $3,343 million, and a balance of paid-in equity capital of $1,654 million.

a. Calculate the average amount of net income that Amazon.com reported in each of the
eight years since it commenced operations in 1995. The company did not pay any
dividends during this period.
b. The stock market value of the equity of Amazon.com was about $5,500 million at the end
of 2002. Explain, with reference to appropriate definitions, why this market value differs
from the book (balance sheet) value of equity and what this difference tells us about the
nature of the company’s assets.
 Università Bocconi | Financial Reporting and Analysis (20214)

Question 3 (Income Statement)

The current income statement of Company C shows gross profit of $118. Relative to the prior
year, sales revenue and cost of sales have increased by 10% and 8%, respectively. Company
C earned a gross profit margin of 20% last year. Calculate this year’s amount of sales
revenue.
 Università Bocconi | Financial Reporting and Analysis (20214)

Question 4 (Accrual Accounting)

This question relates to the 2017 financial statements of BJ’s Restaurants, a casual dining
business known for its pizza and proprietary craft beer. All monetary amounts are in
thousands.

Part A. Write journal entries for the following transactions and events.

1. In 2017, BJ’s Restaurants borrows an additional $2,145,100 on its line of credit (recorded
on the balance sheet as long-term debt). Repayments of long-term debt amount to
$2,129,600.
2. BJ’s Restaurants declares a dividend of $2,330. Dividend payments in 2017 are $2,269.
3. The company repurchases common stock for $66,922 in cash and retires these shares. Out
of the repurchase amount, $5,600 is deducted from the common stock account and the
remainder from retained earnings.
4. BJ’s Restaurants records depreciation expense of $68,665.
5. Fixed asset (i.e., property, plant, and equipment) purchases during the year are $66,127.
Of this amount, $3,876 have not been paid yet by the end of 2017 (and therefore remain
included in accounts payable).
6. The company disposes of long-term assets for cash proceeds of $17,905, at a loss of
$4,775. Assume that these assets consist of equipment with an original acquisition cost of
$30,000.
 Università Bocconi | Financial Reporting and Analysis (20214)

Part B. The following scenarios, related to revenue, require a combination of writing journal
entries and giving short explanations of their underlying economics. Address the items in
sequential order, as some of them require information presented in prior items. In some cases,
you may find it useful to draw T-accounts as you think through the problems.

1. BJ’s Restaurants generates its revenue from food and beverage sales at its restaurants. In
2017, the company’s restaurants generate revenue of $1,031,782. Record sales revenue in
a journal entry, assuming for now that all sales are made in cash.
2. Many customers actually pay by credit card instead of cash. BJ’s Restaurants records
credit card sales as receivables (until it receives the cash remittance from the credit card
company). Record sales revenue (which is still $1,031,782) in a journal entry, this time
assuming that all sales are made by credit card. Next, record cash collections in a journal
entry, assuming that all receivables from credit sales made in 2017, and only those, are
collected during the year. Explain, in one sentence, how the 2017 balance sheet and
income statement differ between this scenario and item 1 above.
3. The beginning and ending balances of credit card receivables on the company’s actual
2017 balance sheet are $5,272 and $5,723, respectively. Given this information, record
sales revenue (which is still $1,031,782) and cash collections in one journal entry, this
time considering cash and credit card sales jointly. Explain, in one sentence, why this
entry is the same regardless of the underlying mix of cash and credit card sales.
4. In addition to cash and credit card sales, BJ’s Restaurants sells gift cards (for meals at its
restaurants). The company records gift cards as deferred revenue at the time customers
buy them and only recognizes sales revenue on the income statement when the cards are
later redeemed. Explain the rationale behind this policy, in one sentence and with
reference to the appropriate underlying accounting concept. Record sales revenue (which
is still $1,031,782) in a journal entry, this time assuming that all sales come from gift card
redemptions.
5. The beginning and ending balances of deferred revenue from gift cards on the company’s
2017 balance sheet are $12,968 and $14,955, respectively. Given this information, record
sales revenue (which is still $1,031,782) and cash collections in one journal entry, now
considering cash sales, credit card sales (including the information from item 3 above)
and gift cards together. Explain, in one sentence, why this entry is the same regardless of
how much each of these three transaction types has contributed to total revenue.
6. Some of the gift cards are sold through third parties, who remit the cash proceeds to BJ’s
Restaurants with some delay. BJ’s Restaurants recognizes a receivable between the time
the third party sells the gift card and the time it remits the cash. The beginning and ending
balances of third party gift card sales receivables on the company’s 2017 balance sheet
are $3,016 and $3,669, respectively. Record sales revenue (which is still $1,031,782) and
cash collections in one journal entry, considering cash sales, credit card sales (including
the information from item 3 above) and gift cards (both own and third party) together.
Explain, in one sentence, whether and why cash collections are higher or lower than in
item 5 above.
 Università Bocconi | Financial Reporting and Analysis (20214)

Part C. The following scenarios, related to the cost of sales and labor, require a combination
of writing journal entries and giving short explanations of their underlying economics.
Address the items in sequential order, as some of them require information presented in prior
items. In some cases, you may find it useful to draw T-accounts as you think through the
problems.

1. BJ’s Restaurants incurs cost of sales of $268,707 in 2017, comprising the cost of all food
and beverages sold in the company’s restaurants during the year. All food and beverage
items are held in inventory prior to sale. Record the company’s cost of sales in a journal
entry.
2. The balance sheet of BJ’s Restaurants shows inventory balances of $9,907 and $10,514 at
the end of 2016 and 2017, respectively. Record the company’s inventory purchases in
2017 in a journal entry, assuming that all purchases are made on credit.
3. The labor expense (hourly wages, management salaries, bonuses, fringe benefits, payroll
taxes, etc.) related to operating the company’s restaurants is $371,220 in 2017. Record the
related journal entry, assuming for now that all labor costs are paid in cash as incurred.
4. Some components of labor cost, such as workers’ compensation, are only settled in cash
sometime after they have been incurred. BJ’s Restaurants records these costs as accrued
expenses until paid. The company’s balance sheet shows accrued payroll-related expenses
of $46,208 and $43,887 at the end of 2016 and 2017, respectively. Based on these figures,
write the journal entry for labor expense (which is still $371,220) and labor-related cash
payments. Explain, in one sentence, whether and why cash payments are higher or lower
than in item 3 above.
5. Some employees of BJ’s Restaurants receive part of their compensation in the form of
equity shares in the company. As required by accounting standards, BJ’s Restaurants
records this stock-based compensation as a reduction in paid-in equity capital. In 2017,
$1,877 of the total labor expense of $371,220 is in the form of stock-based compensation.
Record labor expense and labor-related cash payments in one journal entry, now
considering both accrued labor expenses (from item 4 above) and stock-based
compensation.
 Università Bocconi | Financial Reporting and Analysis (20214)

Part D. The following scenarios, related to rent expenses, require a combination of writing
journal entries and giving short explanations of their underlying economics. Address the
items in sequential order, as some of them require information presented in prior items. In
some cases, you may find it useful to draw T-accounts as you think through the problems.

1. BJ’s Restaurants leases most of the real estate on which its restaurants are located. In
2017, the company recognizes rent expense of $44,700. Record rent expense in a journal
entry, assuming for now that rent expense equals rent payments made during the year.
2. Some of the company’s lease contracts specify rent payments that vary over the course of
the lease term. Accounting rules, on the other hand, demand that the total amount of rent
to be paid under a given contract be expensed evenly over the lease term. BJ’s
Restaurants records the resulting temporary differences between expenses and payments
as deferred rent on its balance sheet. Record rent expense (which is still $44,700) in a
journal entry, this time assuming that the company’s current leases require no payments
from BJ’s Restaurants in 2017 (i.e., all rent payments are delayed until 2018 and later).
Explain, in one sentence, whether and why the deferred rent created in this entry is an
asset or a liability.
3. The company’s actual balance sheet shows deferred rent liabilities of $30,424 and
$32,487 at the end of 2016 and 2017, respectively. Based on these balances, record rent
expense (which is still $44,700) and cash payments to landlords in one journal entry.
Explain, in one sentence, whether and why the company’s lease contracts, on average,
specify increasing or decreasing rent payments from year to year.
4. Landlords often pay BJ’s Restaurants some amount of financial support, known as tenant
improvement allowances, to help new restaurant locations through their startup phase and
become profitable and stable future tenants. BJ’s Restaurants records these payments,
upon receipt, as deferred lease incentives (a liability) on its balance sheet and
subsequently recognizes them in income by reducing rent expense evenly over the lease
term. Explain the rationale behind this accounting treatment, in no more than two
sentences and with reference to the appropriate underlying accounting concept.
5. The company’s balance sheet shows deferred lease incentive balances of $58,687 and
$57,438 at the end of 2016 and 2017, respectively. Record rent expense (which is still
$44,700) and rent-related cash payments in one journal entry, now considering both
deferred rent (from item 3 above) and deferred lease incentives.
6. Tenant improvement allowances are agreed on in the lease contract, but the actual
payment may occur with some delay. BJ’s Restaurants records a receivable (from the
landlord) for any tenant improvement allowances that have not been received yet but that
the company is entitled to under lease contracts that have already been signed. On the
company’s 2017 balance sheet, the beginning and ending balances of tenant improvement
allowances receivable are $4,517 and $2,952, respectively. Record rent expense (which is
still $44,700) and rent-related net cash payments in one journal entry, considering
deferred rent (from item 3 above) and tenant improvement allowances (including amounts
receivable) together. Explain, in one sentence, whether and why net cash payments are
higher or lower than in item 5 above.