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INTRODUCTION TO FINANCIAL ACCOUNTING (1) 1/6 1. Income statement: Below is a partial listing of the adjusted account balances of FA Department Store at fiscal year‐end on April 30, 2018.
Accounts Payable ($) 14,000 Accounts Receivable 19,000 Accumulated Depreciation—Building 10,000 Administrative Expenses (includes depreciation) 20,000 Freight‐in 2,000 Income tax expense 1,900 Interest Expense 1,000 Interest Revenue 800 Merchandise inventory 13,500 Purchases 272,500 Purchases discounts 6,000 Sales 340,000 Sales Discounts 22,000 Selling Expenses (includes depreciation) 35,000
Using whatever data, you believe appropriate, prepare a multiple‐step income statement for FA Department Store for the year ended April 30, 2018. Assume that this is FA Department Store’s first year of operations. 2. Balance sheet: The following data pertain to FA Department Store at May 15, 2018:
Accounts Payable ($) 10,200 Accounts Receivable 7,600 Accumulated Depreciation—Building 2,800 Accumulated Depreciation—Equipment 3,400 Additional paid‐in capital 9,300 Bonds Payable (15 months) 12,000 Building 14,000 Cash 6,240 Common Stock 31,000 Copyright 1,240 Current part of long term bank loan 1,200 Deferred income taxes 2,050 Equipment 30,800 Income tax payable 850 Interest payable 100 Investment in Corporate Securities (long‐term) 4,200 Investment in Six‐Month Government Securities 3,280 Land 5,600 Long term bank loan 16,900 Merchandise inventory 12,000 Notes payable (45 days) 3,000 Notes receivable (18 months) 6,200 Notes receivable (30 days) 5,200 Office supplies 900 Prepaid Rent 240 Retained Earnings 16,640 Revenue Received in Advance 560 Software 8,700 Treasury stocks 6,700 Wages payable 2,900
Prepare a classified balance sheet at May 15, 2018. Assume that this is FA Department Store’s first year of operations.
INTRODUCTION TO FINANCIAL ACCOUNTING (1) 2/6 3. Cash flow statement: A. Compute net cash flows from operating activities using the indirect method. Financial A Company reported net income of $200,000 for the current year. Depreciation recorded on buildings and equipment amounted to $80,100 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows:
Accounts End of Year Beginning of Year Cash ($) 20.000 15.000 Accounts receivable 24.000 32.000 Inventories 50.000 65.000 Prepaid expenses 7.500 5.000 Accounts payable 12.000 18.000 Income taxes payable 1.600 1.200
B. Compute net cash flows from investing activities. During the year, Financial B Company sold a building with a book value of $145,000 for cash of $132,000. The company also sold long‐term investments for cash of $45,000. The company purchased land and a new building for $320,000 by signing a long‐term note payable. No other transactions impacted long‐term asset accounts during the year. C. Compute net cash flows from financing activities. During the year, Financial C Company issued common stock for cash of $14,000 during the year. The company paid dividends of $2,000. The company also issued a long‐term note payable for $30,000 in exchange for equipment during the year. The company sold treasury stock that had a cost of $2,000 for $4,000. 4. Year‐end adjustments: In the journal, prepare adjusting entries for the following items. a. Unearned service revenue had a $8,750 normal balance prior to adjustment. By year end, 40 percent had rendered.
b. Office supplies of $280 were on hand at the beginning of the period. Purchases of office supplies during the period totaled $4,000. At the end of the period, $1,200 in office supplies remained.
c. Commissions amounting to $8,010 were accrued but not recorded or paid by year end. d. Federal income taxes for the year are estimated to be $5,510.
5. Merchandise inventories: a. In the journal, prepare entries corresponding to the transactions listed below, assuming use of the perpetual inventory system.
b. In the ledger, prepare entries corresponding to the transactions listed below affecting the merchandise inventory account, assuming use of the perpetual inventory system.
May. 1 Beginning inventory, 170$ 2 Purchased $1,000 of merchandise on credit, terms n/30. 6 Returned $150 of the items purchased on March 2. 16 Sold merchandise on credit for $1,200, terms n/15. The merchandise had a cost in inventory of $800. 17 Of the merchandise sold on March 16, $100 of it was returned. The items had a cost of $30. 25 Received payment in full from the customer of March 16. 31 Paid for the merchandise purchased on March 2. 31 Physical inventory revealed that the value of the merchandise on hand was $210 31 The net realizable value of merchandise inventory was $195
INTRODUCTION TO FINANCIAL ACCOUNTING (1) 3/6 6. Accounts receivable and allowance method for uncollectible accounts: In the journal, prepare the entries for the following transactions. Dec 31 Made adjusting entry for Uncollectible Accounts Expense, using the percentage of net sales method. Net
sales for the year totaled $14,000, uncollectible accounts are estimated at 2 percent, and Allowance for Uncollectible Accounts has a $50 credit balance prior to adjustment.
Feb. 5 Wrote off an account receivable because the customer filed for bankruptcy, $600. 17 Unexpectedly received the $200 from the customer written off on Feb. 5. 7. Notes receivable: Journalize the following transactions involving promissory notes. Sept. 1 Sold land to other company on credit for $30,000. The acquisition cost was $12,000. A six‐month, 10
percent note was received in exchange. Dec. 31 Recorded accrued interest on the note received on September 1. Mar. 1 Received payment in full from the other company. 8. Current liabilities and payroll: The following totals for the month of March were taken from the payroll register of a company:
Gross salaries $14,000 Income taxes deductions 3,500 Social security tax deductions 850 Medical insurance deductions 700 Life insurance deductions 400 Social security tax expense 1,700 Medical insurance expense 1,400
Prepare journal entries without explanations to record the monthly payroll. 9. Non‐current assets: A. If the purchase of machinery is treated incorrectly as a revenue expenditure, what will be the effect on net income and total assets in the year of purchase and in the following year, and why? B. On January 2, 2012, a company purchased a machine for $90,000. The machine has a five‐year estimated useful life and a $6,000 estimated residual value. In addition, the company expects to use the machine 200,000 hours. Assuming that the machine was used 35,000 hours during 2013, complete the chart in the answer section. If a figure cannot be determined, indicate so by placing an X in the box. C. On November 1, 2011, a company purchased equipment for $18,000. The equipment had an estimated residual value of $3,000 and a five‐year life and was sold on May 1, 2013. Assuming that the company depreciates the asset on a straight‐line basis and reports on a calendar‐year basis, journalize the following independent transactions in the journal provided. a. The entry to update depreciation to May 1, 2013. b. The entry to record the sale for $11,000.
D. For each of the following descriptions, provide the name of the intangible asset that is being described. a. Exclusive right to use a name or symbol. b. Exclusive right to sell photographic reproductions of a painting. c. Excess paid for a business over the fair market value of the net assets purchased. d. Long‐term exclusive right to use certain property. e. A right to an exclusive territory or market. f. Exclusive right to use an invention to sell or manufacture a certain product or use a specific process.
INTRODUCTION TO FINANCIAL ACCOUNTING (1) 4/6 10. Non‐current liabilities: Identify the choice that best completes the statement or answers the question. ____ 1. Which of the following statements best describes the behavior over time of the components of equal mortgage payments? a. Both payment of principal and interest expense decrease. b. Interest expense increases and payment of principal decreases. c. Payment of principal increases and interest expense decreases. d. The proportion of interest expense to payment of principal remains the same. ____ 2. The entry to record the issuance of bonds at a discount on an interest payment date should include a a. credit to Cash for the face amount of the bonds. b. debit to Cash for the face amount of the bonds minus the amount of discount. c. debit to Cash for the face amount of the bonds plus the amount of discount. d. debit to Cash for the face amount of the bonds. ____ 3. Under an operating lease, the lessee a. debits Capital Lease Equipment. b. records depreciation on the leased asset. c. debits Rent Expense. d. credits Capital Lease Obligations. ____ 4. A deferred income tax liability arises when a. a revenue item is not subject to income taxes. b. a corporation is able to obtain an extension on its income tax filing. c. an expense is not deductible for tax purposes. d. there is a difference between financial reporting requirements and income tax filing requirements. ____ 5. Other postretirement benefits should be expensed a. on the employee's retirement date. b. as they are received by the employee. c. when the employee is hired. d. as the employee earns them. 11. Stockholders’ equity: A. A corporation has 2,500,000 authorized shares of $15 par value common stock. As of June 30, there were 1,500,000 shares issued and outstanding. On June 30, the board of directors declared a $0.30 per share cash dividend to be paid on August 1 to shareholders of record on July 15, 2018. Prepare the necessary entries in journal form to be recorded on: a. the date of declaration b. the date of record c. the date of payment.
B. A corporation had both the following transactions occur on the same day: a. Issued 50,000 shares of its $3 par value common stock for $360,000 cash. b. Issued 20,000 shares of its $3 par value common stock in exchange for land and a building. The building is estimated to have a market value of $94,000.
Determine the issue value per share, the additional paid‐in capital per share and the value of the land. Prepare the entries in journal form to record the above transactions. C. Prepare the entries in journal form necessary to record the following stock transactions. These transactions represent all treasury stock transactions entered into by a company. June 1 Purchased 2,000 shares of its own $30 par value common stock for $80 per share, the current market price. 10 Sold 500 shares of treasury stock purchased on June 1 for $75 per share. 30 Retired the remaining shares purchased on June 1. The original issue price was $70 per share.
INTRODUCTION TO FINANCIAL ACCOUNTING (1) 5/6 12. Investments: Identify the choice that best completes the statement or answers the question. ____ 1. Which of the following is not a category of investments? a. Available‐for‐sale securities b. Collateral securities c. Held‐to‐maturity securities d. Trading securities ____ 2. Which is the only type of investment that is always classified as short‐term? a. Available‐for‐sale securities b. Equity securities c. Held‐to‐maturity securities d. Trading securities ____ 3. Trading securities are valued on the balance sheet at a. cost. b. cost, adjusted for the effects of interest. c. lower of cost or market. d. market value. ____ 4. The year‐end adjusting entry to reflect an increase in the value of trading securities includes a a. credit to Allowance to Adjust Short‐Term Investments to Market. b. credit to Realized Gain on Investments. c. credit to Short‐Term Investments. d. credit to Unrealized Gain on Short‐Term Investments. ____ 5. Which of the following categories of investments are debt, but not equity, securities? a. Available‐for‐sale securities b. Held‐to‐maturity securities c. Trading securities d. Both trading and available‐for‐sale securities ____ 6. Which type of investment, if any, could be classified as short‐ or long‐term, as well as debt or equity? a. Available‐for‐sale securities b. Held‐to‐maturity securities c. Trading securities d. None of these are correct. ____ 7. Available‐for‐sale debt securities are valued on the balance sheet at a. cost. b. cost, adjusted for the effects of interest. c. lower of cost or market. d. market value. ____ 8. For available‐for‐sale equity securities, the Unrealized Loss on Long‐Term Investments account should be reported as a(n) a. prior period adjustment. b. realized loss item on the income statement. c. extraordinary item on the income statement. d. separate item in the stockholders' equity section of the balance sheet.
INTRODUCTION TO FINANCIAL ACCOUNTING (1) 6/6 ____ 9. Holidays Corporation purchased 8,000 shares of Study Corporation common stock for $40 per share on January 1, 2012. Study reported net income of $120,000 for 2012 and paid dividends of $42,000 during 2012. As of December 31, 2012, the market value of Study Corporation common stock was $40 per share. Assuming the shares owned by Holidays represent 10 percent of the total outstanding stock of Study, the entry to record the receipt of dividend income in Holidays Corporation’s books is: a. Cash 8,000 Dividend Income 8,000
b. Cash 4,000 Dividend Income 4,000
c. Cash 12,000 Dividend Income 12,000
d. Cash 4,200 Dividend Income 4,200
____ 10. Consolidated financial statements are useful because a. minority shareholders need the consolidated information to make good investment decisions. b. the parent and subsidiaries constitute a single legal entity, and the financial statements should reflect that fact.
c. they are much less detailed than the statements for the individual companies. d. they treat parent and subsidiary firms as one combined company that gives investors a clear financial picture of the entire entity.
INTRODUCTION TO FINANCIAL ACCOUNTING (1) 1/6
ANSWER SECTION SURNAME(S) NAME
Show your calculations and omit explanation in recoding entries 1. INCOME STATEMENT
INTRODUCTION TO FINANCIAL ACCOUNTING (1) 2/6
2. BALANCE SHEET
INTRODUCTION TO FINANCIAL ACCOUNTING (1) 3/6
3. CASH FLOW STATEMENT 4. YEAR‐END ADJUSTMENTS
Date Accounts Debit Credit
5. MERCHANDISE INVENTORIES Date Accounts Debit Credit
INTRODUCTION TO FINANCIAL ACCOUNTING (1) 4/6
5. MERCHANDISE INVENTORIES (continued) Merchandise inventory
Date Dr Cr Balance
6. ACCOUNTS RECEIVABLE AND ALLOWANCE METHOD FOR UNCOLLECTIBLE ACCOUNTS Date Accounts Debit Credit
7. NOTES RECEIVABLE Date Accounts Debit Credit
8. CURRENT LIABILITIES AND PAYROLL Date Accounts Debit Credit
INTRODUCTION TO FINANCIAL ACCOUNTING (1) 5/6
9. NON‐CURRENT ASSETS A. B.
Method Depreciation expense for 2013
Carrying Value at 12/31/13
Straight‐line Production Double‐declining‐balance
Date Accounts Debit Credit
D. a. d. b. e. c. f. 10. NON‐CURRENT LIABILITIES
1 2 3 4 5 a. b. c. d.
INTRODUCTION TO FINANCIAL ACCOUNTING (1) 6/6
11. STOCKHOLDERS’ EQUITY A.
Date Accounts Debit Credit
B. Date Accounts Debit Credit
Calculations Issue value per share = Additional paid‐in capital per share = Land value = C.
Date Accounts Debit Credit
1 2 3 4 5 6 7 8 9 10 a. b. c. d.
INTRODUCTION TO FINANCIAL ACCOUNTING (1) 1/6 INTRODUCTION TO FINANCIAL ACCOUNTING
ANSWER SECTION 1. INCOME STATEMENT
FA DEPARTMENT STORE Income Statement
For Year Ended April, 2018 Sales revenues ($) Sales 340,000 Less: Sales discounts 22,000 Net sales 318,000 Merchandise inventory May 1, 2017 0 Purchases 272,500 Less: Purchases returns 6,000 Net purchases 266,500 Freight‐in 2,000 Net cost of purchases 268,500 Goods available for sale 268,500 Less: Merchandise inventory April 30, 2018 13,500 Cost of goods sold 255,000 Gross profit 63,000 Operating expenses Selling expenses 35,000 Administrative expenses 20,000 Total operating expenses 55,000 Income from operations 8,000 Other revenues and expenses Interest revenue 800 Less: Interest expense 1,000 Total other revenues and expenses (200) Income before taxes 7,800 Income taxes 1,900 Net Income ($) 5,900
INTRODUCTION TO FINANCIAL ACCOUNTING (1) 2/6 2. BALANCE SHEET
FA DEPARTMENT STORE ‐ Balance sheet ‐ May 15, 2018 ASSETS
Current assets Cash 6,240 Investment in Six‐Month Government Securities 3,280 Accounts Receivable 7,600 Notes receivable (30 days) 5,200 Merchandise inventory 12,000 Office supplies 900 Prepaid Rent 240
Total current assets 35,460 Investments Notes receivable (18 months) 6,200 Investment in Corporate Securities (long‐term) 4,200
Total investments 10,400 Plant, property and equipment Land 5,600 Building 14,000 Less: Accumulated Depreciation—Building ‐2,800 Equipment 30,800 Less: Accumulated Depreciation—Equipment ‐3,400
Total plant, property and equipment 44,200 Intangible assets Copyright 1,240 Software 8,700
Total intangible assets 9,940 Total ASSETS ($) 100,000
LIABILITIES Current liabilities Accounts Payable 10,200 Notes payable (45 days) 3,000 Wages payable 2,900 Interest payable 100 Income tax payable 850 Revenue Received in Advance 560 Current part of long term bank loan 1,200
Total current liabilities 18,810 Non‐current liabilities Bonds Payable (15 months) 12,000 Long term bank loan 16,900 Deferred income taxes 2,050
Total non‐current liabilities 30,950 Total liabilities 49,760
STOCKHOLDERS' EQUITY Contributed capital Common Stock 31,000 Additional paid‐in capital 9,300
Total contributed capital 40,300 Retained Earnings 16,640
Total retained earnings 16,640 Less: Treasury stocks ‐6,700
Total stockholders' equity 50,240 Total LIABILITIES + STOCKHOLDERS' EQUITY ($) 100,000
INTRODUCTION TO FINANCIAL ACCOUNTING (1) 3/6 3. CASH FLOW STATEMENT A.
Net income $200,000 Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense 80,100 Decrease in accounts receivable 8,000 Decrease in inventories 15,000 Increase in prepaid expenses (2,500) Decrease in accounts payable (6,000) Increase in income taxes payable 400 Net cash provided by operating activities $295,000
B. Net cash flows from investing activities = $132,000 + $45,000 = $177,000 C. Net cash flows from financing activities = $14,000 ‐ $2,000 + $4,000 = $16,000 4. YEAR‐END ADJUSTMENTS
Date Accounts Debit Credit a Unearned service revenue ($8,750 x 0.4) 3,500 Service revenue 3,500 b Office Supplies Expense ($280 + $4,000 – $1,200) 3,080 Office Supplies 3,080 c Commissions expense 8,010 Accounts payable 8,010 d Income Taxes Expense 5,510 Income Taxes Payable 5,510
DIF: Moderate KEY: Adjustment process 5. MERCHANDISE INVENTORIES
Date Accounts Debit Credit Mar. 2 Merchandise Inventory 1,000
Accounts Payable 1,000 6 Accounts Payable 150 Merchandise Inventory 150
16 Accounts Receivable 1,200 Sales 1,200
16 Cost of Goods Sold 800 Merchandise Inventory 800
17 Sales Returns and Allowances 100 Accounts Receivable 100
17 Merchandise Inventory 30 Cost of Goods Sold 30
25 Cash 1,100 Accounts Receivable 1,100
31 Accounts Payable 850 Cash 850
31 Cost of Goods Sold 40 Merchandise Inventory 40
31 Loss of inventory value 15 Merchandise Inventory 15
INTRODUCTION TO FINANCIAL ACCOUNTING (1) 4/6 5. MERCHANDISE INVENTORIES (continued)
Merchandise inventory Date Dr Cr Balance May. 1 170 170
2 1,000 1,170 6 150 1,020 16 800 220 17 30 250 31 40 210 31 15 195
DIF: Moderate KEY: Merchandise purchases and sales transactions | Recording entries 6. ACCOUNTS RECEIVABLE AND ALLOWANCE METHOD FOR UNCOLLECTIBLE ACCOUNTS
Date Accounts Debit Credit Dec. 31 Uncollectible Accounts Expense 280
Allowance for Uncollectible Accounts ($14,000 x 0.02) 280 Feb. 5 Allowance for Uncollectible Accounts 600
Accounts Receivable 600 Feb. 17 Accounts Receivable 200
Allowance for Uncollectible Accounts 200 Feb. 17 Cash 200
Accounts Receivable 200 DIF: Challenging KEY: Uncollectible accounts receivable 7. NOTES RECEIVABLE
Date Accounts Debit Credit Sept. 1 Notes Receivable 30,000
Land 12,000 Gain on sale of land 18,000
Dec. 31 Interest Receivable 1,000 Interest Income ($30,000 x 0.1 x 4/12) 1,000
Mar. 1 Cash 31,500 Notes Receivable 30,000 Interest Receivable 1,000 Interest Income ($30,000 x 0.1 x 2/12) 500
DIF: Moderate KEY: Notes receivable 8. CURRENT LIABILITIES AND PAYROLL
Date Accounts Debit Credit Salaries Expense 14,000 Employees' Income Taxes Payable 3,500 Social Security Tax Payable 850 Medical Insurance Premiums Payable 700 Life Insurance Premiums Payable 400 Salaries Payable 8,550 Social security tax expense 1,700 Medical insurance expense 1,400 Social Security Tax Payable 1,700 Medical Insurance Premiums Payable 1,400
DIF: Moderate KEY: Recording the payroll
INTRODUCTION TO FINANCIAL ACCOUNTING (1) 5/6 9. NON‐CURRENT ASSETS A. In the year of purchase, both net income and total assets will be understated as a result of the overstatement of expenses. In the following year, net income will be overstated because of the lack of the depreciation that should have been charged, and total assets will continue to be understated. DIF: Challenging KEY: Acquisition cost of property, plant, and equipment B.
Method Depreciation expense for 2013
Carrying Value at 12/31/13
Straight‐line $16,800 $56,400 Production $14,700 X Double‐declining‐balance $21,600 $32,400
Straight‐line Depreciation expense = $16,800 = ($90,000 – $6,000) ÷ 5 Carrying Value = $56,400 = $90,000 – (2 x $16,800) Production
Depreciation expense = $14,700 = ($84,000 ÷ 200,000) x 35,000 = $.42 x 35,000 Carrying Value = X Double‐declining‐balance
Depreciation expense year 2012 = $90,000 x 40% = $36,000 Depreciation expense year 2013 = $21,600 = ($90,000 – 36,000) x 40% = $54,000 x 40% Carrying Value = $32,400 = $90,000 – $36,000 – $21,600 DIF: Moderate KEY: Depreciation C.
Date Accounts Debit Credit a. Depreciation Expense–Equipment 1,000 Accumulated Depreciation–Equipment
($18,000 – $3,000) ÷ 5 x 4/12 = $3,000 x 4/12 1,000
b. Cash 11,000 Accumulated Depreciation–Equipment 4,500 Loss on Sale of Equipment (11,000 – ($18,000 – $4,500)) 2,500 Equipment 18,000
DIF: Moderate KEY: Depreciation | Disposal of depreciable assets D. a. Trademark d. Leasehold b. Copyright e. Franchise or license c. Goodwill f. Patent DIF: Moderate KEY: Intangible assets 10. NON‐CURRENT LIABILITIES
1 2 3 4 5 a. b. B B c. C d. D D
1. ANS: B Moderate Mortgages payable 2. ANS: B Moderate Bonds 3. ANS: C Easy Long‐term leases 4. ANS: D Moderate Estimated liabilities 5. ANS: D Moderate Other postretirement benefits
INTRODUCTION TO FINANCIAL ACCOUNTING (1) 6/6 11. STOCKHOLDERS’ EQUITY A.
Date Accounts Debit Credit June 30 Dividends 450,000
Dividends Payable (1,500,000 x $0.30) 450,000 July 15 No entry
Aug. 1 Dividends Payable 450,000
Cash 450,000 DIF: Moderate KEY: Dividends B.
Date Accounts Debit Credit a. Cash 360,000 Common Stock ($3 per share x 50,000 shares) 150,000 Additional Paid‐in Capital ($360,000 – $150,000) 210,000 b. Land 50,000 Building 94,000 Common Stock ($3 per share x 20,000 shares) 60,000 Additional Paid‐in Capital ($4,2 per share x 20,000 shares) 84,000
Issue value per share = $360,000 ÷ 50,000 shares = $7,2 per share Additional paid‐in capital per share = $7,2 per share – $3 per share = $4,2 per share Land value = $7,2 per share x 20,000 shares – $94,000 = $50,000 DIF: Challenging KEY: Stock issuance C.
Date Accounts Debit Credit June 1 Treasury Stock, Common ($80 per share x 2,000 shares) 160,000
Cash 160,000 June 10 Cash ($75 per share x 500 shares) 37,500
Retained Earnings 2,500 Treasury Stock, Common ($80 per share x 500 shares) 40,000
June 30 Common Stock ($30 per share x 1,500 shares) 45,000 Additional Paid‐in Capital ($40 per share x 1,500 shares) 60,000 Retained Earnings ($10 per share x 1,500 shares) 15,000 Treasury Stock, Common ($80 per share x 1,500 shares) 120,000
DIF: Moderate KEY: Treasury stock 12: 1 2 3 4 5 6 7 8 9 10 a. A b. B B c. C d. D D D D D D
1. ANS: B Easy Classification of investments 2. ANS: D Easy Trading securities 3. ANS: D Easy Trading securities 4. ANS: D Moderate Trading securities 5. ANS: B Easy Held‐to‐maturity securities 6. ANS: A Easy Available‐for‐sale securities 7. ANS: D Easy Available‐for‐sale securities 8. ANS: D Easy No‐influential and non‐controlling investment 9. ANS: D Moderate Non‐influential and non‐controlling investment ($42,000 x .1 = $4,200) 10. ANS: D Easy Consolidated financial statements