# Applying the Accounting Equation and Assessing Financial Statement Linkages Applying the Accounting Equation and Assessing Financial Statement Linkages
Answer the following questions. (Hint: Apply the accounting equation.)

• (a) Intel had assets equal to \$84,351 million and liabilities equal to \$33,148 million for a recent year. What was Intel’s total equity at year-end?

Solution:

(a)

Compute the amount of equity using accounting equation:

Assets=Liabilities + Equity

Equity=Assets−Liabilities

=\$84,351m−\$33,148m

=\$51,203m

Explanation:

Apply the accounting equation to calculate the total equity at the year end. The accounting equation is assets equal to liabilities plus equity. However, when we want to calculate the equity, liabilities will move towards right and subtracted from the total assets.

Why would we expect a company like Intel to report a relatively high proportion of equity vis-à-vis liabilities?:

It is less risky due to its higher profitability and, therefore, reduces the willingness of debt holders to lend.

It is more risky due to technology innovation and, therefore, debt holders are less willing to lend at reasonable rates.

It is more profitable, and we know that profits increase equity.

It is less risky and can comfortably carry more equity financing.

Correct answer is it is more risky due to technology innovation and, therefore, debt holders are less willing to lend at reasonable rates.

(b) At the beginning of a recent year, JetBlue’s assets were \$7,071 million and its equity was \$1,757 million. During the year, assets decreased by \$1 million and liabilities decreased by \$132 million. What was JetBlue’s equity at the end of the year?

(b) solution

Compute the amount of total equity:

First, compute the amount of assets after the decrease:

Asset=Initial value−Decrease in value

=\$7,071m−\$1m

=\$7,070m

And, the amount of liability after the decrease:

Liability=Initialvalue−Decreaseinvalue

=\$5,314m−\$132m

=\$5,182m

then ​Compute the total equity using accounting equation:

Assets=Liabilities+Equity

Equity=Assets−Liabilities

=\$7,070m−\$5,182m

=\$1,888m

(c) Which balance sheet account provides the link between the balance sheet and the income statement?

Cash

Net Sales

Retained Earnings

Total Equity

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