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Southwest Airlines Co. (the "Company") operates Southwest Airlines ("Southwest") and AirTran Airways ("AirTran"), major passenger airlines that provide scheduled air transportation in the United States and near-international markets. For the 41st consecutive year, the Company was profitable, earning $754 million in net income.
Southwest commenced service on June 18, 1971, with three Boeing 737 aircraft serving three Texas cities: Dallas, Houston, and San Antonio. Including the operations of both Southwest and AirTran, the Company ended 2013 serving 96 destinations in 41 states, the District of Columbia, the Commonwealth of Puerto Rico, and five near-international countries including Mexico (Cancun, Mexico City, and Cabo San Lucas), Jamaica (Montego Bay), The Bahamas (Nassau), Aruba (Oranjestad), and Dominican Republic (Punta Cana). At December 31, 2013, Southwest's and AirTran's combined active fleet consisted of 680 aircraft, including 614 Boeing 737s and 66 Boeing 717s. The Company reached a major milestone in 2013 by completing the connection of the Southwest and AirTran networks. Customers can now fly between any of the combined 96 Southwest and AirTran destinations on a single itinerary.
While AirTran continues to service certain domestic cities and all of the Company's international markets, the Company has announced plans to convert AirTran's remaining domestic and international service into Southwest service by the end of 2014.
Access the Southwest Airlines Co. web page at: www.southwest.com, From Southwest Airlines' home page, choose "Investor Relations", then "SEC Filings" from "Financial", followed by clicking on "Annual Filings" from "View" to download 2013 annual report on Form PDF.
Instructions:
Use the annual report to answer the following questions:
1- Is Southwest Airlines Co. a service, merchandising, or manufacturing company? How can you tell? Support your answer with evidence from Southwest' 2013 annual report.
2- Continue paging through the annual report until you find the "Consolidated Statement of Income." For the three most recent years, list the amounts reported for "operating revenues", "Operating Income", and "Net Income". Is Southwest Airlines Co. growing and expanding? Is Southwest Airlines Co. a profitable company"? Comment whether the three years trend of revenues is favorable or unfavorable. Support your answer by suitable figures from the Southwest's 2013 annual report.
3- The realization principle determines when a business should recognize revenue. Most airlines sell tickets well before the scheduled date of the flight. Explain which is the appropriate alternative for Southwest Airlines Co. to apply the realization principle: a) Period ticket sold; or b) Period of flight. Support your answer by suitable figures from the Southwest's 2013 annual report.
4- When Southwest Airlines Co. sells tickets for future flights, it debts Cash and credits an account entitled Advance Ticket Sales. With respect to this Advance Ticket Sales account:
a. What does the balance of the account represent? Where should the account appear in Southwest Airlines' financial statements?
b. Explain the activity that normally reduces the balance of Advance Ticket Sales account. Can you think of any other transactions that would reduce Advance Ticket Sales account?
5- Southwest Airlines' financial statements are followed by a series of explanatory notes. What are some of the subjects covered by those notes?
6- Identify three questions that can be answered by reviewing Southwest Airlines' Statement of Income but cannot be answered by reviewing Southwest Airlines' balance sheet or stockholders' equity. Support your answer by suitable figures and/or examples from the Southwest's 2013 annual report.
7- Identify three questions that can be answered by reviewing Southwest Airlines' balance sheet but cannot be answered by reviewing Southwest Airlines' statement of income or stockholders' equity. Support your answer by suitable figures and/or examples from the Southwest Airlines' 2013 annual report.
8- Using Southwest Airlines' financial statements and related notes, identify four items that may result in adjusting entries for prepayments and accruals. Support your answer by suitable figures from the Southwest Airlines' 2013 annual report.
9- What were Southwest Airlines' cash flows from its investing and financing activities for 2013? What where Southwest Airlines' trends in net cash flows from its operating, investing, and financing activities over the period 2011-2013?
10- For the two most recent years (2013 and 2012), calculate Southwest Airlines' current ratio and comment on its trend. Show your work in calculating this ratio. What was Southwest Airlines' amount of working capital at Dec. 31, 2013?
11- For the two most recent years (2013 and 2012), are Southwest Airlines' assets primarily financed by debt or owner's equity? Explain and support your answer by suitable figures from the Southwest Airlines' 2013 annual report.