Questions and Answers of Corporate Financial Accounting

Extracting fixed asset information from the accounts Henkel is a German-owned manufacturer of personal care and household products. Among its bestknown international brands are Loctite adhesives, Fa
Revaluation and impairment of fixed assets Garter Inns is a hotel chain with small but fast-growing international operations. Early in x2 it buys a hotel in Thailand for cash. The fair value of the
Intangible assets: the recognition controversy SnapHappy is a Canadian mail-order film developer. Although the photo developing business in Canada is growing slowly, SnapHappy has reported large
Intangible assets: from capitalisation to write-off Helius Software is a fast-growing company specialising in environmental management software.Helius capitalises certain software development costs
Manufacturer’s income statement: alternative expense classification Narcissus makes mirrors. N asks for your help in preparing an income statement for the third quarter of x2, using the information
Costs of sales and inventory under absorption costing‘I don’t know whether this product line is profitable or not. We’re selling the Bauhaus line of bus passenger shelters for A900 each but our
Production costs and income statement presentation Pirelli SpA is a large Italian tyre and cable manufacturer. Exhibit 9.16 shows part of the company’s 2001 consolidated income statement (in the
Sensitivity of income to production levels under absorption costing*Hansel has devised a more advanced (wicked?) witchit, to be known as a ‘widget’. His company plans production of this product
Costs of sales and inventory under alternative cost-flow assumptions Naiad distributes equipment for yachts and small boats. It decides to stock the EauK, a new type of desalinator that uses the
Effect of cost-flow assumptions on income and tax The Svejk Company is a wholesaler of beer tankards. The table below shows the company’s purchases and sales of its (1 litre) Pilsener Special
Effect of LOCOM rule on income Refer to P9.6. As a result of European Commission health warnings, demand for large beer tankards falls sharply. Svejk estimates their net realisable value (that is,
Valuing inventory at replacement cost Refer to P9.6. Svejk is considering whether to change the basis of valuation of its inventory from historical cost to replacement cost (RC). Assume that, at the
RC information in HC accounts BP Amoco, a large Anglo-American oil company, is the result of a merger between BP and Amoco that took effect at the end of 1998. Financial statements for 1997 and prior
Converting LIFO-based accounts to a FIFO basis General Motors (GM) is the largest vehicle producer in North America. It is also a leading provider of financial services. Set out below are key numbers
Recognising revenue: innovative practices New revenue recognition practices emerge as companies seek to adapt traditional methods to new circumstances. The following are examples of new practice.(a)
Revenue and profit recognition: the film industry In addition to its theme parks in the USA, Europe and Japan, the Walt Disney Company is a major producer of feature films and television programmes.
Alternative revenue recognition points The Tell Company manufactures a novel apple-shaped archery target. Each archery target costs A6 to produce and A1 to sell. The selling costs are period costs
Revenue recognition issues in a dotcom company ESoccer is an Internet-based media company serving soccer enthusiasts worldwide since its founding four years earlier in x1. It provides
Recognising revenue on long-term contracts I The Stevin Company has just won a major land reclamation contract from the Dutch government. The value of the contract is A800 million and the work is
Recognising revenue on long-term contracts II*Early in x4 Hephaestus Construction Company was awarded a three-year contract by the French and Spanish governments to build a road tunnel through the
Calculation of bad debt expense Harpagon is known to be a miser. One of his great worries is the customers to whom he extends credit.He’s concerned that they will take advantage of his credit terms
Accounts receivable data in published accounts Benetton is a large Italian clothing manufacturer and retailer. Accounts receivable are a significant asset, amounting to a third of the group’s total
Accounting for long-term receivables*Mobile phone operators in Europe were financially stretched in the early 2000s as a result of large payments on third-generation (3G) licences and the cost of
The nature of accounting liabilities In some cases, it is not clear whether a company has an accounting liability and, if it has, how it should be measured. Consider the following (independent)
The nature of accounting liabilities II Altran Technologies is a fast-growing French R&D consulting firm. In x1 its revenues soared to A1.3 billion, a 40% increase on the x0 figure, and it maintained
Frequent-flier miles: accounting issues Three Englishmen, George, Harris and J., are flying to Canada on a Kingston Airlines flight to enjoy a boating holiday in Northern Ontario. They’re
Bonds: terminology and basic accounting On 1 January x3, Ajax Steel Company issues, at a price of 101, A150 million of 6% bonds due 31 December x7. Interest is payable annually. Ajax Steel values the
Early retirement of bonds Refer to P11.4. Ajax Steel issued A150 million of 6% bonds on 1 January x3 at a price of 101. Two years later, on 1 January x5, Ajax decides to retire the bonds. The company
Interest method of amortisation On 1 January x2, Dorrit Company issues A5 million of 2.5% bonds, due 31 December x5. They are priced at 91.14 to yield 5% to maturity. Dorrit amortises any initial
Debt instruments: deriving information from published accounts At end-2001, Roche, the Swiss pharmaceutical company, had total bonds payable of SFr14 billion out of total borrowings of SFr18 billion.
Accounting for lease by lessee Dogberry Security Services wins a five-year contract in late x1 to provide routine police services to Messina’s municipal government. Rather than buy all the
Accounting for lease by lessor Refer to P11.8. Consider the proposed lease of the van from the point of view of Polease, the lessor.The van cost Polease 32,000. Its estimated residual value at the
Debt, lease commitments, and financial statement analysis The French group, LVMH, produces and distributes a range of branded luxury goods such as Louis Vuitton leather and luggage goods, Christian
Accounting for share issue and profit appropriation In year 5, a group of business school graduates decide to launch a courier service in an unnamed EU country. They call their company Iris and its
Reporting changes in share capital FlySavvy is a low-cost airline based in Europe. Revenues and profits have grown rapidly since it started operations in x1. The company has invested heavily in new
Dividends and other appropriations of profit: impact on the accounts Repsol YPF is a large Spanish integrated oil and gas company that has extensive oil and gas holdings in Argentina. Exhibit 12.5
Share splits, share repurchases, and conversion of debentures*PSA Peugeot Citroen is one of Europe’s largest and most successful vehicle manufacturers. Net sales of its manufacturing and sales
Accounting for share repurchase and cancellation*Iris Company started a courier service in year 5 (see P12.1). Following a reappraisal of the company’s investment opportunities in year 9,
Accounting for convertible securities*Suizo-Hispania, a designer and builder of luxury automobiles, issues at par 15 million of 3% ten-year convertible bonds at the start of year 7. (All currency
Capital provided by risk- and revenue-sharing partnerships:accounting issues Rolls Royce, the UK aero-engine maker, was criticised for some of its accounting policies in 2002. One area of controversy
Unusual types of security: debt or equity?Some companies issue unusual types of security that are difficult to classify as either debt or equity.Details of three such issues are given below. They are
Equity investments: LOCOM and fair value accounting At the start of x1, Deriganov, a diversified industrial group, buys 80,000 shares of Pishchik, a china clay producer, at a price of 50 a share.
Accounting for financial investments under new IAS: basic framework Chisme Company makes certain investments in debt and equity securities at the start of year 4. The acquisition cost of the
Hedge accounting: fair value hedge using an interest rate swap In the example of hedge accounting in the chapter, the borrower, Bottom, swaps floating payments for fixed ones to hedge fluctuations in
Investments: converting accounts from LOCOM to fair value basis Orkla a.s., one of Norway’s largest listed companies, has three main areas of activity: branded consumer goods, chemicals and
Computing returns on financial assets under fair value accounting Microsoft is the world’s largest computer software company and, according to a Financial Times survey in May 2002, the world’s
Investments and insurance companies: impact of stock market decline Allianz is Germany’s – and Europe’s – largest insurance group. Premiums earned exceeded A50 billion in 2001 and total
Equity method and consolidation accounting: general issues Equity method and consolidation accounting are not always straightforward as the following (independent)situations demonstrate.(1) Oceana,
The nature of goodwill During the so-called bubble years in the late 1990s, many companies in the telecoms, media and technology(TMT) sectors used their highly valued shares to acquire other
Long-term equity investments: cost method and equity method Olivia, a fashion house, acquires 1.2 million of the 4 million voting shares of Malvolio, a small textile company (best known product:
Equity method, goodwill and losses At the start of x1, Pasquale Company pays A10 million to acquire a 25% stake in Norina SpA. Norina’s net assets at that date are A24 million. Pasquale exercises
Consolidation: basic structure Impressed by the research and production skills of Fleurant Corporation, Argan SA decides at the end of x1 to buy a controlling interest in the pharmaceutical company
Consolidation and intercompany sales(1) At the start of year 8, Fireball Company pays 10/share in cash for all 3 million of Slowcoach Company’s shares. Slowcoach has assets of 40 million and
Consolidation: fair value adjustments and restructuring provision At start year 5, Hardcastle pays 80 in cash to acquire 100% of Marlow’s shares. The balance sheets of the two companies at end year
Joint ventures: alternative methods of accounting*At the start of year 1, Zeus reports the following balance sheet:Zeus Company Assets Equities Cash 20 Liabilities 100 Other assets 180
Acquisitions and disclosures: financial disclosures Unilever, the giant Anglo-Dutch food and consumer products company, made major acquisitions and disposals of businesses in 2000 and 2001. Key cash
Divestment of a business: interpreting financial disclosures*British Telecom (BT), the UK telecoms group, assembled all its wireless operations in a new subsidiary, mmO2 plc. Because BT’s fixed
Unhedged transaction in a foreign currency On 15 October x5, a Swiss retail co-op places a bulk order for ‘Rosa’ ragu sauce with Priore, an Italian food producer. The value of the contract is SFr
Hedged transaction in a foreign currency Refer to the facts in P15.1. Suppose that on receipt of the order from the Swiss retail co-op on 15 October x5, Priore decides to hedge the SFr 2 million
Accounting for autonomous foreign operation To better compete with low-cost imports, Sachs, a German footwear manufacturer, sets up a shoemaking company in an emerging economy, Pacifica, in January
Accounting for non-autonomous foreign operation Refer to the facts in P15.3 and Exhibit 15.5.Required Assume Sachs Pacifica’s operations are an integral part of those of its German parent company
Non-autonomous foreign operation: translation issues Ace, a South Korean electronics company, has a subsidiary, Diamond, in Puerto Grande, a Caribbean island. Diamond assembles computer hardware for
Foreign operations in a hyperinflationary economy Portasports, an EU firm, assembles and markets portable sports facilities – or ‘kits’. A kit allows sports matches – in, say, soccer, tennis
Exchange differences and published accounts(1) Universal Electric (UE), a diversified US company with interests ranging from aero engine production to financial services, has extensive operations
Cost of employee pay and benefits D’Artagnan launches a personal bodyguard service at the start of x1. The company’s name is ‘Les Mousquetaires’. Its financial year ends on 31 December. The
Company-sponsored pension plans: accounting and management issues Despite their technical nature, the international rules on accounting for pension costs arouse strong feelings. Here’s a sample of
Accounting for pension costs under a DB plan Mirandolina Inns, a European chain of mid-price hotels, operates a DB pension plan for its employees.The company follows international standards when
Share-based compensation: a cost to the company?Accounting regulators’ attempts to require companies to recognise as an expense the shares and share options granted to employees have met with
Accounting for employee share options Shareholders in Sif, a cosmetics company specialising in hair care products, agree to the establishment of a share option plan for employees at a general meeting
Analysis of pension plan disclosures I Alice is puzzled by certain pension disclosures in Purdon Corporation’s x3 accounts. Purdon is a (fictitious)US media company. ‘Purdon’s numbers are a
Analysis of pension plan disclosures II Toray Industries is a Japanese manufacturer of fibres, textiles, plastics and chemicals. The group reported worldwide sales of ¥1,016 billion (US$7.6 billion)
Calculation of taxable profit Fremskridt Company reports before-tax profit of 750 in its x9 published accounts. (All amounts are in thousands.) This amount is arrived at after charging depreciation
Deferred tax accounting: taxable temporary differences I Columbara is a textile producer with a reputation for very fast production and delivery of goods. The problem is that labelling of finished
Deferred tax accounting: taxable temporary differences II Refer to P17.2. Columbara is so pleased with the special labelling equipment it purchased in x5 that it decides to buy an additional machine
Deferred tax accounting: comprehensive example Tyr Company designs and manufactures military hardware. It has asked you to calculate its income tax expense for x3 and its current and deferred taxes
Income taxes: analysis of disclosures I Sandvik is a large engineering company with headquarters in Sweden. Its high-speed steel tools and mining equipment have a high reputation. Only 5% of its 2001
Income taxes: analysis of disclosures II*Siam City Cement Company (SCCC) is Thailand’s principal cement producer with consolidated 2001 revenues of Baht 16 billion (A360 million). The group was hit
Accounting for tax losses*Few construction companies have as much experience of land reclamation and conservation as the Stevin Company which made its name on the Zuider Zee project. The company had
Net-of-tax method: a simpler approach to deferred tax accounting?‘Why do we bother with deferred taxes?’ asks the financial controller of a publicly quoted company.‘None of our investors – or
Cash flow statements: initial analysis Swiss-based Nestlé is the world’s largest consumer foods company with 2001 sales of A56 billion. It’s best known for its beverage (Nescafé), bottled water
Assessing financial risk using cash flow data Franz, an analyst at a large insurance company, receives the following e-mail from Sylvie, his boss.‘Can you take a look at Unilever’s financial
Detecting earnings manipulation with cash flow data Managers sometimes try to inflate reported corporate earnings using dubious accounting techniques.Careful inspection of the cash flow statement may
Construction of a cash flow statement I You are Emil. You have an eye for numbers. Geppetto, a puppet-maker, is troubled and asks for your help. ‘We had a good year last year. After-tax profits
Construction of a cash flow statement II PaintPot is a manufacturer and distributor of decorative paints for use inside and outside the home. The company’s x4 income statement and end-x3 and end-x4
The cash flow statement: alternative format An investor asks you to explain some features of the cash flow statement of Thorntons, a UK confectionery producer and retailer, that puzzle
Financing statement: conversion to cash basis Spanish companies include a ‘financing statement’ in their published accounts in place of a cash flow statement. It shows the sources and uses of the
Alternative approach to financial statement analysis Asked what she looked for when analysing a company’s financial statements, a prominent fund manager, Florence Cash, gave a two-word reply:
Japanese production methods and profitability Do Japanese production methods improve corporate profitability? This is a question that has long interested European and US managers. Recently, some
Effect of transactions on financial ratios Pappacoda, a macaroni producer, has a current ratio of 1.5, a receivables turnover of 5, and an inventory turnover (cost of sales/average inventory) of
Profitability: alternative ways of analysing ROE FKI is a UK-based engineering group with interests in automated material handling, lifting products, and energy technology (e.g. electrical
Profitability: comparing corporate performance Kao Corporation is a Japanese toiletries and household products group. The range of its products is similar to that of US-based Procter & Gamble but
Financial ratios: industry differences Certain industries have distinctive economic traits and these can be seen in the financial statements of companies in the industry. Set out in Exhibit 19.18 are
Profitability: competitor analysis The personal computer (PC) industry has experienced spectacular growth in the last 20 years. It started in the late 1970s when Apple, Atari and Commodore introduced
Residual income and measuring value creation Michelin, the French tyre manufacturer, provides in its annual report to shareholders an assessment of its economic performance in the year. Management
Analysis of leverage Deutsche Telekom (DT) is Germany’s – and Europe’s – largest telecoms group. Investors were concerned about DT’s finances in 2002. Fierce competition in its home market
Ebitda: investors’ friend or foe?Many companies now present an Ebitda (earnings before interest, tax, depreciation and amortisation)number in their annual and interim reports, usually among the
Restating accounts for new information Under current accounting rules, companies – in countries where the practice is permitted – can restate past years’ accounts in limited circumstances only.
Earnings impact of major changes in operations Smith & Nephew plc, UK-based producer of medical devices, reorganised its operations in 2001. On 1 April that year it set up a joint venture (called BSN
Change in accounting policy Volund, a metal fabricator, decides to build its own steel mill. The mini-mill costs 120, has a ten-year economic life and an expected scrap value of 10. (Amounts are in A
Reconciling numbers to US GAAP: effect on profitability and leverage Helping Hand is a business services firm that specialises in outsourcing services. Although based in a eurozone country –

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