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financial reporting and analysis

Questions and Answers of Financial Reporting and Analysis

Distinguish between unreported assets and unreported liabilities. Why are items that are unreported on a balance sheet important to financial analysts or managers? Would a banker or other creditor be
Define the term net realizable value as it refers to accounts receivable. Why would a financial analyst or manager be interested in the net realizable value of receivables, as compared to the gross
Differentiate between tangible and intangible assets. Do you believe that both types of assets are equally important in measuring a firm’s financial position? Discuss.
What is meant by the term net book value of a firm’s building and equipment?Explain why net book value differs from the initial cost of these assets and is also likely to differ from current market
Describe the concept of an operating cycle. Identify reasons why operating cycles may differ for firms in different industries, and also for firms in the same industry.
Compare and contrast noncurrent assets and long-term liabilities. How and why are they different? In what ways are they similar?
Differentiate between current and noncurrent assets, and explain why this distinction may be useful to readers of financial reports.
Compare and contrast prepaid expenses and accrued expenses. How and why are they different? Could they be easily confused? How are they being kept separate?
Compare and contrast current assets and current liabilities. How and why are they different? In what ways are they similar?
All assets represent probable future economic benefits to the firm. Identify the probable future benefit associated with each of the following: (a) inventories,(b) accounts receivable, and (c)
The balance sheet may be viewed as the cumulative result of the firm’s past activities. Explain how the assets, liabilities, and equity amounts may be interpreted in this way.
Explain why both sides of the balance sheet must have the same total dollar amount. Does this equality imply that the balance sheet is “correct”as a measure of financial position? Discuss.
Discuss the role and purpose of the balance sheet. How is it different from an income statement?
Rearrange the balance sheet equation into several variations. Why are these differences helpful? How might each version be used? Should an analyst always use the simplest version possible? Why or why
Be alert to the limitations as well as the usefulness of balance sheet information.? LOP85
Use balance sheet relationships to obtain information useful to investors and lenders. LOP85
Appreciate why balance sheets differ for firms in different industries. LOP85
Comprehend the ordering and classification of items on the balance sheet. LOP85
Recognize the types of assets, liabilities, and owners’ equity that are found on the balance sheets of most business firms. LOP85
Identify the basic elements of the balance sheet. LOP85
Locate the most recent 10-K filing by Toys ‘R’ Us and Gillette in the EDGAR archives (www.sec.gov/edaux/searches.htm).Requireda. What is each company’s major product line? (This information
Locate the most recent 10-K filing by Wal-Mart and Kmart in the EDGAR archives(www.sec.gov/edaux/searches.htm). Scroll down to the Summary of Financial Information (in the financial report
Locate the most recent set of financial statements for the regional telecommunications companies listed below. You may use either the 10-K available at EDGAR (www.sec.gov/edaux/searches.htm) or the
You are the chief accountant for the Seal Company, which produces candy bars.You like your job very much, and one reason is that your best friend, Stacy Monroe, is a salesperson for Seal.Seal
Contact local firms with which you are familiar, or review several annual reports from firms in the same industry, and examine their revenue recognition principles and procedures. Review the notes to
Consider the following horizontal analysis of a firm’s income statement (assume that 1998 is the base year used for comparison, when all items equal 100%):2000 1999 Net revenues Product sales
Byte City, Inc., is a leading independent provider of systems and network management software. Its income statements are abbreviated as follows:2000 1999 Net revenues Software products $64,282,171 $
The following scenario illustrates several issues concerning revenue recognition, particularly impacting sustainable earnings or operating profits. You should also consider the managerial
Borden, Inc., in response to pressure from the Securities and Exchange Commission, restated its 1993 and 1992 earnings. It restated the effects of a $642 million restructuring charge taken in 1992,
Sigma Designs is a high-tech software development company specializing in imaging and multimedia computer applications. Sigma’s balance sheets are reproduced below (dollars in thousands):Assets
IBM is a well-known U.S. company specializing in computer hardware. Several U.S. companies are comparable to IBM.Requireda. Using library resources (or the Internet), obtain income statements for IBM
Pioneer Resource Inc.’s 1999 income statement (dollars in millions) is summarized on the next page. Pioneer Resource is involved in telecommunications.Revenues $13,932.3 $13,231.1 Costs and
Microbyte Corporation’s consolidated statement of operations (dollars in thousands) follows. Note that Microbyte is a computer company, specializing in data storage devices.2000 1999 Sales $184,355
SILLA, Inc., is a producer and supplier of natural gas and petroleum-based products. Its condensed statements of operations for the first quarters of 1998 and 1999 are shown below (dollars in
The following worksheet has been retrieved from a company’s files that were destroyed by fire. Identify the underlying transactions that occurred during the month. Write a brief (one to two
Review the Income Statement from Reebok International Ltd. in Appendix D.Requireda. Conduct a horizontal and vertical analysis of the income statement for each year from 1995 to1997.b. Calculate the
Review the Income Statement from Wendy’s International Inc. in Appendix D.Requireda. Conduct a horizontal and vertical analysis of the income statement for each year from 1995 to1997.b. Calculate
Consider the following cases:1. Banana Republic sells clothes for cash or on credit card vouchers, which are collected from banks within a few days after the sale.2. Micropoint Computer Systems sells
Consider the following income statement:Commission revenue $120,000 Rental revenue 9,900 Interest income 4,100 Total revenue $134,000 Salaries expense 54,000 Depreciation expense 23,000 Interest
Beth’s Espresso Cart Inc. sells coffee, pastries, and mineral water at the Boulder Mall. Last year, Beth leased a coffee cart and opened her business. She initially felt that cash flows were a
Susan’s Drawing Studio has been very successful, with annual sales and profits at a record high. Susan wants to evaluate and better understand the studio’s profitability and performance based on
Consider the following income statement (dollars in thousands):1999 1998 Net revenues:Computer sales $ 75,250 $ 62,250 Software sales 45,400 38,600 Net revenues 120,650 100,850 Operating
Consider the following income statement (dollars in thousands):2000 1999 Net revenues Software sales $ 77,350 $ 66,450 Customer support and service 48,500 39,040 Total net revenues 125,850 105,490
for the year ended December 31, 1999. Selling expenses include advertising and commission expense.b. Calculate earnings per share. Assume that 100,000 shares were outstanding.
Revenue, expenses, and related accounts of Stackwell Enterprises Inc. for the year ended December 31, 1999, were Cost of goods sold $135,000 Utilities expense $4,800 Depreciation expense 12,000
for the year ended December 31, 2000. Note: Make the necessary adjustments before preparing the income statement.b. Assume that stockholders’equity at the beginning of the year was $740,000.The
The Bichette Company had the following transactions during the year ended December 31, 2000:1. Sales on account were $155,000. Cash sales were $38,000.2. Cost of goods sold during the year was
The Lick Skillet Bakery provides deli meals, bakery goods, and espresso to restaurant customers. It also sells take-out specialty foods, including bakery goods, hot and cold entrees, and so on. The
Consider the following transactions, which are independent, except as noted:1. Sarah Jones, R.N., provided home nursing services to her clients and billed them for 20 hours of service at $65 per
Consider the following transactions:1. A firm sold merchandise for $1,000, but no cash was received.2. A firm collected the $1,000 from transaction 1.3. A medical clinic provided treatment for a
Jill Zimmer wants to evaluate the success of her restaurant, Planet Broadway. She has assembled the following 2000 data:1. Wages were $270,000, paid in cash.2. Collections from customers were
Denny’s CPA School provided the following vertical analysis of its income statements for 1999 and 2000:Percentage of Revenues 1999 2000 Revenues 100% 100%Salaries expense 40 45 Rentals expense 20
Consider the following transactions for the publishers of Mobile Home Improvement. This magazine is produced monthly and sold on newsstands and to annual subscribers.1. Mobile Home Improvement
Amherst Trucking Co. had the following pre-tax amounts of revenues, expenses, gains, and losses during 2000. All items are subject to an income tax rate of 40%.Revenues $1,500,000 Operating expenses
Boomingdales, Inc., reported the following transactions:1, Purchased $150 of equipment on account. The corporation has over $1 million in assets.2, Sold merchandise at retail of $150,000 during the
Spinner Sewing Corporation was incorporated on January 1, 2000. Three investors each invested $150,000 in exchange for $150,000 of common stock of the corporation. The following transactions took
Sort the following account titles according to whether they would appear on the income statement or the balance sheet:Supplies expense Salaries payable Accounts payable Cost of goods sold Land Trucks
James Hardie Industries Ltd. is an Australian company specializing in building materials. It also has several plants in the USA specializing in producing fibrecement roofing materials. It reported
and 4-32, what estimate would you make regarding Woodway’s adjusted income (sustainable operating profit or sustainable earnings)?. LOP95
The Woodway Company included the following note in its 2000 annual report:In June 2000, Woodway Company and its principle subsidiaries filed for protection under Chapter 11 of the United States
Woodway Company’s annual report contained the following data (dollars in millions) on its income statement Interest expense $ 2,489 Investment income 11,218 Other income 9,033 Depreciation 1,257
For each numbered item, indicate (by letter) where in the income statement it belongs.a. Revenuese. Other Income and Expensesb. Cost of Goods Soldf. Separate Line Item, Net of Taxc. Selling Expenses
Conduct a vertical analysis of the income statement for Hahn Automotive Warehouse in Exhibit 4-4. Discuss Hahn’s profitability (or lack thereof).. LOP95
Describe the nature of a big bath reported in the income statement. How would a big bath affect reported income in later years? What is the likely effect of a big bath on a firm’s stock price in
The chapter states that “accounting income does not strictly measure changes in wealth.”Provide two examples of changes in wealth that would not be reported currently in the income statement. In
The ratios discussed in this chapter include return on assets, return on shareholders’equity, and times interest earned. In each case, a different measure of income is used. Identify and discuss
Provide two examples of ratios that link the income statement and the balance sheet. In each case, explain why it is useful to relate the items that appear in the numerator and the denominator of the
Distinguish between vertical analysis and trend analysis of the income statement. Describe two ways of implementing a trend analysis.. LOP95
Discuss several reasons why a firm’s net income percentage might change over time. Discuss how financial statements help explain the reasons for changes in the net income percentage over time?.
Identify three reasons why a firm’s gross profit (gross margin) percentage might change over time.. LOP95
Describe the construction of a common-size income statement. Why is the selection of the base (the number selected as the 100% figure) so important? Discuss how common-size statements are used in a
Discuss the meaning of a “restructuring charge” and explain why you believe that such charges should (or should not) be reported as extraordinary items in the income statement. How does the
Under what circumstances might an income statement report a tax benefit?. LOP95
Explain why GAAP requires that income taxes be allocated to each major section of the income statement.. LOP95
Define the accounting principle of conservatism. Why would a manager or owner prefer conservative profits? When would a manager or owner prefer that income or profit not be measured conservatively?.
Discuss the differences between profits and profitability. In what context might they be used interchangeably? When must they be kept separate?. LOP95
Discuss the differences between revenues and profits. Where do each appear on the income statement? Why is it important to keep these two separate?. LOP95
Why are extraordinary items reported separately in the income statement? Identify an event that would be classified by one firm as an ordinary item and by another firm as an extraordinary item?
Income statements are often used in order to provide a historical measure of a firm’s performance, and are also used as a basis for predicting future profitability. How are income statements useful
Determine how the matching principle would affect recognition of the following items: (a) cost of inventory sold, (b) depreciation expense of production equipment, and (c) expenditures for new
Discuss the purpose of the matching principle, and explain the three ways in which this principle is implemented.. LOP95
Explain the two criteria that must be met for a firm to recognize revenue in its income statement. Discuss how these criteria might be applied to revenue recognition by (a) a fast-food restaurant and
Identify and discuss the kinds of information that investors in a firm’s debt and equity securities may seek when reading the income statement. What decisions will usually be of interest to such
Identify and discuss several decisions that managers make based on information from the income statement. Include a discussion of the basic purpose and objectives of an income statement.. LOP95
Distinguish between a single-step and a multiple-step income statement. Why is a multiple-step format usually more informative to the reader?. LOP95
Explain why interest expense is not considered to be an operating expense by most firms. Identify several types of businesses where interest expense might be reported as an operating expense?. LOP95
Why do most companies disclose the cost of goods sold as a separate item on the income statement? How might this item differ for merchandising firms versus manufacturing firms? Why might some firms
Often the first item on a firm’s income statement is labeled “Net sales” or “Sales revenue.” Discuss the measuring of these terms. Why do you think this is displayed so prominently on the
In deciding which items to disclose on the income statement, managers are guided by the materiality principle. Explain how this principle would affect a decision about whether to disclose a firm’s
Explain why a firm might elect to report its annual income using a fiscal year-end that doesn’t end on December 31. LOP95
Describe the differences between revenues and gains. Also distinguish between expenses and losses. Explain why these items are usually disclosed separately on income statements. LOP95
Describe the effects that reported earnings have on managers’ wealth and, consequently, on their accounting policy decisions. LOP95
Analyze income statement information using various ratios. LOP95
Interpret the components of the income statement. LOP95
Explain when to recognize expenses. LOP95
Explain when to recognize revenues. LOP95
Explain when to recognize revenues. p-635
Explain when to recognize expenses. p-635
Interpret the components of the income statement. p-635
Analyze income statement information using various ratios. p-635

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