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financial reporting and analysis

Questions and Answers of Financial Reporting and Analysis

Where are the effects of changes in accounting estimates reported? Why should the financial statement user often not be aware of many of these changes? P-*96
When the effects of a change in an accounting estimate are recognized, can prior financial statements be restated retroactively? Why? P-*96
Why does the FASB require that firms make retroactive adjustments when a new reporting standard has been issued? P-*96
Why would a firm that is issuing its first public financial statements have more latitude in using retroactive adjustments for the effects of accounting changes? P-*96
Under what circumstances are prior years’financial statements retroactively restated? Why do you suppose these exceptions exist? P-*96
Are financial statements that include an accounting change more comparable with those of prior years or of subsequent years? Why? P-*96
Discuss any inconsistencies that are introduced when accounting principle changes occur. P-*96
Under the general rule dealing with accounting principle changes, have the firm’s retained earnings changed? How has the firm gained or lost some of its prior (accumulated) retained earnings? Why?
Discuss the general rule in reporting the effects of an accounting principle change. What is meant by a “cumulative effect”adjustment? P-*96
What is the financial statement user’s first indication that an accounting change has occurred? Why should this source be examined first when reading a financial statement? P-*96
Discuss why financial statement users prefer a firm to consistently use the same accounting principles. P-*96
Describe three different types of accounting changes. Under what circumstances should each be reported? P-*96
How does comprehensive income differ from the concept of sustainable income, as described earlier in the text? Under what circumstances might an investor or creditor prefer sustainable income, as
Under what circumstances would a manager prefer comprehensive income or net income? An investor? A creditor? P-*96
Describe comprehensive income. How does it differ from net income? P-*96
Identify the exchange rate (current, historical, or average) that would be used to translate each of the following elements of a foreign subsidiary’s financial statements to U.S. dollars: LPO8a.
The balance sheets of foreign firms,prepared in their local currencies,must be in balance (assets equal liabilities plus shareholders’equity).Yet when such balance sheets are translated to U.S.
Explain why the financial statements of U.S.firms’foreign subsidiaries must be translated to U.S.dollars in order to prepare consolidated financial statements. LPO8
Distinguish between spot rates and forward rates of foreign currency exchange.Which rate would a U.S.firm use in order to report its balance sheet accounts receivable in foreign currencies? LPO8
Assume that a U.S.firm has an account receivable in Swiss francs,with payment due in 90 days,and wishes to hedge its exposure to currency rate fluctuations.Explain the actions the U.S. firm would
Explain what is meant by a hedge of a foreign currency-denominated account receivable or payable. LPO8
Explain whether a U.S.firm would experience a gain or a loss related to its unhedged accounts receivable or payable in each of the following cases:a. A U.S. firm has accounts receivable in British
Which of the following events is a foreign currency transaction from the point of view of the U.S. firm?a. A U.S. firm purchases inventory from a British firm, with payment to be made in British
Describe what is meant by a foreign currency transaction. LPO8
It is sometimes argued that consolidation may result in a loss of information and may produce aggregations in the financial statements that are difficult to interpret. Do you agree or disagree? In
Is it necessary for one firm to own more than 50 percent of the voting stock of another firm in order to exert control over the investee firm? If not, how should control be defined for purposes of
Respond to the following remarks: I just read in the financial pages that Whale company owns 60 percent of Minnow Inc.’s shares.Whale Company includes all of Minnow’s assets and liabilities and
Indicate how each of the following financial ratios changes after a consolidation of a parent firm and its subsidiaries: LPO8a. Debt-to-total assets ratiob. Net income-to-shareholders’ equity
Which of the following items would differ on a firm’s financial statements before and after consolidation of its subsidiaries? Explain your answers. LPO8a. Total assetsb. Total liabilitiesc.
Discuss why the following items may require adjustments when preparing a consolidated income statement:a. Income from a subsidiary (on the parent’s income statement)b. Salesc. Cost of goods soldd.
Consolidation is mainly a process of adding together the financial statement elements of a parent and its controlled subsidiaries with certain necessary adjustments. Discuss why the following items
Describe what is meant by consolidated financial statements. In what circumstances should a parent company’s financial statements be prepared on a consolidated basis? LPO8
Suppose that Psycho Company buys all of Somatic Inc.’s outstanding shares directly from Somatic’s existing shareholders. Describe how Somatic’s balance sheet would be affected by the
Evaluate the following statements:Accounting for goodwill makes no sense.If a firm generates goodwill internally, the costs are written off as expenses, and no related asset appears on the balance
What advantages might a business acquisition offer as opposed to a merger or a consolidation? LPO8
Business combinations usually occur in the form of mergers,consolidations,or acquisitions. How do each of these types of combinations differ? LPO8
Explain how a firm might attempt to diversify risks by combining with other business firms. LPO8
Distinguish between business growth through internal and external expansion.Discuss several reasons why a firm might seek to expand externally,rather than internally. LPO8
Appreciate the wide diversity of international accounting practices. LPO8
Determine how financial statements prepared initially in foreign currencies are translated to U.S. dollars. LPO8
Understand how foreign exchange rate fluctuations affect the financial reporting of transactions conducted in foreign currencies. LPO8
Appreciate how affiliated firms construct and report their consolidated financial statements. LPO8
Understand the reasons for reporting consolidated financial statements. LPO8
Prepare and post journal entries. P-698
Calculate account balances. P-698
Prepare and post adjusting entries. P-698
Prepare and post closing entries. P-698
Generate balance sheets and income statements from general ledger accounts.? P-698
Define the terms debit and credit. P-698
Draw a diagram reflecting the parts of the accounting cycle, showing how journals, ledgers, and so on, are used to record transactions. P-698
Define the term posting. P-698
Discuss why a firm might use subsidiary ledgers. P-698
Why are adjusting entries used?
Would a cash-based system have a need for adjusting entries? Why? P-698
Why are closing entries used? P-698
If a firm never prepared periodic financial statements, would it need to prepare adjusting or closing entries? Why? P-698
What are some of the conditions that might cause a trial balance not to be “in balance”? P-698
Describe each of the steps in the accounting process, as shown below: P-698 1. Identify transactions and events 2. Analyze transactions and events in terms of the basic accounting equation.3.
(Similar to Exercise 2-16) John Hasty opened his bakery on March 1, 1999. The following transactions took place in early March:1. Deposited $10,000 into a checking account in the name of the Hasty
(Similar to Problem 2-23) The following account balances are shown on November 30, 1999, for the Clever Bookstore:Cash $ 8,000 Accounts payable $ 4,000 Accounts receivable 9,000 Salaries payable
(Similar to Problem 2-20) The following transactions all occurred on January 2 of the current year:1. A company paid a $2,000 bill for a fire insurance policy that covers the current year and next
(Similar to Problem 2-21) On June 1, a sole proprietorship was formed to sell and service personal computers. During the first six months, the following transactions occurred:1. On June 1, invested
(Similar to Problem 2-22) Seaver & Co., a CPA firm, prepare their own financial statements with a December 31 year-end.1. As of December 31, Seaver & Co. have rendered $20,500 worth of services to
(Similar to Problem 2-24) Susan’s Sweets opened a candy shop on January 1.1. Susan invested $100,000 in cash on January 1, 1999, and began business as a sole proprietorship.2. Susan paid $20,000
(Similar to Problem 2-25) Susan’s Shoe Shop opened on January 1. The following transactions took place during the first month:1. Deposited $30,000 in the firm’s checking account.2. Purchased
Matt’s Ski Shop is in the process of acquiring a vehicle for the business. The following transactions took place in December, 2000:1. Verbally agreed to purchase a used car from Slee-Z-Auto for
(Similar to Problem 2-29) Matt, the sole proprietor of Matt’s Ski Shop, traveled to Switzerland to attend the Alpine Equipment Exposition. The following transactions occurred:1. Paid $2,000 for
(Similar to Problem 2-33) John’s Anti-Mediation League (JAML) engaged in the following transactions in 1999:1. On January 1, JAML borrowed $100,000 at six percent per year with interest due
Sue’s Mediation League (SML) engaged in the following transactions in 2000:1. On January 1, SML borrowed $250,000 at nine percent per year with interest due quarterly.2. SML paid $1,000 to a good
(Similar to Problem 2-34) Sharon’s Affairs and Parties (SAAP) engaged in the following transactions in 1999:1. SAAP borrowed $150,000 at 10 percent per year to begin operations.2. SAAP accrued the
Hilger’s Intimate Promises (HIP) engaged in the following transactions in 2000:1. HIP borrowed $50,000 at eight percent per year to begin operations.2. HIP accrued the first month’s interest on
The SEC archives can be accessed at www.sec.gov/edaux/searches.htm.Required Locate the SEC disclosures for the corporate filings listed below. For each filing, answer the questions and identify who
International Dairy Queen’s annual income statement for the year ended November 30, 1994, and its four quarterly income statements are presented below.Annual ending 11/30/94 11/30/94 2/24/95
Falcon Amusements, Inc. chose September 30 as its year-end. Reported below are its quarterly income statements for fiscal 2000 and its annual income statement.Quarterly 10/1/99 1/1/00 4/1/00 7/1/00
Locate the most recent 10-K filing by Gillette Corporation from the EDGAR archives (www.sec.gov/edaux/searches.htm). The “Notes to the Financial Statements”contains detailed segment
TRW, Inc., is a global company that specializes in producing automotive, spacecraft, and information system products. The following (partial) segment data was reported (dollars in millions): LOP585
Examine notes from the financial statements of two different companies to determine how they report segments of their operations. Evaluate the level of disclosure for each firm in terms of the
The following (partial) information was provided in the industry segment note in American Home Products Corporation’s 1994 financial statements (dollars in millions):Years Ended December 31 1994
Assume you have just conducted a preliminary analysis of your firm’s 1999 financial statements. The firm has not prospered in recent years, and you are particularly concerned about violating a
Locate the most recent 10-K filing by Bank One and Time-Warner from the EDGAR archives (www.sec.gov/edaux/searches.htm). Refer to the note on significant accounting policies in “Notes to the
The following consolidated financial statements, selected excerpts from the notes, and auditor’s report for Zenith Electronics Corporation were obtained from the EDGAR database:Consolidated
Match the following terms to the correct description. For each situation, describe in words (ignore the dollar amounts) what accounting treatments are required.a. Change in accounting principle,
Review the prior chapters in this text and compile a list of at least five areas where estimates are required as part of the accounting measurement process.Determine through your review or through
Discuss why the effects of a change in an accounting estimate are not reported using the “cumulative effects” rule. Discuss the differences between the “cumulative effects”method and the
Why would a change from FIFO, or some other inventory method, to LIFO not require a retroactive adjustment of a firm’s financial statements? What would be the cumulative effect of such an
Identify an accounting change (other than a change in depreciation method)that requires a cumulative adjustment. Create a numerical example of this accounting change and show the effects on net
Ace Construction Company accounted for all its long-term contracts on a deferred basis; that is, all revenue and expenses were deferred until the completion of the contract when all the costs were
U. S. Shoe Corporation reported the following income statement information:U.S. Shoe Corporation Consolidated Statement of Earnings (Partial)(Dollars in Thousands)1991 1990 1989 Earnings (loss)
Bergen Brunswig Corporation reported the following information (dollars in thousands) in its 1993 consolidated earnings statement:Operating earnings from continuing operations $70,983 Net interest
Fitzer, Inc. reported the following data in its 1999 income statement (dollars in millions):Income before cumulative effect of accounting changes $1,093.5 Cumulative effect of change in accounting
Review Reebok’s financial statements in Appendix E.Requireda. Read Notes 2 and 12. Identify any unfamiliar or unusual terms.b. Discuss Reebok’s relationship with these firms. What impact did
The Kellogg Company reported the following financial information (dollars in millions):1993 1992 1991 Earnings before cumulative effect of accounting change $680.7 $682.8 $606.0 Cumulative effect of
Listed below are the income statements for Alco Standard Corporation, the largest distributor of copiers in North America (dollars in thousands):September 30 1994 1993 Revenues:Net sales $7,925,784
Dandy’s Discount Duds offers credit to all customers. It estimated that 15 percent of all such customers will not be able to pay their accounts. Dandy’s credit sales in 2000 were $4,000,000. Its
A copy machine was acquired at the beginning of 1998 for $12,000. It had a salvage value of $2,000 and an estimated life of five years.Requireda. Calculate the annual straight-line (SL)
A firm has a delivery truck that originally cost $55,000 with an estimated salvage value of $5,000 and an estimated life of 10 years. During the first two years, the firm used
A firm has a computer that originally cost $37,500 with an estimated salvage value of $17,500 and an estimated life of five years. During the first two years, the firm used straight-line (SL)
Polymer Element Corporation presented the following (partial) income statements (dollars in thousands, except EPS):December 31 2000 1999 1997 Income from continuing operations after tax $ 207,500 $
Central Air Conditioning, Inc. purchased machinery for installing air conditioners. The purchase price of the machine on July 1, 2000, was $35,000. The company chose a seven-year life, a
Mesple Music, Inc. purchased musical instrument equipment on January 1, 1999, for $25,000. Mesple depreciated it on the straight-line basis over five years with no salvage value. However, on January

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