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business
financial reporting and analysis

Questions and Answers of Financial Reporting and Analysis

IDQ’s income statement data for the years ended November 30, 2000 and 2001, are presented below (dollars in millions). LOP585 11/30/00 11/30/01 Net sales $1061 $1154 Cost of goods sold 792 830
IDQ’s income statement data for the year ended November 30, 1999, is presented below (dollars in millions). LOP585 11/30/99 Net sales $340 Cost of goods sold 249 Gross profit 91 Selling, general,
The Sisters Coffee Emporium has been researching and developing new exotic coffee flavors and innovative coffee equipment. During 1998, it spent over$250,000 on R&D costs. It is now year-end and the
What are the implications of earnings management? As an external financial analyst, what can be done to combat earnings management? LOP585
Identify some methods that might be used to manage earnings that were not described in this chapter. Are these new methods more appropriate or more ethical than the methods already described in the
Describe each of the methods used to manage earnings. Which seem appropriate and ethical? Why? LOP585
Discuss each of the motivations for earnings management. Under what circumstances would you support the use of these techniques? Why? LOP585
What is earnings management? Why would a manager engage in earnings management? Would an investor or creditor approve of such activities? Under what circumstances would an investor or creditor
Identify the differences between relevance and reliability. Which would a manager emphasize? A financial analyst? LOP585
Why should financial analysts not be willing to accept all the information in a firm’s financial statements at face value? LOP585
Discuss how economic consequences can affect various users of financial statements. How should those who are affected by economic consequences participate in the development of accounting principles?
How do a firm’s accounting principles affect contracts that are based on the financial statements? LOP585
Describe financial accounting’s two primary roles. Discuss the major criteria that financial accounting must adopt as part of its informational role? What other roles or criteria would you suggest?
Why do price-to-earnings (P/E) ratios differ between firms? LOP585
Assume that a firm changes from FIFO to LIFO during a period of rising prices.Would a proponent of the EMH predict an increase or decrease in the firm’s share price as a result of the change in
Describe the efficient market hypothesis (EMH). How does it affect financial statement analysis as described in this text? LOP585
Why are interim reports less reliable and less useful than annual reports? In what major ways do interim reports differ from annual reports? LOP585
Why does a firm’s annual report contain so much information in such a variety of formats? Under what circumstances would a more condensed format be more useful? LOP585
Describe why a firm with more foreign operations or more large customers(greater than 10 percent of its volume) might be viewed as having higher risk than a domestic company with many small customers
Why is information about a firm’s major customers reported as part of the notes on the firm’s segment? Why not use a threshold higher than 10 percent as the criterion for determining who is a
Why are domestic and foreign operations separately disclosed? How would this information be helpful to an investor or creditor? LOP585
Why are profits for each segment shown as part of segment reporting? LOP585
Why are the identifiable assets for each segment shown as part of segment reporting? LOP585
Describe what is meant by an industry segment and the types of information that must be reported for each segment. LOP585
Identify three types of segment reporting. Where is this information reported?Why have such types of segment reporting been required? LOP585
Why is a change in reporting entity shown as a retroactive adjustment and not as a prospective adjustment? LOP585
In general, how are the financial statements changed when two firms merge or engage in some similar restructuring? LOP585
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? LOP585
When the effects of a change in an accounting estimate are recognized, can prior financial statements be restated retroactively? Why? LOP585
Why does the FASB require that firms make retroactive adjustments when a new reporting standard has been issued? LOP585
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? LOP585
Under what circumstances are prior years’financial statements retroactively restated? Why do you suppose these exceptions exist? LOP585
Are financial statements that include an accounting change more comparable with those of prior years or of subsequent years? Why? LOP585
Discuss any inconsistencies that are introduced when accounting principle changes occur. LOP585
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? LOP585
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? LOP585
Discuss why financial statement users prefer a firm to consistently use the same accounting principles. LOP585
Describe three different types of accounting changes. Under what circumstances should each be reported? LOP585
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? LOP585
Describe comprehensive income. How does it differ from net income? LOP585
Understand the motivations for and methods of earnings management. LOP585
Describe the two major roles of financial accounting. LOP585
Explain the efficient market hypothesis and its implications for accounting. LOP585
Identify reports filed with the Securities and Exchange Commission (SEC). LOP585
Describe annual and interim reports. LOP585
Analyze information about operating segments. LOP585
Interpret the financial statements of firms that have undertaken accounting changes. LOP585
Understand and interpret comprehensive income. LOP585
Access the EDGAR archives (www.sec.gov/edaux/searches.htm) and locate the Schedule 14D1 filing made by either Amdura Corporation or FKI plc on March 22, 1995 (they are identical). Hint: You can
Access the EDGAR archives (www.sec.gov/edaux/searches.htm) and locate the Schedule 14D1 filing (February 1,1995) made by Cadbury Schweppes on the successful acquisition of Dr. Pepper/Seven-Up
Kimberly-Clark is a global corporation whose primary product is diapers and tissues.Access the EDGAR archives (www.gov.sec/edaux/searches.htm) to locate Kimberly-Clark’s 1995 10-K.Answer the
Boise Cascade Company is a major producer of paper,building,and office products.The company reported the following items related to foreign exchange gains and losses in its 1993 financial statements
Polygram’s financial statements included the following additional disclosure(see preceding problem):The calculation of Net income . . . substantially in accordance with U.S. GAAP, is as follows (in
The PolyGram Group includes businesses around the world that are chiefly involved in acquisition, production, and marketing in the music industry, as well as the manufacture, sale, and distribution
Foreign companies whose shares are registered on U.S. security exchanges must file a description of significant differences between U.S.and domestic accounting principles with the SEC as well as a
Foreign companies whose shares are registered on U.S. security exchanges must file a description of significant differences between U.S.and domestic accounting principles with the SEC,as well as a
The balance sheet and income statement of Buchanen, Inc., a subsidiary of a U.S.company,is shown below.Buchanen,Inc.operates in New Zealand and prepares its financial statements in New Zealand
a. Managers of U.S. firms sometimes allege that they are at a disadvantage when selling securities in international markets because U.S.disclosure and measurement standards are more
In Du Pont Corporation’s 1994 annual report,Note 27 contained the following(partial) information:Principal foreign currency exposures and related hedge positions on December 31, 1994, were as
Review Reebok’s financial statements in Appendix E.Requireda. Read Notes 1 and 13. Identify any unfamiliar or unusual terms. Match the terms presented in this chapter to the terms used by Reebok.b.
On October 1, 1999, the Keaton Company, a U.S. firm, sold merchandise to Chaplin, Inc., a British firm. The sales agreement specifies that Chaplin will make a payment of £500,000 to Keaton in 120
In each of the following cases, determine the amount of gain or loss to be reported in 1999 due to unhedged accounts receivable or payable that are denominated in foreign currencies.All exchange
In each of the following examples, determine the gain or loss resulting from foreign exchange transactions.All exchange rates are shown as the number of U.S. dollars required to obtain one unit of
In each of the following examples, determine the gain or loss resulting from foreign exchange transactions.All exchange rates are shown as the number of U.S. dollars required to obtain one unit of
Access the EDGAR archives (www.sec.gov/edaux/searches.htm) and locate the 8-K report filed by Disney Enterprises Inc. (formerly Walt Disney Co.)on February 9, 1996.This report was filed on the
a. In the takeover battle between Viacom and QVC over Paramount, the potential cost of acquiring Paramount varied between $8 and $11.5 billion.How do you suppose a potential buyer (Viacom) would
On January 1, 1999,Tipper Company purchased all of Albert Inc.’s outstanding stock.The post-combination balance sheets of both firms are listed below (dollars in millions):Tipper Company Albert
Ronco,Inc.purchased all of the outstanding voting stock of Nanco,Ltd.on January 1, 1999, at a cost of $750 million paid in cash. On the acquisition date, Nanco had the following assets and
Selected items from the unconsolidated financial statements of Mammoth Motors Company and its wholly owned subsidiary, Chattel Credit Corp., are provided below. Mammoth uses the equity method to
Cabot Corporation, a producer of specialty chemicals and materials, reported the following accounting policies for intercorporate investments:Principles of Consolidation:The Consolidated Financial
Selected items from the unconsolidated financial statements of Tipton Financial Services, Inc., and its wholly owned subsidiary are provided below.Tipton accounts for its investment in Smartcom,
Presented below are condensed balance sheets for the ASAP Company and its wholly owned subsidiary, BYOB Inc., at December 31, 1999 (dollars in millions):ASAP Company BYOB Inc.Current assets $ 30 $ 55
Presented below are condensed income statements for the MHL Company and its wholly owned subsidiary, PTE Inc., for the year ended December 31, 2000(dollars in millions). MHL acquired its ownership of
On January 1,1999,Maplegrove Deli,Inc.purchased all of the outstanding stock of Bizno’s Sub Shops,Inc.for $4,500,000.Maplegrove paid $2,000,000 cash and issued 25,000 shares of its common stock, no
Goliath Corporation purchased all of Masonry Corporation’s outstanding stock on January 1,1999,for $6,000,000.The purchase price was paid as follows:Goliath Corporation issued 40,000 shares of its
The following excerpt is from the acquisitions note contained in Tyler Corporation’s 1994 annual report:On January 7, 1994, the company completed the purchase of Institutional Financing
Identify several areas of accounting practice where there are substantial differences among nations. In each case, defend what you consider to be the superior practice. P-968
Describe how taxation rules can influence the types of financial accounting standards that are developed.How might this influence differ in nations where there is no difference between income
Explain how the prevailing financial structure of business firms can affect the types of financial reports that are published. P-968
Explain how the legal system of a nation can influence the types of accounting standards that are established. P-968
Is worldwide harmonization of accounting standards a desirable objective? If so, prepare a memo indicating how such accounting standards should be developed and enforced. If not, prepare a memo
Describe the main factors that cause differences in accounting standards across nations. P-968
Assume that a foreign subsidiary of a U.S.firm acquired a parcel of land in 1998, and that each year thereafter the functional currency of the foreign subsidiary continues to weaken against the
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: P-968a.
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. P-968
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? P-968
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. P-968
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. P-968
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:a. Debt-to-total assets ratiob. Net income-to-shareholders’ equity ratioc.
Which of the following items would differ on a firm’s financial statements before and after consolidation of its subsidiaries? Explain your answers.a. 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.

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