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financial reporting and analysis

Questions and Answers of Financial Reporting and Analysis

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? P-968
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? P-968
Business combinations usually occur in the form of mergers,consolidations,or acquisitions. How do each of these types of combinations differ?
Explain how a firm might attempt to diversify risks by combining with other business firms. P-968
Distinguish between business growth through internal and external expansion.Discuss several reasons why a firm might seek to expand externally,rather than internally. P-968
Appreciate the wide diversity of international accounting practices. P-968
Determine how financial statements prepared initially in foreign currencies are translated to U.S. dollars. P-968
Understand how foreign exchange rate fluctuations affect the financial reporting of transactions conducted in foreign currencies. P-968
Appreciate how affiliated firms construct and report their consolidated financial statements. P-968
Understand the reasons for reporting consolidated financial statements. P-968
Access the EDGAR archives (www.sec.gov/edaux/searches.htm) and locate the most recent 10-K filing by Kmart. Information about Kmart’s pension plan can be found in the Notes to the Financial
Bethany Iron, Inc.’s 2000 annual report provided the following information regarding postretirement benefits:Bethany Iron, Inc.Pension Liability Recognized in Consolidated Balance Sheet(2000 Annual
Mercury,Inc.designs,develops,and markets human and animal health products and specialty chemicals.The following information has been abstracted from the notes to Mercury’s 2000 financial
Adolph Coors Company included the following two notes in its 1997 annual report as follows on the next page. LO68
Review Reebok’s financial statements in Appendix E.Requireda. Scan the notes and the rest of the financial statement for information pertaining to Reebok’s retirement benefits. Identify any
Review Wendy’s financial statements in Appendix D.Requireda. Read Note 11.Identify any unfamiliar or unusual terms.Match the terms presented in this chapter to the terms used by Wendy’s.b.
Public Service Company of Colorado, a major supplier of natural gas and electricity in Colorado, included the following amounts in its 1993 balance sheet(dollars in thousands):1993 1992 Deferred
Spelling Entertainment Group (SEI), specializing in film and video entertainment, reported the following liabilities on its 1993 balance sheet:• Accounts payable, accrued expenses, and other
Access the EDGAR archives (www.sec.gov/edaux/searches.htm) and locate the most recent 10-K filings for US Air Group and Southwest Airlines.Both these companies rely extensively on the use of leased
Movie Madness, Inc., sells and rents movies, video games, and VCRs.The company wanted to lease some video editing equipment in order to expand its market. They are also considering signing either an
Whole Foods Market,Inc.reported the following information about leases in its 1997 annual report:Whole Foods Market, Inc. and Subsidiaries Notes to Consolidated Financial Statements(8) Leases The
The following note was provided by Adolph Coors Company in its 1997 annual report:NOTE 3:Leases The Company leases certain office facilities and operating equipment under cancelable and
Triangle Air Lines is one of the largest airlines in the world. It provides scheduled passenger service, airfreight, mail, and other related aviation services. Selected balance sheet information from
Identify any unfamiliar or unusual terms and match the terms presented in this chapter to the terms used by Reebok.b. Does the firm have any capital leases?c. Do the firm’s operating leases have
Review Reebok’s financial statements in Appendix E.Requireda. Read Note
Review Wendy’s financial statements in Appendix D.Requireda. Read Note 5.Identify any unfamiliar or unusual terms.Match the terms presented in this chapter to the terms used by Wendy’s.b. Do the
Consider the following summary financial statements at the beginning of the period:Current assets $1,050,000 Current liabilities $ 650,000 Other assets 2,450,000 Other liabilities 1,500,000 Capital
Consider the following summary financial statements at the beginning of the period:Current assets $ 40,000 Current liabilities $ 15,000 Other assets 110,000 Other liabilities 113,150 Capital stock
L’alpane is a transportation company headquartered in Paris.Its 1999 annual report includes the following liabilities (all in French francs):Payables to:Affiliated companies 38,642,541 8,325,461
Hannah Steel Corporation signed a five-year lease agreement on January 2, 2000,for the lease of equipment.The annual lease payment required at the end of each year is $4,000.The useful life of the
Schott Sausages, in trying to lease a sausage machine, is concerned about whether the machine will be reported as a capital or operating lease.Consider the following facts in your deliberations:•
Consider the following terms:• Annual payments, end of each year, $30,000• 12-year useful life• Eight percent borrowing rate• Straight-line benefit pattern• Zero residual value• Lease
Consider the following terms:• Annual payments, end of each year, $40,000• 10-year useful life• 10 percent borrowing rate• Straight-line benefit pattern• Zero residual value• Lease
Determine the first year’s financial statement impact of the following lease terms:• Annual payments, at year-end, $15,000• Five-year useful life• 10 percent borrowing rate• Straight-line
Determine the first year’s financial statement impact of the following purchase terms:• Annual payments, at year-end, $15,000• Five-year useful life and note term• 10 percent borrowing rate
Many firms provide their employees with other, nonpension postretirement benefits, primarily medical plans. Outline the similarities and differences in accounting for pensions and nonpension
Present accounting standards report only the amount of unfunded pension obligations on the balance sheet.Gross pension assets and liabilities are not reported on the financial statements.This
Distinguish between the actuarial assumptions and the economic assumptions that underlie the measurement of pension liabilities and expenses.Which of these types of assumptions is more controversial?
Pension expense includes three main components: service cost, interest cost, and a reduction in expense for the return on plan assets. Explain how each of these amounts is determined. LO68
Accounting standards require that firms report their unfunded pension liabilities on the balance sheet. Describe what is meant by an unfunded pension liability. Explain why such an amount should (or
Firms with defined benefit pension plans report three separate liability amounts in the notes to the financial statements.These are the obligations for vested benefits, accumulated benefits, and
A typical defined benefit pension plan involves three entities: the employer firm, the pension plan, and the covered employee. Describe the relationships among these three entities. LO68
Distinguish between defined contribution and defined benefit pension plans.Which arrangement is riskier for the employee? Which is riskier for the employer? Explain. LO68
When should the costs of postretirement benefits be reported as expenses on the income statement? LO68
Why do firms provide postretirement benefits to employees? LO68
What types of postretirement benefits are usually provided to employees by larger-sized business firms? LO68
For a capital lease, the amounts that are initially recorded as leased assets and lease obligations depend on the interest rate used to discount the lease payments. In addition, the discount rate
Notes to financial statements cover disclosures about operating leases, including minimum rental commitments,disclosed by year for the ensuing five years, and in the aggregate for later years.How
Respond to the following statements:Firms have many different types of contracts that obligate them to make a series of cash payments at dates well into the future.For example, CEOs and other top
Evaluate the following statement: Capitalizing a lease creates a fictitious asset.The lessee does not own the leased asset, because the lessor retains title and will repossess the asset at the end of
Explain why the total annual expenses associated with capital leases are higher in the earlier years,and lower in the later years,of the lease term.Why is it necessary that the total expense over the
Assume that a given lease contract qualifies as a capital lease.a. How would the lease be reported in the balance sheet as an asset?b. How would this dollar amount change over successive balance
Contrast the effects that capital leases and operating leases have on the following financial statement elements and relationships. Discuss how each of these effects might influence a manager’s
Which criteria are used in deciding whether a given lease agreement constitutes a capital lease or an operating lease? Do these criteria make economic sense? Discuss. LO68
Distinguish between capital leases and operating leases as the terms are used in financial reporting. Is the distinction meaningful? Discuss. LO68
Describe the key features that are normally found in a long-term lease agreement. LO68
Discuss several reasons why a firm’s managers might choose to lease rather than purchase operating assets (such as buildings and equipment). LO68
Understand the key assumptions necessary to measure postretirement obligations and expenses. LO68
Appreciate the impact of pension and non-pension postretirement benefit liabilities on reported financial position and operating results. LO68
Know the difference between defined contribution and defined benefit pension plans. LO68
Understand how leases impact the measurement of financial position and operating performance. LO68
Distinguish between leases that are ordinary rentals, and those that are in substance a purchase of assets. LO68
Waco Rubber Co. disclosed the following items in its 1999 financial statements:1999 1998 Current assets Deferred income tax benefit $1,894,550 $4,139,205 Current liabilities Deferred income taxes
Sigma Designs’ statement of operations is summarized below (dollars in thousands):1995 1994 1993 Net sales $43,700 $ 34,989 $27,058 Costs and expenses:Cost of sales 36,980 27,538 23,045
The following information was reported by Pfizer, Inc., in its 1997 Financial Report:(Dollars in millions)Income before income taxes $3,088 Provision (expense) for income tax 865 Income taxes paid
Tyler Corporation’s statement of operations is summarized below (dollars in thousands):2000 1999 1998 Net sales $357,850 $282,403 $286,206 Costs and expenses:Cost of sales 256,195 221,024 223,826
Gottlieb Enterprises is concerned about its balance sheet disclosures of deferred tax liabilities. Gottlieb’s preliminary balance sheet at the end of 2000 is summarized as:Current assets $ 400,000
Rosty Co. began operations in 2000. The firm recognized $30 million of depreciation expense on its income statement and reported $50 million as depreciation on its 2000 tax return. The firm’s
During 2000, Wilbur Mills, Inc., recognized an additional $12 million of depreciation expense on its income statement and reported $16 million as depreciation on its tax return. During 2000, the
Wilbur Mills, Inc., began operations in 1999. The firm recognized $12 million of depreciation expense on its income statement and reported $20 million as depreciation on its tax return for 1999. The
Selected information from the income statements and tax returns of Buchanan Trading Co. are provided below for 1999 and 2000, the firm’s first two years of operations (dollars in millions):Selected
Refer to Reebok’s financial statements in Appendix E. Review the balance sheet to determine how and where deferred taxes were reported.Requireda. Read Notes 1 and 14. Identify and discuss any
Refer to Wendy’s financial statements in Appendix D. Review the balance sheet to determine how and where deferred taxes were reported.Requireda. Read Note 6, “Income Taxes.” Identify and
Many corporations retire part of their long-term debt prematurely (prior to maturity). Two such corporations are Kodak and Scotts Co. For each company, locate the 10-K filing for fiscal 1994 from the
Retrieve the most recent 10-K filings for Kmart, Wal-Mart, Gillette, and Mem Co.from the EDGAR archives (www.sec.gov/edaux/searches.htm). Examine the long-term debt section of the Notes to the
Tall Tree Timber issued $10 million in bonds with a nominal interest rate of 8%, at a time when the market rate for similar bonds was 4%. The bonds have a fouryear maturity and pay interest
Tall Tree Timber, Inc., issued $10 million in long-term bonds that contained the following restrictive covenants:• Current ratio must exceed 2.0.• Return on assets must exceed 2%.• Net income
ALZA Corporation develops, manufactures, and markets therapeutic products that incorporate drugs into advanced dosage forms designed to provide controlled, predetermined rates of drug release for
Using a library or other information sources, obtain financial statements or summaries of financial information for one set of three companies in the same industry:1. IBM StorageTek Compaq 2. UAL
The following balance sheets for Eli Lilly and Company and Pfizer, Inc., were extracted from the SEC’s EDGAR database:December 31 1997 1996
Hansel, Inc., is an international company specializing in debt collection with a range of complementary credit management services. It is headquartered in Amsterdam and aims to maintain and enhance
Maggie Markel’s Moving Emporium needs to acquire additional capital in order to purchase new trucks and warehouse storage space, and to conduct a national advertising campaign. Maggie has heard of
Compare and contrast the 1995 composition ratios for Exabyte and Pfizer (see the preceding two assignments). Which company seems to be the most conservative in managing its liabilities? Why? Which
Exabyte Corporation reported the following subtotals in its 1994 annual report, in thousands of dollars, for the years ending December 31, 1994 and January 1, 1994 (note that these dates still
Pfizer, Inc. reported these subtotals in its 1997 annual report (dollars in millions):1997 1996 1995 Total current liabilities $ 5,305 $ 5,640 $ 5,187 Total liabilities 7,403 7,713 7,223 Total
Contrast the debt management strategies of Oncogene Science and Sigma Designs (see data in the preceding two assignments). Which company seems to be the most conservative in managing its liabilities?
Sigma Designs repaid much of its long-term debt between January 31, 1994 and January 31, 1995. Its liabilities and stockholders’equity at January 31 were as follows (dollars in thousands):1995 1994
Oncogene Science, Inc., reported no long-term debt in its 1994 financial statements. The equity section of its balance sheet can be summarized as:1994 1993 Total current liabilities $ 2,979,555 $
Sally Shrimpton’s pottery business was quite successful and needed to expand further. However, she wanted to avoid paying periodic interest payments to the bank. She saw an ad for discounted notes
Dagwood’s issued $800,000 of 10-year, 8% bonds at a time when the market demanded a yield of 4% (on similar bonds). The bonds were issued on January 1, requiring interest payments on each
Zany Sam’s issued $600,000 of six-year, 8% bonds at a time when the market demanded a yield of 12% (on similar bonds). The bonds were issued on January 1, requiring interest payments on each
Use the balance sheet equation to analyze the effects of the following transactions involving noncurrent liabilities. Set up separate accounts for each liability and use a separate column for cash.1.
Use the balance sheet equation to analyze the effects of the following transactions involving noncurrent liabilities. Set up separate columns as necessary for each liability. Use a separate column
Assume that a firm has bonds outstanding with a principal amount of $100 million, a carrying value of $105 million, and a current market value of $112 million. What gain or loss would the firm report
Use the balance sheet equation to analyze the financial statement effects of the following transactions involving long-term bonds. Assume semiannual compounding. Set up separate columns as necessary
Use the balance sheet equation to analyze the financial statement effects of the following transactions involving long-term bonds. Assume semiannual compounding. Set up separate columns as necessary.
Use the balance sheet equation to analyze the effects of issuing the following long-term bonds. Assume a market interest rate of 8% and semiannual compounding. Set up separate columns as necessary.

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