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business
financial reporting and analysis

Questions and Answers of Financial Reporting and Analysis

Use the balance sheet equation to analyze the effects of issuing the following long-term bonds. Assume a market interest rate of 12% and semiannual compounding. Set up separate columns as
Use the balance sheet equation to analyze the effects of issuing the following long-term bonds. Assume semiannual compounding and a coupon rate of 8%. Set up separate columns as necessary. Use a
Calculate the financial statement effects at the date of issue for each of the following discounted notes (also, refer to Chapter 8, “Accounts Payable, Commitments, Contingencies, and Risks”):a.
On June 1, 1999, the Brewer Company signed a $450,000, four-year note, discounted at 16% (compounded rate) payable to First Bank. The note matures May 30, 2003.Required Use the balance sheet equation
Refer to Reebok’s financial statements in Appendix E. Review the balance sheet to determine how and when long-term liabilities are reported.Requireda. Read Note 8 “Long Term Debt.”Identify and
Refer to Wendy’s financial statements in Appendix D. Review the balance sheet to determine how and where long-term liabilities are reported.Requireda. Read Note 3 “Term Debt.” Identify and
Write a short memo describing the key features of long-term bonds. Include at least the following terms in your memo: par or face value, collateral, restrictive covenants, coupon rate, maturity date,
Consider the following notes from the annual report of Jocko Enterprises. Interpret any unusual terms. How are lines of credit and long-term debt used by Jocko’s managers? Explain how these notes
Nuclear Indentures, a firm specializing in providing debt financing to high-tech firms, provided the following information concerning restrictive covenants in its notes to the financial
Yellow-Jacket Company, which manufactures imaging and health products for commercial and medical customers, included the following information in a note describing its long-term debt:Long-term debt
Cabot Cove’s annual report contained a note on long-term debt. A partial list of the long-term debt follows, exclusive of current maturities (dollars in thousands):2000 1999 Notes due 2001, 9.875%
If a firm has noncurrent liabilities with floating (variable) interest rates, what will happen to a valuation of the firm’s liabilities when the market rate of interest increases? Decreases? Why is
Current financial accounting standards do not permit the discounting of deferred tax obligations, even in cases where the deferred obligations will not be paid for many years. Evaluate this practice.
Assume U.S. nominal or maximum income tax rates are increased from 35 to 40%. How would this increase affect a firm that presently reports a deferred tax liability of $700 million? Specifically, how
Comment on the following observation: “Mammoth Company is not paying its fair share of the national budget.The firm reported income before taxes of $4 billion in 1994, and paid only $40 million in
Evaluate the following proposal: “If an asset is fully depreciated for income tax purposes, it is less valuable than an asset that has a substantial undepreciated cost for tax purposes.This implies
Provide a reply to the following: “If a firm does not earn taxable income in future periods, then it will not pay taxes.For this reason, it makes no sense to report deferred tax liabilities. These
Discuss the meaning of a deferred income tax liability. At minimum, address the following points:a. Why does a deferral exist?b. Do these obligations satisfy the definition of liabilities that was
Whether a firm uses straight-line or accelerated depreciation in accounting for a long-lived depreciable asset, the total amount of depreciation expense over the entire service life of the asset will
Explain the nature of temporary differences between book and tax measurements of assets and liabilities. Why is this concept important for financial reporting of income tax expense? Why is it
Suppose the U.S. Congress decides to stimulate business investment in new plant and equipment by providing a reduction in income taxes equal to 10% of the costs of eligible new investments. If a firm
Most firms keep at least two “sets of books,”in the sense that a given transaction can be interpreted differently for “book”(financial reporting) and “tax”(income tax calculations)
Discuss the purposes of income measurement for financial reporting. Then discuss why income taxes are included in a firm’s financial statements as an expense and as a liability.
Assume that a firm has several long-term bonds outstanding at different interest rates. Explain the relationship between bond coupon rates and current market interest rates that would cause the bonds
Discuss why lenders include various restrictive covenants in a lending agreement. Provide several examples of restrictive covenants.P-698
Identify several reasons why managers may prefer to issue long-term bonds to a number of investors, rather than borrow directly from a few financial institutions.P-698
Evaluate the following statement: “When a firm issues bonds at a discount, in effect the firm is paying the lender some of the bond interest expense in advance.The difference between the bond
If a long-term bond is issued at a premium, both the carrying value of the bond and the recognized interest expense will decrease in each successive period during which the bond is outstanding.
P-698If a long-term bond is issued at a discount, both the carrying value of the bond and the recognized interest expense will increase in each successive period during which the bond is outstanding.
Describe the major differences between a bond discount and a bond premium.Discuss the distinctions between coupon (or nominal) interest rates and market interest rates at the bond issuance date.P-698
Under what circumstances would managers prefer fixed interest rates and when might they prefer to have variable interest rates on their noncurrent liabilities?Discuss several choices that managers
If a firm has noncurrent liabilities with a fixed interest rate, what will happen to the firm’s liabilities when market interest rates increase? Decrease? Although interest rates on a firm’s
Identify some of the reasons why a firm may prefer to have both current and some noncurrent liabilities.P-698
Define long-term or noncurrent liabilities. What are the differences between current and noncurrent liabilities?P-698
Interpret financial statement measurements of income tax expense and deferred income tax liability?P-698
Understand why the tax basis and the financial reporting basis of assets and liabilities may differ.P-698
Appreciate why income is measured differently for income tax and financial reporting purposes.P-698
Determine periodic interest expense and the valuation of noncurrent obligations in financial reports.P-698
Comprehend features of long-term borrowing contracts, such as notes and bonds payable. P-698
Recognize the types of noncurrent obligations that are reported by business firms.P-698
Sigma Designs is a high-tech software development company specializing in imaging and multimedia computer applications. Sigma Designs’ statement of cash flows is presented below:Sigma Designs,
Two firms provided the following information at the end of 1999 (dollars in millions):Adam Co. Zachary Co.Total assets $ 105 $ 210 Total liabilities $ 70 $ 120 Shareholders’ equity $ 35 $ 90 Net
Exabyte Corporation reported the following information in its 1994 balance sheet (dollars in thousands and shares in thousands as well):1994 1993 Preferred stock: $0.001 par value; — —14,000
Pierre’s, headquartered in Paris, reports the following note to its 1999 financial statements:Share Capital: The share capital comprises fully paid shares with a nominal value of 1 FRF [French
Vicorp Restaurants, Inc., headquartered in Denver, operates or franchises 408 midscale restaurants, primarily under the names Bakers Square and Village Inn.Its 1994 balance sheet included the
Gap, Inc. provided the following notes (excerpts) in its 1997 financial statements:Note F: Employee Benefit And Incentive Stock Compensation Plans Retirement Plans The company has a qualified defined
Crown Resources, Inc., an international producer of cardboard packaging, reports the following information in its 1999 financial statements:Stock issued under stock option and employee savings plans:
A footnote to the 1999 financial statements of General Dynamite, Inc., a major producer of explosive weapons, armored vehicles, and other weapons systems, includes the following information:Stock
Refer to Reebok’s financial statements in Appendix E. Review the financial statements to determine how and where shareholders’ equity has been reported.Requireda. Calculate the financial leverage
Refer to Reebok’s financial statements in Appendix E. Review the balance sheet to determine how and where shareholders’ equity has been reported.Requireda. Read the Consolidated Statement of
Refer to Wendy’s financial statements in Appendix D. Review the financial statements to determine how and where shareholders’ equity has been reported.Requireda. Calculate Wendy’s financial
Refer to Wendy’s financial statements in Appendix D. Review the balance sheet to determine how and where shareholders’ equity has been reported.Requireda. Read the Consolidated Statement of
Late in 1999, Natalie Attired, a recent MBA graduate, signed a four-year employment contract with Generic Co. that provides her with an annual salary of$90,000. In addition, at the start of each
Why might a firm prefer to issue shares with no par value (zero stated value)? OL89
Consider Sigma Designs’ balance sheets for 1995 and 1994 (dollars in thousands). Sigma Designs is a high-tech software development company specializing in imaging and multimedia computer
BF Group, a British company, reported the following components of shareholders’ equity in its 1999 balance sheet (the relative size of each account balance is also shown):• Called- up share
The Nothing But Cheese (NBC) Company is a small but successful familyowned business that specializes in family photography in wholesome circumstances. The company conducts still and video photography
Scan the recent financial press, such as Business Week, Forbes, or the Wall Street Journal, to identify a company that has recently changed its capital structure. Read one or two recent articles on
Choose one of the companies whose financial statements appear in Appendixes D or E. Obtain the company’s most recent financial statement, or get its balance sheet on the Internet. Find one or two
Choose an industry. Identify the three largest firms in that industry. Obtain their most recent financial statements or summaries thereof. Obtain one or two recent articles on this industry or on the
Pfizer, Inc. provided the following information in the notes to its 1997 financial statements:12 Common Stock We effected a two-for-one split of our common stock in the form of a 100 percent stock
Eli Lilly and Company provided the following information in the notes (excerpts) to its 1997 financial statements:Note 8: Stock Plans Stock options and performance awards have been granted to
Philip Morris was the founder and chairman of Lollipops, Inc. until his death in 1998. The company’s performance had been sharply declining during the 1990s. Because Morris owned the majority of
Clorox and Lubrizol repurchased some common stock in 1995. Locate their 10-K filings for 1995 from the EDGAR archives (www.sec.gov/edaux/searches.htm).Requireda. For each company, list the number of
Quicken.com’s home page (www.quicken.com) contains information on several hundred corporations. In addition to links to corporate home pages or financial information, it also provides current and
Access Quicken.com’s home page (www.quicken.com), which provides links to corporate pages and market-related data. The menu contains two options for charts.Requireda. Set the time horizon so that
Premier Anesthesia is a high-tech health services provider that transformed itself from a private company to a public company in 1992. At the end of 1992, its price-to-earnings ratio was 45.0, based
DUD Computer is a private company. DUD’s major product lines are CAD/CAM computer vision design systems, midrange computers, and computer services.DUD had $1.26 billion in debt at the end of 2000,
Locate recent annual reports for three companies in the same industry. If such reports are not conveniently available, use a business reference service, such as Moody’s, Standard & Poor’s,
An American Accounting Association Committee suggested the following in a committee report subtitled “Debt Disguised as Equity” (Accounting Horizons, September 1991, p. 88):. . . If [debt can be
Many U.S. firms have completed exchanges or swaps of stock for debt. Collectively, such swaps often retire more debt than the value of the stock that is exchanged. In other words, the face value of
DWN Corporation began operations in 2000. Calculate the balances in each component of shareholders’equity at the end of 1998, after recognizing the following transactions:1. Issue one million
Understand why large business firms prefer to organize as corporations. OL89
Describe why retained earnings is not cash. Why can’t shareholders withdraw their portion of shareholders’ equity as cash? OL89
Distinguish between invested capital and retained earnings. What are the sources of each? Describe how each can be reduced. OL89
With regard to common stock, distinguish among authorized, issued, and outstanding shares. Why would a firm never have more outstanding shares than authorized and issued shares? OL89
Under what circumstances does a firm receive cash when it issues stock? Under what circumstances might it not receive cash? OL89
Identify and describe the differences between a stock dividend and a stock split. OL89
With regard to common stock, describe the concept of treasury stock. Describe why this is shown in a contra-equity account. OL89
Distinguish between outstanding common stock and treasury stock. Why would a firm want to have treasury stock? OL89
Describe the concept of employee stock options. Why might a firm want to issue stock options? OL89
What are cumulative dividends as compared to noncumulative dividends? OL89
Identify and describe the differences between convertible preferred stock and convertible bonds. OL89
Distinguish between dividends and other benefits that an investor gets by owning shares in a corporation. Why would an investor prefer a $100 noncash benefit, rather than a $100 cash dividend? Under
Describe the differences between an equity or ownership interest in a corporation as compared to a creditor interest. What different rights does each have? OL89
Comprehend the types of transactions and events that affect the components of shareholders’ equity. OL89
Interpret shareholders’ equity ratios that are helpful in analyzing financial statements.? OL89
Describe the differences between shareholders’ equity and liabilities. OL89
Identify three components of shareholders’ equity and describe each component. OL89
Describe how dividends decrease shareholders’ equity. Under what circumstances will dividends not reduce shareholders’ equity? OL89
Write a short memo explaining why large firms prefer to organize as corporations. OL89
Describe why a firm’s owners might prefer a corporate structure, rather than a partnership. OL89
Under what circumstances might a partnership want to shift immediately to a corporate structure? OL89
Describe the differences between common and preferred stock. OL89
Describe why a firm’s financial statements do not reflect the market value of the firm’s shares of common and preferred stock. OL89
Describe why shareholders’ equity can be referred to as a residual interest in a corporation. OL89
Why might a firm want to issue hybrid securities, such as convertible bonds or preferred stock with special preference rights? OL89
Record the effects of the following transactions, using the balance sheet equation and Cash and other assets. Calculate the ending balance in Retained Earnings.1. The beginning balance in retained
Calculate earnings per share (EPS), given the following information:• Net income, $63,000,000• Common stock outstanding, 3,000,000 shares• Bonds payable, $35,000,000• Retained earnings
Calculate EPS, given the following information:• Common stock outstanding, 4,000,000 shares• Net income, $55,000,000• Bonds payable, $33,000,000• Retained earnings (ending balance),

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