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financial reporting and analysis

Questions and Answers of Financial Reporting and Analysis

Manuel’s Transmission Shoppe, Inc., is comparing prices from two potential suppliers for a similar component part. The first supplier quotes a price of $100, with payment in cash on delivery. The
Bob’s Steakhouse can either pay its suppliers within 30 days at a 1% discount or pay the full amount due in 60 days. The firm can also borrow from banks by signing short-term notes payable at an
Explain why the matching concept that guides the measurement of periodic net income often entails the reporting of accrued liabilities on the balance sheet. LOP9
Discuss the similarities and differences between notes payable and accounts payable. LOP9
Understand the types of business transactions and events that create current liabilities. LOP9
Appreciate how liability reporting often depends on estimates and judgments. LOP9
Be alert to a variety of other potential liabilities and risks that are not presently reported in the balance sheet.? LOP9
Define a liability. What is the difference between liabilities and other equities? LOP9
If liabilities represent amounts owed to others, why is judgment needed in determining the amount of some liabilities? Identify several cases where the accountant must use judgment because the amount
a. Identify three different types of liabilities.b. Indicate how they are created, and how they are then reduced or eliminated.What does it mean to reduce a liability?c. How else might you describe a
Why do firms want to have liabilities? Could a firm operate without liabilities?Who would be advantaged or disadvantaged if there were no opportunities for a firm to incur liabilities? Under what
a. Discuss the differences between current and long-term liabilities.b. Identify three types of each.c. Indicate how such current liabilities reduce a firm’s need for cash.d. Discuss how noncurrent
a. Describe how three different types of current liabilities might be established.b. What, or who, restricts the growth of current liabilities?c. How might current liabilities be abused or misused?d.
Describe four separate items that are typically included in the current liability section of the balance sheet. LOP9
Evaluate the following statement: “The success of a firm depends as much on the effective management of its liabilities and shareholders’ equity as it does on the efficient utilization of its
Compare and contrast the terms contingencies and commitments. Could a particular firm disclose one and not the other? Why? LOP9
Discuss the fact that many companies disclose many details about contingencies and commitments, but fail, or refuse, to put any dollar valuation on them. LOP9
Use the balance sheet equation to analyze the effects of the following transactions:1. Jill’s Slipper Shop was formed with an original investment of $100,000 in exchange for common stock.2.
What is the long-term effect of not paying employees? What are the possible long-term effects of not paying suppliers? In other words, if Jill’s continues to defer its employees’ salaries and
In its first year, Sam’s Subway Emporium engaged in the following transactions.Indicate the effects of each transaction on Sam’s balance sheet by using the balance sheet equation. Total your
The Distraught Novelty Co. reports the following current liabilities in its balance sheet on December 31, 2000:Accounts payable to suppliers $2,500,000 Revenues received in advance 920,000 Income
Antic Evenings, a local catering service, had the following transactions during December 2000:1. Purchased decorative paper products on credit for $75,000 to be paid in full in 60 days.2. On December
Road Scholars offers a program of study leading to its E.Z. MBA degree. Classes are offered during commuting hours in a leased car traveling from suburban areas to urban business centers. The firm
Tenuous Products provides a two-year warranty for repairs and services of its products. The firm has been operating for four years, and each year’s warranty expense has been estimated at 5% of
The following worksheet entries were retrieved from a water-logged worksheet stored in a flooded basement. Identify the transaction to which the worksheet entry refers. Discuss the underlying
The annual report of the Jolly Gold Giant, an international food processing and food service firm, included a liability for accrued restructuring costs of $179.3 million. Footnotes contain the
Refer to the Wendy’s financial statements in Appendix D. Review the balance sheet to determine how and where commitments and contingencies were reported.Requireda. Read Note 10. Identify and
Refer to Wendy’s financial statements in Appendix D. Review the balance sheet to determine how and where current liabilities are reported.Requireda. Read Note 3. Identify and discuss any unusual
Set up the following accounts and balances at December 31, 2000, in an accounting equation:Cash $ 5,000,000 Inventory 10,000,000 Warranty obligation 2,250,000 Notes payable 0 Interest payable 0
How should the following contingencies be treated in the annual report of Akronite Corporation on December 31, 1997?a. The corporation is presently being sued for patent infringement. The damages are
Choose the best response to the following multiple choice questions:1. All of the following are current liabilities except:a. Unearned revenueb. Accrued liabilitiesc. Prepaid insuranced. Current
Use the accounting equation to show the effects of each of the following transactions on the firm’s balance sheet:1. Purchased $250,000 of inventory on account.2. Paid creditors $125,000 on
Use the accounting equation to record the effects of each of the following transactions on the firm’s balance sheet (create separate columns for cash, inventory, and accounts payable):1. Purchased
Use a balance sheet equation to analyze the effects of the following transactions on Jack’s Shoe Company:1. Jack’s Shoe Company acquired 300 pairs of shoes and is billed $18,000. Jack’s has not
Use the accounting equation to show the effects of each of the following transactions on the firm’s balance sheet:1. Received subscription orders and cash of $360,000, representing 160,000
Use the accounting equation to analyze the effects of the following transactions on Town Floral, Inc.:1. Acquired 2,000 floral bouquets at a billed cost of $15 per bouquet. Terms of payment are 2/10,
Set up column headings as necessary (including a Warranty Payable column) and use the accounting equation to record the effects of each of the following transactions on the firm’s balance sheet:1.
Use the accounting equation to show the effects of each of the following transactions on the firm’s balance sheet:1. Accrued estimated warranties of $3,375,000.2. Paid warranty claims of
Jill’s Slipper Shop took out a short-term bank loan of $32,000 to pay for merchandise. This bank loan carried a simple interest rate of 12% per year.Requireda. Use the balance sheet equation to
Maggie’s Millinery Magazine (MMM) is very popular among the jet set, which rely on Maggie’s exotic hats and other fine apparel for every film premiere and Academy Award ceremony. MMM is only
MMM has many satisfied subscribers who have now realized their objectives of fame, fortune, and glory. Show the effects of the following transactions on MMM’s balance sheet:1. As a result of its
Refer to Reebok’s financial statements in Appendix E. Review the balance sheet to determine how and where current liabilities were reported.Requireda. Read Note 6. Identify and discuss any unusual
A firm purchased land for $150,000. Broker commissions of $3,000 and other closing costs of $1,800 were paid in acquiring the land. An old building that was on the land was demolished. The demolition
Discuss two different types of noncurrent assets that may be found on a typical balance sheet.
Discuss three different types of intangible assets, indicating what types of firms might hold such assets.
Why do accountants write off, or reduce, a noncurrent asset? Why might such write-offs be confusing? How could these possibly confusing effects be reduced?How does a “big bath”relate to such
Refute the assertion that “depreciation is a source of cash.”
Refute the assertion that “balance sheets reflect ‘true’values (market values) of noncurrent assets.”
When depreciation expense is shown in a firm’s financial statements, how and why is it often shown as a source of cash? How does depreciation expense affect cash flows?
When accumulated depreciation is shown on a balance sheet, how do changes in accumulated depreciation affect cash flows? What events result in changes to accumulated depreciation? Which have an
Identify the only transactions involving noncurrent assets that have an effect on cash flows.
Under what circumstances could the sum-of-the-years’-digits depreciation method produce the same pattern of total annual expenses as would the straight-line method?
Discuss the differences between the full cost method and the successful efforts methods when accounting for natural resources. Why might large firms prefer one method and small firms the other?
Discuss the term accumulated depreciation. How does this differ from depreciation expense? Why is accumulated depreciation treated as a contra asset? Why is this often called a “negative”asset?
Explain how to account for the acquisition of these assets.
Describe the procedures for depreciation, amortization, and depletion.
List the factors affecting managers’ selection of a depreciation method.
Determine which postacquisition expenditures should be expensed and which should be capitalized.
Explain the accounting issues associated with asset write-downs and disposals.
How are current assets different from noncurrent assets?
Interpret financial statement disclosures about noncurrent assets.Define the following terms related to non-current assets:a. Depreciation expenseb. Intangiblesc. Amortizationd. Straight-line method
Current assets, such as inventory, are not depreciated. Why should noncurrent assets be depreciated, amortized, or depleted?
How does depletion of natural resources affect cash flows? When does cash change as a result of transactions involving natural resources?
How does amortization of an intangible asset affect cash flows? When does cash change as a result of transactions involving intangibles?
A firm purchased an oil well costing $2,600,000, which is expected to produce five million barrels of oil. The well can probably be sold for $100,000 after all the oil is extracted. If 500,000
A firm acquired a machine for $150,000 and spent $50,000 to install it. The machine has a five-year life and a zero residual value. The firm is considering the possible effects on net income if it
A firm purchased computer-aided drafting and machining equipment at the beginning of the year for $420,000. The machine has an expected useful life of six years and a $38,000 residual
A firm acquired a $650,000 fixed asset that has a four-year life and a residual value of $50,000. Show the effects on the balance sheet equation of the asset’s disposal at the end of the fourth
A firm acquired a $24,000 truck that has a three-year life and an estimated residual value of $6,000. Using the balance sheet equation, record the truck’s purchase and depreciation using
A firm acquired a $20,000 computer, along with $14,000 of related ancillary equipment that can only be used on this machine. The computer and the related equipment have an estimated life of five
A firm acquired a patent for $125,000 and expected its economic useful life to be 15 years.Requireda. What useful life should be used to amortize the patent?b. Show the balance sheet effects of
A firm spent $1,500,000 for an oil well that is expected to produce 3,000,000 barrels of oil. During the first year, no oil is extracted. During the second year, 1,000,000 barrels are extracted and
A firm acquired a $4.5 million gold mine that is expected to yield 500,000 ounces of gold. During each of the first two years, 100,000 ounces of gold are mined and sold.Requireda. Show the effects on
A firm purchased machinery on account with an invoice price of $15,000. The terms of payment were 2/10, net 30. In addition, transportation of $250, installation of $420, and sales tax of $1,000 were
Discuss the following proposition: GAAP should only include one depreciation method: options give managers too much flexibility and too many opportunities to manipulate net income.
Why would a firm choose one depreciation method over another?
Identify key differences between three depreciation methods: straight-line, sumof-the-years’-digits, and declining-balance.
Discuss the following proposition: GAAP should permit managers the flexibility to choose from among several depreciation methods; each firm is unique and may require the flexibility to match its
Discuss the following proposition: Intangible assets may last one year, or they may last indefinitely; therefore, no one can determine the proper amortization schedule until the asset is exhausted or
Discuss the following proposition: Intangible assets reflect so much uncertainty that they should not be shown on the firm’s balance sheet.
Identify the following costs that could be capitalized on the firm’s balance sheet.Identify costs that should be included in property, plant, and equipment (PPE).a. New windshield wiper blades on
Firm A purchased a patent from another firm at a cost of $1 million. Firm B spent the same amount in developing a patent through its own internal research and development (R&D) efforts.Requireda.
Discuss the following proposition: Intangible assets have no substance; therefore, they have no value and should not be shown on the firm’s balance sheet.
Locate the three 10-Q filings and the 10-K for the most recently completed fiscal year for Cedar Fair, L.P., and H&R Block.These statements can be retrieved from the EDGAR archives
The 10-K for Oncogene Science,a biotechnology company,contains a thorough description of its main products. Locate the most recent 10-K from the EDGAR archives (www.sec.gov/edgarhp.htm).Requireda.
Locate the most recent financial statements for the computer manufacturing companies listed below.You may use either the 10-K available at EDGAR (www.sec.gov/edgarhp.htm) or the annual report
The following financial statements from Eli Lilly and Company and Pfizer INC.were downloaded from the SEC’s EDGAR database:194 CHAPTER 5 Critical Thinking Consolidated Statements of Cash Flows ELI
The following financial statements from SOS Staffing Services, Inc. were downloaded from the SEC’s EDGAR database:190 CHAPTER 5 Writing SOS STAFFING SERVICES, INC.CONSOLIDATED STATEMENTS OF CASH
Write a short memo discussing the advantages of using operating cash flows as an indicator of success. Contrast the use of operating cash flows as a performance measure, with accrual-based net income
Obtain the cash flow statements for a company that has been described in a recent business article as having cash flow problems. Conduct your own analysis of the company’s cash flows, using the
Scan recent business publications or use a business index in your library to locate an article discussing a company’s cash flow issues. Read the article and write a short summary discussing the
Obtain recent financial statements for two or three companies.If possible,these companies should be in the same industry and they should use the same method in reporting their cash flows from
From Appendix E,“Reebok International Ltd.,” review Reebok’s cash flow statement and income statement.Requireda. Evaluate Reebok’s cash flow from operations. Calculate the relevant cashbased
From Appendix D,“Wendy’s International, Inc.,”review Wendy’s cash flow statement and income statement.Requireda. Evaluate Wendy’s cash flow from operations. Calculate the relevant,
VaporWare II,Inc.(VWIII),had spectacularly good financial results in 1999.However, in 2000, the millenium bug, other defects, and general customer dissatisfaction resulted in returns of $3
Key,Inc.,manufactures key rings and “dummy”keys for football fans to shake and rattle at opportune times during football games.These items are sold to sports specialty shops and sidewalk vendors
Four Square Computer Company has provided the following (partial) income statement for the year ended December 31, 2001:Revenues Cash sales $1,600,000 Sales on account 3,335,000 Subtotal4,935,000
Write a short essay describing the advantages and disadvantages of using the income statement and the cash flow statement as a basis for evaluating the performance of a firm. Specifically comment on
Jane Stallings is the vice-president of operations for the Floppy Disk Computer Company,which produces a wide variety of hardware and software for personal computers.This equipment is sold to other
Beth’s Espresso Cart, first introduced in Chapter 4,“The Income Statement,” finished its second year of operations.1. Cash collections from clients $35,505 2. Payments to suppliers (beans,

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