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financial statement analysis

Questions and Answers of Financial Statement Analysis

How does pension accounting serve to smooth pension expense? Under what circumstances will this relatively smooth expense not reflect the underlying economics?
Discuss key estimates in accounting for pension and other postretirement benefits and how these estimates affect net income and total liabilities.
How can management exercise latitude over the amount of pension expense recorded?
Where do pension costs appear in the financial statements?
Accounting for OPEBs draws on the accounting for pensions, with some important differences. Explain these differences.
Discuss the required accounting disclosures for OPEBs.
It is often asserted that using the LIFO inventory costing method during an extended period of rising prices and the expensing of all human resource costs are among the accepted accounting practices
The accounting treatment for postretirement benefits other than pensions requires that companies offering these benefits adopt accrual accounting (similar to the requirements for pension
On November 1, Year 5, Abbott Company sells its five-year, $1,000 face value, 11% term bonds dated October 1, Year 5, at a discount yielding an effective annual interest rate (yield) of 12%.Interest
Abbott amortizes the bond discount. It also incurs bond issue costs in preparing and selling the bond issue. In another, unrelated transaction, dated December 1, Year 5, Abbott issues six-year,
The following information for Decher Automotives covers the year ended 2012:Requireda. Prepare a multiple-step income statement.b. Assuming that 100,000 shares of common stock are outstanding,
The following information for Lesky Corporation covers the year ended December 31, 2012:RequiredChange this statement to a multiple-step format, as illustrated in this chapter. Revenue: Revenues from
Motorola Mobility Separation On July 1, 2010, an initial registration statement on Form 10 was filed with the U.S. Securities and Exchange Commission (“SEC”) in connection with the Company’s
Why is the price/earnings ratio considered a could increase reported income in a particular year.
The accounts of Consolidated Can contain the following amounts at December 31, 2012:RequiredPrepare a multiple-step income statement combined with a reconciliation of retained earnings for the year
The following items are from Taperline Corporation on December 31, 2012. Assume a flat 40% corporate tax rate on all items, including the casualty loss.Requireda. Prepare a single-step income
The income statement of Rawl Company for the year ended December 31, 2012, shows the following:RequiredCompute the net earnings remaining after removing unusual write-offs and the extraordinary
Corvallis Corporation owns 80% of the stock of Little Harrisburg, Inc. At December 31, 2012, Little Harrisburg had the following summarized balance sheet:The earnings of Little Harrisburg, Inc., for
The following is the balance sheet of McDonald Company:RequiredIndicate your criticisms of the balance sheet and briefly explain the proper treatment of any item criticized. Inventory Current
Abbott Laboratories and Subsidiaries*Requireda. The statement is entitled “Consolidated Balance Sheet.” What does it mean to have a consolidated balance sheet?b. 1. What current liability
The following information was obtained from the accounts of Alleg, Inc., as of December 31, 2012. It is presented in scrambled order.RequiredPrepare a classified balance sheet in report form. For
The following information was obtained from the accounts of Lukes, Inc., as of December 31, 2012. It is presented in scrambled order.RequiredPrepare a classified balance sheet in report form. For
Select a company from a nonregulated industry for which you can obtain complete financial statements for at least the most recent six years.Required:Based on these financial statements, the
Ace Company’s net income for the year is $4 million and the number of common shares outstanding is 3 million (there is no change in shares outstanding during the year). Ace has options and warrants
Playgrounds, Inc., is granted a distribution franchise by Shady Products in Year 1. Operations are profitable until Year 4 when some of the company?s inventories are confiscated and large legal
Big-Deal Construction Company specializes in building dams. During Years 3, 4, and 5, three dams were completed. The first dam was started in Year 1 and completed in Year 3 at a profit before income
Selected financial ratios from the (i) S&P 400, (ii) the brewing industry, and (iii) Anheuser-Busch Companies (BUD), for Years 2 through 6 are reproduced below.Required:a. Using these financial
You are the portfolio manager of a highyield bond portfolio at Solomon Group.You are concerned about the financial stability of Florida Gypsum Corporation (FGC), whose bonds represent one of the
Refer to the financial statement data of ABEX Chemicals, Inc., reproduced in Case 10–5.Required:a. Prepare a forecast of ABEX’s total operating income for Year 10. (Hint: Refer to forecast data
Refer to the financial statements of Campbell Soup Company in Appendix A.Required:a. Estimate the amount of depreciation expense reported on Campbell’s tax returns for each of the Years 11, 10,
The unaudited income statements of Disposo Corporation are reproduced below.On August 15, Year 8, the company decided to discontinue its Metals Division. The business was sold on December 31, Year 8,
Reproduced below are condensed common-size financial statements of companies operating in nine different industries. The nine industries represented are:a. Tobacco manufacturing b.
The following financial data are available for each of two manufacturers of mountain bikes.Required:Compute and analyze each of the following seven factors and ratios. For each factor and ratio, does
What are the attributes of a good financial analysis report? What distinct sections constitute a complete financial analysis report?
What additional knowledge and analytical skills must an analysis of financial statements bring to bear on companies operating in specialized or regulated industries?
What are the analytical implications of recognizing that financial statements are an abstraction of a company’s underlying business transactions and events?
What type of investigation should precede analysis of financial statements?
Condensed financial statements of General Electric, along with note information regarding postretirement benefits, are shown here:Note that this postretirement data was reported under the older
Identify and describe the six major building blocks of financial statement analysis. What is the initial step in applying the building blocks to an analysis of financial statements?
What is the days’ sales in receivables? What does it measure?
What does accounts receivable turnover measure?
What are management’s objectives in determining a company’s investment in inventories and receivables?
What is the justification for including prepaid expenses in current assets?
Certain installment receivables are not collectible within one year. Why are these receivables sometimes included in current assets?
What is the forecast horizon?
A current exposure draft requires companies to recognize the fair value of employee stock op-tions as an operating expense. Options pricing models are used to estimate the fair value of the options.
Accounting for earnings per share has certain weaknesses that our analysis must consider for interpreting EPS data. Identify and discuss at least two weaknesses.
EPS can affect a company’s stock prices. Can a company’s stock prices affect EPS?
What is the purpose underlying the reporting of diluted EPS?
What factors cause the effective tax rate to differ from the statutory rate?
Analysts often refer to the core income of a company. What is meant by the term core income?
Although comprehensive income is the bottom line income number, it is rarely reported in the income statement. Where will you typically find details regarding comprehensive income?
Explain how accountants measure income.
Describe the analysis procedure available to adjust an income statement using pooling accounting so as to be comparable with an income statement using purchase accounting.
Describe the accounting treatment for speculative derivatives.
When does a derivative security qualify for hedge accounting under SFAS 133?
What is a hedge transaction?
Describe a swap contract. How are swaps typically used by companies?
Describe a futures contract.
Distinguish between hedging and speculative activities with regard to derivatives.
Distinguish between a “hard asset” and a “soft asset.” Cite several examples.
Explain when an expenditure should be capitalized versus when it should be expensed.
One means for a corporation to generate long-term financing is through issuance of noncurrent debt instruments in the form of bonds.Required:a. Describe how to account for proceeds from bonds issued
Identify what items are treated as prior period adjustments.
Explain how off-balance-sheet financing items should be treated for financial analysis purposes.
Define off-balance-sheet financing and provide three examples.
Define the term big bath. Explain when a manager would consider “taking a big bath” and how analysis of current financial position and future profitability might be adjusted if one suspects that
Discuss how the lessor reflects the benefits of leasing in the income statement under (a) an operating lease and (b) a capital lease.
Discuss how the lessee reflects the cost of leased equipment in the income statement for (a) assets leased under operating leases and (b) assets leased under capital leases.
Explain how analysis of financial statements is used to evaluate a company’s liabilities, both existing and contingent.
Debt contracts usually place restrictions on the ability of a company to deploy resources and to pursue business activities. These are often referred to as debt covenants.a. Identify where
Describe the major disclosure requirements for long-term liabilities.
Explain how the issuance of convertible debt and warrants can affect the valuation analysis conducted by current and potential stockholders.
Both convertibility and warrants attached to debt aim at increasing the attractiveness of debt securities and lowering their interest cost. Describe how the costs of these two features affect income
Describe the conditions necessary to demonstrate the ability of a company to refinance its short-term debt on a long-term basis.
Identify the major disclosure requirements for financing-related current liabilities.
Identify and describe the two major sources (as linked with business activities) of current liabilities.
Public accounting firms are being implored to assess a company’s reported earnings per share relative to the market expectation of earnings per share (e.g., consensus analysts’ forecast) when
Explain why financial statements are important to the decision-making process in financial analysis. Also, identify and discuss some of their limitations for analysis purposes.
Citigroup is currently audited by KPMG. Who pays KPMG for its audit of Citigroup? To whom is KPMG providing assurance regarding the fair presentation of the Citigroup financial statements? List two
What are some circumstances suggesting higher audit risk? Explain.
What does the auditor’s reference to generally accepted accounting principles imply for our analysis of financial statements?
An auditor does not prepare financial statements but instead samples and investigates data to render a professional opinion on whether the statements are “fairly presented.” List the potential
What are some implications to financial analysis stemming from the audit process?
What does the opinion section of the auditor’s report usually cover?
What are auditing procedures? What are some basic objectives of a financial statement audit?
What are generally accepted auditing standards?
What gives rise to accounting distortions? Explain.
Discuss the advantages and disadvantages of fair value accounting.
What adjustments would you make to net income to determine economic income?
Explain how accountants measure income.
Describe alternative information sources beyond statutory financial reports that are available to investors and creditors.
Describe forces that serve to limit the ability of management to manage financial statements.
Who has the main responsibility for ensuring fair and accurate financial reporting by a company?
Describe the U.S. financial reporting environment including the following:a. Forces that impact the content of statutory financial reportsb. Rule-making bodies and regulatory agencies that formulate
Common-size and trend percents for JBC Company’s sales, cost of goods sold, and expenses follow:Determine whether net income increased, decreased, or remained unchanged in this three-year period.
Refer to the information in Exercises 1–3 and 1–5 about Mixon Company. Compare the long-term risk and capital structure positions of the company at the end of 2006 and 2005 by computing the

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