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introductory financial accounting for business

Questions and Answers of Introductory Financial Accounting for Business

19 “Treasury stock is not an asset.” Explain.
18 Why might a company decide to buy back its own shares instead of paying additional cash dividends?
17 “When a company retires shares, it must pay the stockholders an amount equal to the original par value and additional capital contributed for those shares plus the stockholders’ fractional
16 “When companies repurchase their own shares, the accounting depends on the purpose for which the shares are purchased.” Explain.
15 “A stock split can be achieved by means of a stock dividend.” Do you agree? Explain.
14 “A 2% stock dividend increases every shareholder’s fractional portion of the company by 2%.” Do you agree? Explain.
13 “The only real dividends are cash dividends.” Do you agree? Explain.
12 Why might an employee prefer a restricted stock award rather than a stock option award?
11 Why do you suppose companies offer their employees stock options instead of simply paying higher salaries?
8 In what respects is preferred stock similar to debt and in what respects is it similar to common stock? 9 Which are riskier—bonds or preferred stock? Why? Whose perspective are you taking—the
7 What are convertible securities?
6 “The liquidating value of preferred stock is the amount of cash for which it can currently be exchanged.” Do you agree? Explain.
5 “Cumulative dividends are liabilities that must be paid to preferred shareholders before any dividends are paid to common shareholders.” Do you agree? Explain.
4 “Treasury stock is unissued stock.” Do you agree? Explain.
3 Can a share of common stock be outstanding but not authorized or issued? Why?
2 “Common shareholders have limited liability.” Explain.
1 What is the purpose of preemptive rights?
90 Analyzing Financial Statements Using the Internet: Macy’s, Inc. Go to www.macysinc.com to find financial information for Macy’s. Select For Investors, and click on the most recent annual
89 Analyzing Starbucks’ Financial Statements Find Starbucks’ financial statements for the fiscal year ended October 2, 2011, either via the Starbucks Web site or on the SEC’s EDGAR database.
88 Financial Statement Research Select any two companies from the airline industry, and find each company’s footnote describing its leases. (Possible companies include Alaska Airlines, American
87 Accounting for Pensions Form groups of two or more students. Divide each group into two debate teams. Each team should be assigned one of the two following positions: 1. Pensions and other
85 Present Value and Sports Salaries Study the appendix. On December 13, 2007, Alex Rodriguez signed a 10-year, $275 million contract with the New York Yankees. Five years into the contract, it
84 Liabilities for Frequent Flier Miles and Ethics Most airlines in the United States have frequent flier programs that grant free flights if a customer accumulates enough flight miles on the
83 Review The Kroger Company, a Cincinnati-based supermarket chain, operates nearly 2,500 stores throughout the United States. The company’s annual report for the fiscal year ended January 28,
82 Debt-to-Equity Ratios The total debt and stockholders’ equity for three companies follows. The companies are described as follows: • General Electric is a multinational technology and services
81 The Income Tax Footnote Alcoa had sales of $24,951 million in 2011 and generated income from continuing operations before income taxes of $1,063 million. In its 10-K for 2011, Alcoa provided
80 Deferral of Taxes and Reversal of Temporary Differences Assad Company bought an asset for $400,000 on January 1, 20X0. The asset has a 10-year life and zero salvage value for both financial
79 Deferred Taxes The Home Depot reported earnings from continuing operations before the provision for income taxes of $6,068 million for the year ending January 29, 2012, in its 10-K. Footnote 6
78 Pensions Alcoa, Inc., is the world’s leader in the production and fabrication of aluminum and aluminum products. The company has had a defined benefit pension plan for many years. Footnote W of
77 Pension Liabilities According to note 15 in its 10-K, Boeing Company, the aircraft and aerospace manufacturer, had pension obligations of $67,651 million and obligations for postretirement
76 Capital Leases The Home Depot is the leading retailer in the home improvement industry and one of the 10 largest retailers in the United States. The company included the following on its January
75 Leases Consider footnote 7 from the 2011 annual report of FedEx: We utilize certain aircraft, land, facilities, retail locations, and equipment under capital and operating leases that expire at
74 Leases The following information appeared in a footnote to the 2011 annual report of Delta Air Lines, Incorporated: The following table summarizes, as of December 31, 2011, our minimum rental
73 Capital or Operating Lease On December 31, 20X0, the law firm of Preston, Gomez, and Bergman is offered 30 laptop computers for the firm’s partners. It can either (a) buy them outright for
72 Comparison of Operating and Capital (Financing) Lease Refer to the preceding problem. Compare income statement and balance sheet effects of treating the lease as a capital lease rather than an
71 Capital (Financing) Lease On December 31, 20X0, the Jackson Building Maintenance Services acquired cleaning equipment on a capital lease for three annual lease payments of $30,000 each on December
70 Zero Coupon Bonds The state of Illinois issues zero coupon bonds as part of its Illinois College Savings Bonds series. This bond series had different maturity dates and the different maturities
69 Zero Coupon Bonds Issuers of “deep-discount” or “zero coupon” debt securities must use an effective interest approach to amortization of discount for both tax reporting and reporting to
68 Noninterest-Bearing Notes On January 2, a local bookstore borrowed from a bank on a 1-year note. The face value of the note was $80,000. However, the bank deducted its interest “in advance” at
67 Early Extinguishment of Debt (Alternative is 66.) On December 31, 20X0, a Zurich real estate holding company issued CHF10 million of 10-year, 8% debentures. The market interest rate at issuance
66 Early Extinguishment of Debt (Alternative is 67.) On December 31, 20X0, Limestone Charters issued $20 million of 10-year, 12% debentures. Interest is paid semiannually. The market interest rate at
65 Interest Expense on the Cash Flow Statement—IFRS and U.S. GAAP Siemens AG is Europe’s largest conglomerate. It is headquartered in Berlin and Munich. The amounts that follow are in millions of
64 Bond Premium Transactions (Alternate is 63.) Assume that on December 31, 20X0, Colorado Woolens issued $10 million of 10-year, 10% debentures. Proceeds were $11,359,000; therefore, the market rate
63 Bonds Issued at a Premium (Alternate is 64.) On January 1, 20X0, Global Travel issued $6 million of 5-year, 10% debentures. The market interest rate at issuance was 8%. Interest is paid
62 Bond Discount Transactions (Alternates are 59 and 60.) Assume that on December 31, 2009, Oslo Dahler issued NKR20 million of 10-year, 10% debentures. Proceeds were NKR15,762,000; therefore, the
61 Bond Amortization Schedule Consider a $10 million issue of 5-year, 6% debentures when the market interest rate was 10%. It was issued on January 1, 20X0. 1. Prepare a table showing the interest
60 Bonds Issued at a Discount (Alternates are 59 and 62.) On January 1, 20X0, Washington Park District issued $20 million of 5-year, 6% debentures. Interest is paid semiannually. The market interest
59 Bond Discount Transactions (Alternates are 60 and 62.) On March 1, 2009, Oregon Gas & Electric issued $100 million of 20-year, 9% debentures. Proceeds were $91,420,000, implying a market interest
58 Bonds Issued at Par (Alternative is 57.) On December 31, 2009, Idaho Mining, Inc., issued $50 million of 10-year, 6% debentures at par. 1. Compute the proceeds from issuing the debentures. 2. By
57 Bonds Issued at Par (Alternative is 58.) On December 31, 20X1, Northeast Financial, Corp., issued $20 million of 8-year, 10% debentures at par. Interest is paid semiannually. 1. Compute the
56 Convertible Bonds Sometimes companies find it desirable to include a convertibility option to sell bonds at a reasonable interest rate. Siemens AG, the huge German electronics company, issued
55 Convertible Bonds—IFRS and U.S. GAAP Brock Company issued $100,000 convertible 5-year bonds with a face value of $100,000 on January 1, 20X0. The coupon rate on the bonds was 6%, and Brock
54 Liabilities on the Balance Sheet—IFRS ArcelorMittal, headquartered in Luxembourg, is the largest steel producer in the world. It reports using IFRS. Following are items from the company’s
53 Accounting for Payroll For the week ended January 27, the Massengill Company had a total payroll of $100,000. The company withheld three items from employees’ paychecks: (1) Social Security
52 Discounted Present Value and Leases Study the appendix. Suppose Wal-Mart signed a 10-year lease for a new store location. The lease calls for an immediate payment of $50,000 and annual payments of
51 Basic Relationships in Interest Tables Study the appendix. Then answer the following questions: 1. Suppose you borrow $50,000 now at 16% interest compounded annually. The borrowed amount plus
50 Exercises in Compound Interest Study the appendix. Then answer the following questions: 1. At age 60, you find that your employer is moving to another location. You receive termination pay of
49 Exercises in Compound Interest Study the appendix. Then answer the following questions: 1. It is your sixtieth birthday. You plan to work 5 more years before retiring. Then you want to spend
48 Compound Interest and Journal Entries Study the appendix. Benenson Company bought some equipment on a contract entailing a €200,000 cash down payment and an €800,000 lump sum to be paid at the
47 Exercises in Compound Interest Study the appendix. A reliable friend has asked you for a loan. You are pondering various proposals for repayment. 1. Repayment of a $30,000 lump sum 4 years hence.
46 Exercises in Compound Interest Study the appendix. Then answer the following questions: 1. You deposit $10,000. How much will you have in 4 years at (a) 8% compounded annually, and (b) at 12%
45 Debt and Interest-Coverage Ratios The Empire District Electric Company, headquartered in Joplin, Missouri, provides electric services and also distributes natural gas to customers primarily in the
44 Deferred Taxes Procter & Gamble Company’s (P&G) net sales in 2011 exceeded $82 billion. On its income statement, P&G reported the following earnings from continuing operations ($ in millions):
43 Accounting for Pensions Merinoff Company’s 20X0 pension expense was $800,000, of which it paid $500,000 in cash to a trustee. By using the balance sheet equation format, show which accounts were
42 Criteria for Capital Leases Indicate which of the following leases would be a capital (financing) lease and which would be an operating lease: 1. Rental of a warehouse for $10,000 per month,
41 Discounted Present Value and Bonds On December 31, 20X1, Hartley Company issued a 3-year $10,000 bond that promises an interest rate of 12%, payable 6% semiannually. Compute the discounted present
40 Priorities of Claims Bram Real Estate Corporation is being liquidated. It has one major asset, an office building, which was converted into $16.4 million cash. The stockholders’ equity has been
39 Various Liabilities 1. Whirlpool Corporation sells electric appliances, including automatic washing machines. Suppose that experience in recent years has indicated that warranty costs average 3.0%
38 Liabilities on the Balance Sheet Krispy Kreme Company, the doughnut company, had the following items on its January 29, 2012, balance sheet (in thousands): Cash and cash equivalents $ 44,319
37 Unearned Revenues The Reader’s Digest Association, Inc., one of the largest publishers of magazines in the world, had unearned revenues of $340.4 million on its March 31, 2012, balance sheet.
36 Product Warranties During 20X0, the Ashley Appliance Company had cash sales of $800,000. The company estimates that the cost of servicing products under warranty will average 3% of sales. 1.
35 Sales Taxes Most of the food sold in retail stores in California is not subject to sales taxes (e.g., candy), but some items are (e.g., soft drinks). Apparently, the candy lobbyists were more
34 Accrued Employee Compensation Choi Company had total compensation expense for March of $40,000. The company paid $30,000 to employees during March, and it will pay the remainder in April. 1.
33 Lottery Winnings The New York Lottery provides prizes that start at $3 million and rise each time someone fails to win the lottery. Participants in the lottery are permitted to choose to receive a
32 Cash Interest Versus Interest Expense As a lender, you are contemplating a covenant that is based on the interest-coverage ratio. A young member of your organization with a new MBA degree has
31 Refinancing Bonds Your treasurer is new to the job and has just noticed that your bonds are trading below par (i.e., at a discount). This officer recommends that you retire the bonds by issuing
30 Lenders and Covenants Why would a lender want to add a covenant specifying a maximum debt-to-total-assets ratio to a loan contract?
29 Refer to the appendix. How are Table A-2 and Table A-3 related to each other?
28 Name four ratios that help analysts assess a company’s risk. Give a brief explanation of each.
27 “A contingent liability is a liability having an estimated amount.” Do you agree? Explain.
26 “It is unethical for big companies to recognize a large income tax expense on their income statements reported to the public but to pay a small amount to the government.” Do you agree? Explain.
25 “Differences in tax and GAAP rules lead to more depreciation being charged on tax statements than on financial reports to the public.” Do you agree? Explain.
24 Compare and contrast permanent differences and temporary differences between GAAP and tax reporting.
23 “Because a company never knows how much it will have to pay for pensions, no pension liability is recognized. Pension obligations are simply explained in a footnote to the financial
22 Discuss which characteristics of a lease are evaluated in deciding whether it is a capital (or finance) lease.
21 “A capital (or finance) lease and operating lease are recorded differently on the balance sheet, but their effect on the income statement is the same.” Do you agree? Explain.
20 “A capital (or finance) lease results in both an asset and a liability on a company’s balance sheet.” Explain.
19 Certain leases are essentially equivalent to purchases financed with debt. A company must account for such leases as if the asset had been purchased. Explain.
18 “When accounting for a lease, it is necessary to determine whether the lease is a capital lease or a finance lease.” Do you agree? Explain.
17 “A company that issues zero coupon bonds recognizes no interest expense until the bond matures.” Do you agree? Explain.
16 A company reported interest payments in the financing activities section of the statement of cash flows. Does the company report under IFRS or U.S. GAAP? Explain.
15 What are the three main differences between accounting for a bond discount and accounting for a bond premium?
14 “When a bond is issued at a discount, there are two components of interest expense.” Explain.
13 A company plans to issue bonds with a coupon rate of 10%. At what market rates will the bonds be issued at a discount? At what market rates will they be issued at a premium?
12 “The quoted bond interest rates imply a rate per annum, but the bond markets do not mean that rate literally.” Explain.
11 “The face amount of a bond is what you can sell it for.” Do you agree? Explain.
10 “When a company buys back bonds that it has issued, it always pays the book value to the bondholders. Therefore, there is never a gain or loss on extinguishing bonds.” Do you agree? Explain.
9 How does reporting for convertible bonds differ under IFRS compared with U.S. GAAP?
8 Many callable bonds have a call premium for “early” calls. Who does the call premium benefit—the issuer or the purchaser of the bond? How?
7 Bond covenants usually restrict the borrower’s rights in various ways. An example might be a restriction that no additional long-term debt could be issued unless the debtto-total assets ratio was

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