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business
understanding financial accounting

Questions and Answers of Understanding Financial Accounting

The following relationships were obtained for Boulder Mineral Company for 1997. (Preparing financial Current ratio 3:1 statement data from Inventory turnover (average days supply) 12.167 financial
The following quote was taken from a recent annual report of The Quaker Oats Company: (Financial performance objectives in terms of earning power and solvency) Any review of Quaker'sfinancial
Several years ago, the auditor’s report for Allegheny International, Inc., an airline company, contained the following excerpt: As described in Note 6 to the consolidatedfinancial statements, the
In The Accounting Review (January 1971) Baruch Lev and Aba Schwartz noted that “The dichotomy in accounting between human capital and nonhuman capital is fundamental; the lat¬ ter is recognized as
Like the takeover-giddy 1980s, investors are again showing respect for hard numbers like quar¬ terly earnings. But those reported earnings numbers are becoming less and less trustworthy, analysts
Merger mania in the 1980s increased the leverage levels of many major U.S. corporations. The vice president and financial economist of Kemper Financial Services commented in The Wall Street Journal
In 1990 General Motors recorded a $2.1 billion special charge to cover plant closings. In fact, the company’s chief financial officer commented in The Wall Street Journal (November 11, 1990) that
In 1991 IBM, GM, and GE all experienced very poor years—slow sales, costly reorganiza¬ tions, and low profits. During that year each company decided to adopt an accounting standard that required
An accounting professor at the University of California at Berkley was quoted in The Wall Street Journal (December 17, 1990) as saying, “The most important items on the financial statements are
In the first quarter of 1991 Compaq Computer reported a net profit of $971 million, a 24 per¬ cent increase above the previous year’s first quarter. Unfortunately, the company’s stock price
A major conclusion in a study reported in Frontiers ofInternational Accounting: An Anthology is that “accounting measurements reflected in corporate financial reports represent, in one sense,
Consolidated balance sheets and statements of income and cash flows, taken from the 1994 annual report of Federal Express Corporation, are provided on the following pages. Analyze the statements by
Why is the amount of income such an important number?
What is comprehensive income, and in terms of the objectives of financial accounting, how is it useful?
What is a capital transaction, and how does it differ from an operating transaction?
The text states that all transactions can be placed on the capital/operating continuum. List the five categories of transactions discussed in the chapter, and briefly explain why each is placed where
Define the terms usual andfrequent as they are used in the chapter. Provide an example of (a) a transaction that is both usual and frequent, (b) a transaction that is usual and infre¬ quent, (c) a
Describe how transactions that fall into each of the four categories identified in (5) are pre¬ sented on the income statement, and explain how these categories are useful in terms of the objectives
Define a business segment.
What is an extraordinary item?
Is a change in an accounting principle/method inconsistent with the notion of consistency?
Differentiate between a voluntary and a mandated accounting method change. Why should users be aware of the difference?
In what three places in the financial report can you find evidence that a company changed a major accounting principle?
How are earnings per share disclosed on the face of the income statement? Why is it done in this manner?
Explain the idea of intraperiod tax allocation. List the items that are disclosed net of tax on the income statement and statement of stockholders’ equity.
Define the concept of earnings persistence, and explain how the income statement classi¬ fications provide information about it. How is this concept useful?
How can dividing income into its components (i.e., income from operations, income from continuing operations, discontinued operations, extraordinary items, and changes in accounting methods) give
Explain why users must be careful when relying on classification on the income statement provided by management.
List the items that are normally disclosed on the reconciliation of retained earnings. Where is this reconciliation found in the financial reports of many major U.S. companies?
What are prior period adjustments, and how are they disclosed in the financial statements?
Why must investors and creditors be particularly cautious about investing in companies that have significant international operations? What effect can such operations have on the income statement?
Briefly explain how it is used by investors, creditors, and other interested parties.
What two items are disclosed on the income statement when a business segment is sold or discontinued?
Explain how a certain transaction entered into by one com¬ pany might be considered extraordinary, while the same transaction entered into by another company might be considered a part of normal
If management wishes to change an accounting principle, of what must the auditors be convinced?
What is fully diluted earnings per share, and why should potential or exist¬ ing shareholders be concerned about it?
Listed below are transactions or items that are frequently reported in financial statements.
Income effect due to changing from the double-declining-balance method to the straightline method of depreciation.
Purchase an insurance policy on December 31 that provides coverage for the following year. 668 Part 5 Income and Cash Flows
Accrue wages earned by the employees.
Estimate uncollectible accounts receivable using the aging method.
Recognize a gain on the sale of plant equipment.
Recognize a loss when the government expropriates land for a highway.
Declare a dividend valued at $100,000.
Under the requirements of a debt covenant, appropriate a portion of retained earnings.
Receive dividends on stocks held as a short-term investment. The dividends were declared and paid on the same day.
Recognize the cost of inventory sold during the year under the periodic method.
Pay rent for the current year. REQUIRED:a. Indicate whether each item would be included on the company’s income statement, state¬ ment of stockholders’ equity, or neither, using the following
A number of transactions are described below.
Declaration of a stock dividend.
Purchase of 50 percent of the outstanding stock of another company.
Payment of previously accrued interest payable.
Accrual of interest expense.
Recognition of depreciation on machinery.
Sale of treasury stock at a price less than its original cost.
Conversion of debt to common stock.
Receipt of cash on an outstanding receivable.
Sale of inventory on account.
Purchase of inventory on account.
Receipt of dividends on short-term marketable securities.
Early retirement of outstanding long-term debt. REQUIRED:a. Refer to Figure 13-2 in the text, and classify each transaction in one of the following categories. (1) Exchanges with stockholders (2)
Morton Manufacturing maintains a credit line with First Bank that allows the company to bor¬ row up to $1 million. A covenant associated with the loan contract limits the company’s divi¬ dends in
The December 31, 1997, balance sheet of Smedley Company is provided below. Assets $70,000 Liabilities $15,000 _ Stockholders’ equity 55,000 Total liabilities and Total assets $70,000 stockholders
Common stock was issued for $35,000 cash.
Services were performed for $50,000 cash.
Cash expenses of $24,000 were incurred.
Long-term liabilities of $15,000 were paid.
Dividends of $7,000 were declared and paid. REQUIRED:a. Classify each transaction as operating or capital and then prepare an income statement.b. Compute comprehensive income, and compare it to the
The income statement data for the year ended December 31, 1997, of Bentley Brothers follows. Operating revenues $35,000 Operating expenses 20,000 Net operating income $15,000 Loss on sale of
LTB Enterprises consists of four separate divisions: building products, chemicals, mining, and plastics. On March 15, 1996, LTB sold the chemicals division for $625,000 cash. Financial information
It is December, 1997, and Sharon Sowers, the CEO of Mallory Services, has decided to sell the clerical division. She has received an offer for $105,000, but is undecided about whether she wishes to
It is December, 1997, and Rob Blandig, the CEO of Carmich Industries, has decided to sell the chemical division. He has received an offer for $350,000, but is undecided about whether he wishes to
The following income statement was reported by Battery Builders for the year ending December 31, 1997. Sales $85,000 Rent revenue 23,000 Interest income 7,000 Total revenues $115,000 Cost of goods
The management of Sting Enterprises share in a bonus that is determined and paid at the end of each year. The amount of the bonus is defined by multiplying net income from continuing operations
The following information was taken from the 1997 financial records of Rothrock Consolidated. All items below are pretax. Debit Credit Operating Revenues Operating Expenses 32,500 87,000 Gain on Sale
The following pretax amounts were obtained from the for 1997. Debit Credit Retained Earnings (1/1/97) 847,000 Sales Revenues 1,385,000 Rent Revenue 360,000 Cost of Goods Sold 475,000 Administrative
Kennington Company has outstanding debt that contains restrictive covenants limiting divi¬ dends to 15 percent of net income from continuing operations. During 1997 the company reported net income
A $25,000 gain was recognized on the sale of an investment.
A $62,000 loss was recognized on lawsuit.
A $38,000 loss was recognized on the early retirement of debt. REQUIRED: Assume that the gain in (1) is taxable, the losses in (2) and (3) are tax deductible, and the com¬ pany’s tax rate is 35
Madigan International is planning a major stock issuance in early 1998. During 1997 the com¬ pany reported net income from operations before taxes of $865,000. The four items below describe major
A $42,000 gain was recognized on the sale of a subsidiary.
Inventory was written down by $53,000 due to earthquake damage.
An outstanding accounts receivable of $38,000 was written off when a major customer declared bankruptcy.
A $25,000 gain was recognized due to the change of an accounting principle. REQUIRED: Assume that items (1) and (4) are taxable, items (2) and (3) are tax deductible, and that the company’s tax
Lundy Manufacturing produces and sells football equipment. The company was involved in the following transactions or events during 1997.
The company purchased $250,000 worth of materials to be used during 1998 to manufac¬ ture helmets and shoulder pads. 674 Part 5 Income and Cash Flows PI 3-2 (Bonus contracts based on income can
The company sold football equipment for a price of $500,000. The inventory associated with the sale cost the company $375,000.
One of the company’s plants in San Francisco was damaged by a minor earthquake. The total amount of the damage was $100,000.
The company issued 10 ($1,000 face value) bonds at a discount (.98).
The company incurred $143,000 in wage expenses.
The company was sued by a high school football player who was injured while using some of the company’s equipment. The football player will probably win the suit, and the amount of the settlement
The company switched from the double-declining-balance depreciation method to the straight-line depreciation method.
The company declared and paid $50,000 in dividends.
The company incurred a loss when it sold some securities it was holding as an investment. REQUIRED:a. Classify each of these transactions as capital or operating.b. Refer to Figures 13-2 and 13-3 in
The managers of Martin House are paid a salary and share in a bonus that is determined at the end of each year. The total bonus is determined by multiplying the company’s income from operations by
Raleigh Corporation began operations on February 10, 1997. During 1997 the company entered into the following transactions.
Issued $110,000 of common stock and $25,000 of preferred stock.
Performed services for $580,000.
Issued $475,000 in long-term debt for cash.

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