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Using Financial Accounting Information The Alternative to Debits and Credits 7th Edition Gary A. Porter, Curtis L. Norton - Solutions

Susan Applies for a Loan Susan Spiffy, owner of Spiffy Cleaners, a drive-through dry cleaners, would like to expand her business from its current location to a chain of cleaners. Revenues at the one location have been increasing an average of 8% each quarter. Profits have been increasing
Determine Acquisition Cost Which of the following would be considered part of the acquisition cost of an asset? Transportation costs Installation costs Repair costs incurred at the time of purchase Repair costs incurred after the asset has been installed and used Interest on loan to purchase the
Two companies are in the same industry. Company A uses the LIFO method of inventory valuation, and Company B uses FIFO. What difficulties does this present when comparing the two companies?
Lump-Sum Purchase On December 1, 2010, Company X bought from Company Y land and an accompanying warehouse for $800,000. The fair market values of the land and the building at the time of purchase were $700,000 and $300,000, respectively. How much of the purchase price should Company X allocate to
You are told to compare the company’s results for the year, as measured by various ratios, with one of the published surveys that arranges information by industry classification. What difficulties might you encounter when making comparisons using industry standards?
Capitalization of Interest A company begins construction of an asset on January 1, 2010, and completes construction on December 1, 2010. The company pays the following amounts related to construction: $1,000,000....January 1 $2,000,000 .........July 1 $1,000,000..December 31 Calculate the average
What types of problems does inflation cause when financial statements are analyzed?
Depreciation Methods A company uses the double-declining-balance method of depreciation. The company purchases an asset for $40,000, which is expected to have a ten-year life and a $4,000 residual value. What depreciation rate will be applied each year? What amount will be charged for depreciation
Distinguish between horizontal and vertical analyses. Why is the analysis of common-size statements called vertical analysis? Why is horizontal analysis sometimes called trend analysis?
Change in Depreciation Estimate A company purchased an asset on January 1, 2008, for $10,000. The asset was expected to have a ten-year life and a $1,000 salvage value. The company uses the straight-line method of depreciation. On January 1, 2010, the company determines that the asset will last
A company experiences a 15% increase in sales over the previous year. However, gross profit actually decreased by 5% from the previous year. What are some of the possible causes for an increase in sales but a decline in gross profit?
Capital Expenditure A company purchased an asset on January 1, 2008, for $10,000. The asset was expected to have a ten-year life and a $1,000 salvage value. The company uses the straight-line method of depreciation. On January 1, 2010, the company made a major repair to the asset of $5,000,
A company’s total current assets have increased by 5% over the prior year. Management is concerned, however, about the composition of the current assets. Why is the composition of current assets important?
Ratios were categorized in the chapter according to their use in performing three different types of analysis. What are the three types of ratios?
Sale of Asset A machine with a cost of $100,000 and accumulated depreciation of $80,000 was sold at a loss of $6,000. What amount of cash was received from the sale?
Describe the operating cycle for a manufacturing company. How would the cycle differ for a retailer?
Classification of Intangible Assets Which of the following would be considered Intangible Assets on the balance sheet? Which intangibles should be amortized? Patents Copyrights Research and development Goodwill The company’s advantageous location Broadcast rights
What accounts for the order in which current assets are presented on a balance sheet?
Amortization of Intangible A company develops a patent on January 1, 2008, and the costs involved with patent approval are $12,000. The legal life of the patent is 20 years, but the company projects that it will provide useful benefits for only 12 years. At January 1, 2010, the company discovers
A company has a current ratio of 1.25 but an acid-test (or quick) ratio of only 0.65. How can this difference in the two ratios be explained? What concerns might you have about this company?
Operating Assets and Cash Flows In which category of the statement of cash flows (indirect method) should the following items appear? Depreciation of an operating asset Gain on the sale of an asset Amortization of an intangible Loss on the sale of an asset Amount paid to purchase an assetAmount
Explain the basic concept underlying all turnover ratios. Why is it advisable in computing a turnover ratio to use an average in the denominator (for example, average inventory)?
Analysis of Operating Assets At December 31, 2010, a company has the following amounts on its financial statements: Property, plant, and equipment ........$10,000 Accumulated depreciation ..........5,000 Total assets at January 1, 2010 ........30,000 Total assets at December 31, 2010
Sanders Company’s accounts receivable turned over nine times during the year. The credit department extends terms of 2/10, n/30. Does the turnover ratio indicate any problems that management should investigate? Explain.
Acquisition Cost On January 1, 2010, Ruby Company purchased a piece of equipment with a list price of $60,000. The following amounts were related to the equipment purchase: • Terms of the purchase were 2/10, net 30. Ruby paid for the purchase on January 8. • Freight costs of $1,000 were
The turnover of inventory for Ace Company has slowed from 6.0 times per year to 4.5. What are some possible explanations for this decrease?
How does the operating cycle for a manufacturer differ from the operating cycle for a service company (e.g., an airline)?
Lump-Sum Purchase To add to his growing chain of grocery stores, on January 1, 2010, Danny Marks bought a grocery store of a small competitor for $520,000. An appraiser, hired to assess the acquired assets’ value, determined that the land, building, and equipment had market values of $200,000,
What is the difference between liquidity analysis and solvency analysis?
Why is the debt service coverage ratio a better measure of solvency than the times interest earned ratio?
Straight-Line and Units-of-Production Methods Assume that Sample Company purchased factory equipment on January 1, 2010, for $60,000. The equipment has an estimated life of five years and an estimated residual value of $6,000. Sample’s accountant is considering whether to use the straight-line or
A friend tells you that the best way to assess solvency is by comparing total debt to total assets. Another friend says that solvency is measured by comparing total debt to total stockholders’ equity. Which friend is correct?
Accelerated Depreciation Koffman’s Warehouse purchased a forklift on January 1, 2010, for $6,000. The forklift is expected to last for five years and have a residual value of $600. Koffman’s uses the double-declining-balance method for depreciation.Required1. Calculate the depreciation expense,
A company is in the process of negotiating with a bank for an additional loan. Why will the bank be interested in the company’s debt service coverage ratio?
What is the rationale for deducting dividends when computing the ratio of cash flow from operations to capital expenditures?
Change in Estimate Assume that Bloomer Company purchased a new machine on January 1, 2010, for $80,000. The machine has an estimated useful life of nine years and a residual value of $8,000. Bloomer has chosen to use the straight-line method of depreciation. On January 1, 2012, Bloomer discovered
The rate of return on assets ratio is computed by dividing net income and interest expense, net of tax, by average total assets. Why is the numerator net income and interest expense, net of tax, rather than just net income?
Asset Disposal Assume that Gonzalez Company purchased an asset on January 1, 2008, for $60,000. The asset had an estimated life of six years and an estimated residual value of $6,000. The company used the straight-line method to depreciate the asset. On July 1, 2010, the asset was sold for
A company has a return on assets of 14% and a return on common stockholders’ equity of 11%. The president of the company has asked you to explain the reason for this difference. What causes the difference? How is the concept of financial leverage involved?
Asset Disposal Refer to Exercise 8-6. Assume that Gonzalez Company sold the asset on July 1, 2010, and received $15,000 cash and a note for an additional $15,000.Required1. Identify and analyze the effect of the transaction for depreciation for 2010. Identify and analyze the effect of the sale of
Amortization of Intangibles For each of the following intangible assets, indicate the amount of amortization expense that should be recorded for the year 2010 and the amount of accumulated amortization on the balance sheet as of December 31, 2010.
Impact of Transactions Involving Operating Assets on Statement of Cash Flows From the following list, identify each item as operating (O), investing (I), financing (F), or not separately reported on the statement of cash flows (N). _______ Purchase of land _______ Proceeds from sale of land _______
Impact of Transactions Involving Intangible Assets on Statement of Cash Flows From the following list, identify each item as operating (O), investing (I), financing (F), or not separately reported on the statement of cash flows (N). _______ Cost incurred to acquire copyright _______ Proceeds from
Capital versus Revenue Expenditures On January 1, 2008, Jose Company purchased a building for $200,000 and a delivery truck for $20,000. The following expenditures have been incurred during 2010:• The building was painted at a cost of $5,000.• To prevent leaking, new windows were installed in
Capitalization of Interest and Depreciation During 2010, Mercator Company borrowed $80,000 from a local bank. In addition, Mercator used $120,000 of cash to construct a new corporate office building. Based on average accumulated expenditures, the amount of interest capitalized during 2010 was
Research and Development and Patents Erin Company incurred the following costs during 2010 and 2011:a. Research and development costing $20,000 was conducted on a new product to sell in future years. A product was successfully developed, and a patent for it was granted during 2010. Erin is unsure
Lump-Sum Purchase of Assets and Subsequent Events Carter Development Company purchased, for cash, a large tract of land that was immediately platted and deeded into the following smaller sections: Section 1, retail development with highway frontage Section 2, multifamily apartment development
Depreciation as a Tax Shield The term tax shield refers to the amount of income tax saved by deducting depreciation for income tax purposes. Assume that Supreme Company is considering the purchase of an asset as of January 1, 2010. The cost of the asset with a five-year life and zero residual value
Book versus Tax Depreciation Griffith Delivery Service purchased a delivery truck for $33,600. The truck has an estimated useful life of six years and no salvage value. For purposes of preparing financial statements, Griffith is planning to use straight-line depreciation. For tax purposes, Griffith
Depreciation and Cash Flow O’hare Company’s only asset as of January 1, 2010, was a limousine. During 2010, only the following three transactions occurred:Services of $100,000 were provided on account.All accounts receivable were collected.Depreciation on the limousine was $15,000.Required1.
Reconstruct Net Book Values Using Statement of Cash Flows Centralia Stores Inc. had property, plant, and equipment, net of accumulated depreciation, of $4,459,000 and intangible assets, net of accumulated amortization, of $673,000 at December 31, 2010. The company’s 2010 statement of cash flows,
Cost of Assets, Subsequent Book Values, and Balance Sheet Presentation The following events took place at Pete’s Painting Company during 2010:a. On January 1, Pete bought a used truck for $14,000. He added a tool chest and side racks for ladders for $4,800. The truck is expected to last four
Cost of Assets and the Effect on Depreciation Early in its first year of business, Toner Company, a fitness and training center, purchased new workout equipment. The acquisition included the following costs:Purchase price .......$150,000Tax .............15,000Transportation ..........4,000Setup*
Capital Expenditures, Depreciation, and Disposal Merton Company purchased a building on January 1, 2009, at a cost of $364,000. Merton estimated that its life would be 25 years and its residual value would be $14,000.On January 1, 2010, the company made several expenditures related to the building.
Amortization of Intangible, Revision of Rate During 2005, Reynosa Inc.’s research and development department developed a new manufacturing process. Research and development costs were $85,000. The process was patented on October 1, 2005. Legal costs to acquire the patent were $11,900. Reynosa
Purchase and Disposal of Operating Asset and Effects on Statement of Cash Flows On January 1, 2010, Castlewood Company purchased machinery for its production line for $104,000. Using an estimated useful life of eight years and a residual value of $8,000, the annual straight-line depreciation of the
Amortization of Intangibles and Effects on Statement of Cash Flows Tableleaf Inc. purchased a patent a number of years ago. The patent is being amortized on a straight-line basis over its estimated useful life. The company€™s comparative balance sheets as of December 31, 2010 and 2009,
Lump-Sum Purchase of Assets and Subsequent Events Dixon Manufacturing purchased, for cash, three large pieces of equipment. Based on recent sales of similar equipment, the fair market values are as follows: Piece 1 $200,000 Piece 2 $200,000 Piece 3 $440,000 Required1. What value is assigned to each
Depreciation as a Tax Shield The term tax shield refers to the amount of income tax saved by deducting depreciation for income tax purposes. Assume that Rummy Company is considering the purchase of an asset as of January 1, 2010. The cost of the asset with a five-year life and zero residual value
Book versus T ax Depreciation Payton Delivery Service purchased a delivery truck for $28,200. The truck will have a useful life of six years and zero salvage value. For the purposes of preparing financial statements, Payton is planning to use straight-line depreciation. For tax purposes, Payton
Amortization and Cash Flow Book Company’s only asset as of January 1, 2010, was a copyright. During 2010, only the following three transactions occurred: Royalties earned from copyright use, $500,000 in cash Cash paid for advertising and salaries, $62,500 Amortization, $50,000 Required1. What
Reconstruct Net Book Values Using Statement of Cash Flows E-Gen Enterprises Inc. had property, plant, and equipment, net of accumulated depreciation, of $1,555,000 and intangible assets, net of accumulated amortization, of $34,000 at December 31, 2010. The company’s 2010 statement of cash flows,
Cost of Assets, Subsequent Book Values, and Balance Sheet Presentation The following events took place at Tasty-Toppins Inc., a pizza shop that specializes in home delivery, during 2010: a. January 1, purchased a truck for $16,000 and added a cab and an oven at a cost of $10,900. The truck is
Cost of Assets and the Effect on Depreciation Early in its first year of business, Key Inc., a locksmith and security consultant, purchased new equipment. The acquisition included the following costs: Purchase price ...........$168,000 Tax ....................16,500 Transportation ............4,400
Capital Expenditures, Depreciation, and Disposal Wagner Company purchased a retail shopping center on January 1, 2009, at a cost of $612,000. Wagner estimated that its life would be 25 years and its residual value would be $12,000. On January 1, 2010, the company made several expenditures related
Amortization of Intangible, Revision of Rate During 2005, Maciel Inc.’s research and development department developed a new manufacturing process. Research and development costs were $350,000. The process was patented on October 1, 2005. Legal costs to acquire the patent were $23,800. Maciel
Purchase and Disposal of Operating Asset and Effects on Statement of Cash Flows On January 1, 2010, Mansfield Inc. purchased a medium-sized delivery truck for $45,000. Using an estimated useful life of five years and a residual value of $5,000, the annual straight-line depreciation of the trucks
Amortization of Intangibles and Effects on Statement of Cash Flows Quickster Inc. acquired a patent a number of years ago. The patent is being amortized on a straight-line basis over its estimated useful life. The company€™s comparative balance sheets as of December 31, 2010 and 2009,
Refer to the financial statements and notes for General Mills included at the back of the book. Required1. What items does the company list in the Property and Equipment category?2. What method is used to depreciate the operating assets?3. What is the estimated useful life of the operating
Comparing Two Companies in the Same Industry: General Mills and Kellogg’s Refer to the financial information for General Mills and Kellogg’s included at the back of the book. Required1. Compare the list of property, plant, and equipment for General Mills to the list on the Kellogg’s balance
Comparing Companies Assume that you are a financial analyst attempting to compare the financial results of two companies. The 2010 income statement of Straight Company is as follows:Straight Company depreciates all operating assets using the straight-line method for tax purposes and for the annual
Depreciation Alternatives Medsupply Inc. produces supplies used in hospitals and nursing homes. Its sales, production, and costs to produce are expected to remain constant over the next five years. The corporate income tax rate is expected to increase over the next three years. The current rate,
Valuing Assets Denver Company recently hired Terry Davis as an accountant. He was given responsibility for all accounting functions related to fixed asset accounting. Tammy Sharp, Terry’s boss, asked him to review all transactions involving the current year’s acquisition of fixed assets and to
Depreciation Estimates Langsom’s Mfg. is planning for a new project. Usually, Langsom’s depreciates long-term equipment for ten years. The equipment for this project is specialized and will have no further use at the end of the project in three years. The manager of the project wants to
The following income statement, statement of cash flows, and additional information are available for PEK Company:Additional information:a. Beginning inventory and purchases for the one product the company sells are as follows:b. During the year, the company sold 250,000 units at $5 each.c. PEK
What is meant by the “quality” of a company’s earnings? Explain why the price/earnings ratio for a company may indicate the quality of earnings.
Some ratios are more useful for management, whereas others are better suited to the needs of outsiders, such as stockholders and bankers. What is an example of a ratio that is primarily suited to management use? What ratio is more suited to use by outsiders?
The needs of service-oriented companies in analyzing financial statements differ from those of product-oriented companies. Why is this true? Give an example of a ratio that is meaningless to a service business.
What is the reason for reporting discontinued operations and extraordinary items in a separate section of an income statement?
A supplier is thinking of extending credit to a company but decides not to because the company’s current ratio is only 0.50. Do you agree with the supplier’s decision? What other factors need to be considered in drawing any conclusions about a company’s liquidity?
Fill in the blanks for each of the following statements.A comparison of financial statement items within a single period is called ______ analysis.A comparison of financial statement items over a period of time is called ______ analysis.
Assume that your boss has asked you to prepare common-size financial statements. All accounts on the balance sheet should be stated as a percentage of which number? All accounts on the income statement should be stated as a percentage of which number?
For each of the following ratios, fill in the missing numerator. Ratio Current: Current Liabilities Acid-Test: Current Liabilities Accounts Receivable Turnover: Average Accounts Receivable Inventory Turnover: Average Inventory
Fill in the blank with the name of the ratio that would be used for each of the following situations.Ratio Measures the ability of the company to__________ Meet its interest and principal payments__________ Finance long-term asset acquisitions with cash from operations__________ Meet its
For each of the following ratios, indicate what adjustment must be made to net income in the numerator and whether the adjustment is an addition to (A) or a deduction from (D) net income.Ratio Adjustment to Net Income in Numerator (A) or (D)Return on assets __________Return on
Fill in the blank to indicate the line item that would appear on the income statement for each of the following events.Item on Income Statement Event____________________ Disposed of a segment of the business____________________ Incurred a loss from an event that was unusual and infrequently
The following account balances are taken from the records of the Faraway Travel Agency:Faraway extends credit terms requiring full payment in 60 days, with no discount for early payment.Required1. Compute Faraway€™s accounts receivable turnover ratio for 2010 and 2009.2. Compute the
The following account balances are taken from the records of Lewis Inc., a wholesaler of fresh fruits and vegetables:Required1. Compute Lewis€™s inventory turnover ratio for 2010 and 2009.2. Compute the number of days€™ sales in inventory for 2010 and 2009. Assume 360 days in a
The following information was obtained from the 2008 and 2007 financial statements of Coca-Cola Company and Subsidiaries and PepsiCo Inc. and Subsidiaries. (Yearends for PepsiCo are December 27, 2008, and December 29, 2007.) Assume all sales are on credit for both companies.Required1. Using the
The following information was summarized from the balance sheets of the Coca-Cola Company and Subsidiaries at December 31, 2008, and PepsiCo Inc. and Subsidiaries at December 27, 2008:Required1. Using the information provided, compute the following for each company at the end of 2008:a. Current
The following information was summarized from the balance sheets of McDonald€™s Corporation at December 31, 2008, and Wendy€™s/Arby€™s Group, Inc., at December 28, 2008.Required1. Using the information provided, compute the following for each company at year-end:a.
The following information was obtained from the comparative financial statements included in IBM€™s 2008 annual report. (All amounts are in millions of dollars.)Required1. Using the information provided, compute the following for 2008 and 2007:a. Debt-to-equity ratio (at each year-end)b.
The following information is available from the balance sheets at the ends of the two most recent years and the income statement for the most recent year of Impact Company:Other Informationa. Short-term notes payable represents a 12-month loan that matured in November 2010. Interest of 12% was paid
Carnival Corporation & plc is one of the largest cruise companies in the world with such well-known brands as Carnival Cruise Lines, Holland America Line, and Princess Cruises. For the year ended November 30, 2008, the company reported net income of $2,330 million. Total stockholders’ equity on
The following selected data are taken from the financial statements of Evergreen Company:Sales revenue .............. $ 650,000Cost of goods sold ............ 400,000Gross profit .............. $ 250,000Selling and administrative expense ..... 100,000Operating income ............ $
A company€™s return on assets is a function of its ability to turn over its investment (asset turnover) and earn a profit on each dollar of sales (return on sales). For each of the following independent cases, determine the missing amounts. (Note: Assume in each case that the company has
The Stockholders’ Equity section of the balance sheet for Cooperstown Corp. at the end of 2010 appears as follows:8%, $100 par, cumulative preferred stock, 200,000 sharesauthorized, 50,000 shares issued and outstanding $ 5,000,000Additional paid-in capital on preferred 2,500,000Common
The Stockholders€™ Equity section of the balance sheet for Lahey Construction Company at the end of 2010 is as follows:9%, $10 par, cumulative preferred stock, 500,000 shares authorized,200,000 shares issued and outstanding $ 2,000,000Additional paid-in capital on preferred
Comparative balance sheets for Farinet Company for the past two years are as follows:Required1. Using the format in Example 13-4, prepare common-size comparative balance sheets for the two years for Farinet Company.2. What observations can you make about changes in the relative composition of
Income statements for Mariners Corp. for the past two years are as follows:Required1. Using the format in Example 13-5, prepare common-size comparative income statements for the two years for Mariners Corp.2. What observations can you make about the common-size statements? List at least four

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