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Financial Accounting Information For Decisions 6th Edition Robert w Ingram, Thomas L Albright - Solutions
Rodriguez Company acquired sophisticated production equipment at a cost of $450,000. In addition, the firm paid $7,540 to have the equipment delivered and another $11,435 was spent on installation and testing. The annual cost paid to insure the equipment while used in production is $3,000. The
Clemson Manufacturing Company produces specialty textiles. On January 1, it purchased a new weaving machine at a cost of $600,000. The machine has an expected life of five years and an estimated salvage value of $40,000. The company manager thinks the machine can be used to weave 4.0 million yards
McGuire Batt Company produces a wide line of insulation materials. On January 1, it acquired new production equipment at a cost of $1,200,000. The machine has an expected life of four years and an estimated salvage value of $80,000. The engineering specifications of this new equipment state that it
Sioux City Minerals acquired a copper mine, paying $40,000,000. The mine is expected to be productive for 10 years and yield 500,000 tons of copper ore. At the end of that time, the property will be donated to the state. To produce the ore, the company purchased mining equipment at a cost of
Portia Enterprises manufactures automobiles and occasionally makes small investments in other corporations for long-term purposes. During its 2003 fiscal year, Portia purchased 100,000 common shares (10%) of Leonardo Company for $3,470,000. Also, it purchased 5% of the common stock of Shylock
On January 1, the Cheng Corporation purchased $10,000 of 5%, five-year bonds as a long term investment. Interest is paid annually. The company is not involved in active trading of securities.RequiredUsing the format presented in the chapter, record each of the following transactions.A. Record the
On January 1, Gandini Company purchased $300,000 face value of Battaglia’s 8.4% bonds at a price of $283,439. At this price, the bonds yielded 9% annually. At December 31, Gandini received an interest check on these bonds of $25,200. The market price of these bonds that day was
On August 22, 2004, Burgess Company purchased 20,000 common shares of Radius Measurement, Inc. at a price of $8 per share. Brokerage commissions, taxes, and transfer fees totaled an additional $800. At December 31, 2004, Burgess still owned the securities but the aggregate market value had declined
The accounting staff at Golden Mining Company will soon prepare year-end entries to the accounting system to record the partial consumption of certain long-term assets. Your advice is sought regarding each of the following situations.1. A mining site was acquired 10 years ago at a cost of
On the last day of the fiscal year, the chief financial officer of MultiPlex Industries is reviewing several accounting matters. They are as follows:1. Equipment purchased seven years ago at a cost of $450,000 was sold yesterday as scrap metal at a price of $3,000. It had originally been estimated
Garland Company purchased construction equipment on July 1, 2001, for $800,000. The equipment was expected to have a useful life of five years and a residual value of $50,000. On June 30, 2004, Garland no longer needed the equipment and sold it for $311,000. Garland’s accounting year ends on
Show-Me-the-Money, Inc. is a medium-sized bank. The bank’s stock is owned primarily by residents in the city where the bank operates. During the last decade, the bank lent money for numerous real estate developments. Most of the loans went to developers who constructed office space and expected
On January 1, Schuster Company bought 2,400 of Helio Corporation’s 10,000 outstanding shares of common stock as a long-term investment. The stock was acquired at a cost of $24,000. On December 31, Helio reported net income of $38,000 and paid dividends totaling $6,000. On the same date, the
The Book Wermz expanded its operations in March 2005 by purchasing an existing chain of bookstores. The total cost of the purchase was $5 million. Of this amount, $2.2 million was allocated to the cost of buildings, $1.0 million to the cost of store equipment, and $275,000 to the cost of
1. Which of the following is (are) used to determine how a given asset will be reported on the balance sheet?2. Belly-Acres Land Company made capital expenditures during the current year. At yearend, these expenditures should be reported on thea. Income statement as expenses.b. Balance sheet under
Swenson Company plans to acquire new chemical processing equipment on January 1, the beginning of the company’s fiscal year. The equipment costs $2 million. Swenson can either borrow $2 million from a bank or lease the equipment. Both the bank and the leasing company believe that a 10% interest
Appendix B of this book contains a copy of the 2002 annual report of General Mills, Inc. RequiredReview the annual report and write a short report in which you respond to each of the issues raised below.A. Identify the accounting methods used by the company to account for plant assets, intangible
How do assets create value for our business? Investing decisions affect a company’s profits, risk, and value. Investment decisions that result in fixed costs increase risk and the ability of a company to create higher profits and sales. Managing risk involves selecting the amounts and types of
Why are investing activities critical to the success of a company?
How do investing activities affect a company’s growth?
How do investing choices affect the choices available to a company in the future? Explain.
A friend who is approaching retirement is discussing her investment plan. She tells you that she wants to find a mutual fund that invests in stock of companies with high fixed costs, such as airlines, software developers, and publishers. “The higher fixed costs should make expenses more
The balance sheet and statement of cash flows provide information about a company’s access to and use of cash. What differences would you expect to see in the information related to cash on these statements for a company reporting strong financial performance and a company reporting weak
In reviewing a company’s financial statements you observe that the company is consistently profitable and has consistent positive cash flows from operations and investing activities. Its cash flow from financing activities is consistently negative. What does this suggest to you about the company?
Why do some companies have a very large portion of total assets invested in property, plant, and equipment while other companies have just a small portion of assets invested in this manner?
What useful information can be obtained by comparing a firm’s cost of plant, property, and equipment to the amount of its accumulated depreciation?
Why might a company wishing to increase its asset turnover acquire new assets? Wouldn’t the greater amount of assets merely decrease asset turnover?
How do investing activities affect company value?
How is return on assets related to investing decisions?
Asset turnover is a measure of effectiveness. How can a firm increase its effectiveness?
How is it possible that profits can increase by 40% when sales increase by a much smaller amount?
Why is information about investing activities of interest to creditors?
Malcolm Greenlees is a friend who is planning to be a business manager. In a recent discussion about financial matters, Malcolm made the following statement. “A company’s balance sheet measures the value of a company’s resources. Investors can use this value for pricing the company’s stock
Sanders Company recorded sales revenues of $10 million for the year just ended. It recorded expenses totaling $9 million. Of these expenses, $4 million were expenses that would not have been different if sales revenue had been different. They were fixed expenses.a. Prepare a table showing how much
The Kolby and Kent companies both increased sales by 30% this year when compared with last year’s results. Kolby’s net income increased 40% as a result of the increased sales. Kent’s net income increased 20%. Explain why differences in operating leverage may have resulted in a higher increase
Given below is selected information about two companies.a. Calculate net income for each company.b. What is operating leverage? Is it present in the operations of these two companies? If so, which company uses the greater amount of operating leverage?c. If sales decrease by 10%, which company will
The following information was reported by McDonald’s Corporation in its 2001 annual report.Evaluate McDonald’s Corporation’s investing decisions by computing the ratio of cash flow from operating activities to total assets for 1999 through 2001. Compare the cash flow ratio with
Information is provided below for two companies that produce similar jewelry items for the same market.Compute the asset turnover, profit margin, and return on assets for each company for each of the two years. Compare the performances of the two companies. Look at changes within each company and
Given below is information about four companies.a. Which company generated the greatest profit?b. Which company is the most efficient? Why?c. Which company is the most effective? Why?d. Which company has the greatest totalassets?
Following is information about current and projected sales and expenses for Squiggy Company. The company’s total assets are also given.a. Calculate the percentage changes in net income that would occur under each projection.b. Calculate the percentage changes in return on assets, profit
At a meeting of the top managers in your company, President Anne Thompson points out that stockholders have been pressuring the organization to increase return on assets. She asks for suggestions. Four of your colleagues respond in the following manner:• “Sales, sales, sales. You’ve got to
In a continuation of E12-14, another member of the group comments that to maximize return on assets, both efficiency and effectiveness are necessary. Explain what is meant by “efficiency” and “effectiveness,” how they relate to return on assets, and whether you agree with your colleague’s
Bumblebee Enterprises is considering adding another product line. Below are results from last year and pro forma (expected) results with the addition of the new line. Little change in sales from the current product lines is expected.Analyze the changes in effectiveness, efficiency, and return on
Winger, Inc. is in the business of renting medical equipment for home health care. New government standards for lifts for disabled patients have rendered some equipment obsolete.Winger owns 10 four-year-old machines, each with a cost of $6,000. They have been depreciated using the straight-line
Yarrow Company increased its investment in long-term assets by 20% in the past three years. This investment was financed by rapid increases in cash generated from operating activities. Cash from operating activities also was used to repay about 30% of Yarrow’s long-term debt and to repurchase 10%
Abdullah Company reported the following information on its statement of cash flows.Interest expense for the past three years has been $372, $420, and $514. The company does not pay dividends. What information about the company€™s future prospects is communicated by its investing and
You have graduated with a business degree, and you have worked for three years for a small management consulting firm. Ivan Steeger (1352 Bull Run Road, Milltown, OR 97111) is a client who has been involved with several businesses in the past. He expects to be the major provider of equity capital
Following is a set of pro forma (or projected) income statements for a company. The columns labeled A are projected results for the company if it follows Strategy A. The columns labeled B are projected results for the company if it follows Strategy B.Required Study the information given and discuss
The Book Wermz reported sales for 2005 of $6,230,000. Cost of goods sold was 55% of sales, and operating expenses were $2,155,000. Interest expense was $190,000. Income taxes were 35% of pretax income. Total assets at the end of 2005 were $5,623,000.RequiredUse the information provided to produce
1. As defined in this text, return on assets involves a comparison of total assets witha. Net income.b. Net income adjusted for dividends.c. Net income adjusted for income taxes.d. Net income adjusted for interest expense.2. A high asset turnover indicates that a companya. Buys and sells its
Appendix B of this book contains a copy of the 2002 annual report of General Mills, Inc.RequiredReview the annual report and write a short report in which you cover each of the following:A. What major investing decisions did the company make from 2000 to 2002? Include decisions about disposing of
You are a financial analyst with a major corporation, High Hopes Company. You have been assigned the task of evaluating a potential acquisition candidate, Roll-the-Dice, Inc. Selected accounting information for the two companies is presented on the next page. Information for 2003 and 2004 reports
Employees of the divisions of JX Controls, Inc. receive a bonus of 4% of their salary in any year in which the divisional return on assets is above 10%. Toward the end of 2004, accountants for the fire alarm division projected the following year-end numbers:Sales ...........$1,230,000Cost of goods
How do we account for operating activities? This chapter considered the estimation and reporting of revenues and expenses. A company’s income statement is affected by estimates of sales returns, doubtful accounts, warranty costs, inventory costs, and similar items. Also, it is affected by whether
If the purpose of the income statement is to report the results of operating activities, why is there a section on the statement of cash flows that reports the results of operating activities?
Why is an income statement divided into so many different categories? Couldn’t all the revenues and all the expenses each be totaled and then subtracted from each other to determine net income? Wouldn’t this make accounting easier to learn?
A friend tells you, “I just ignore the income statement when I’m making an investment decision. All I care about is the cash, so that the company can pay me dividends. The balance sheet tells me about the cash the company’s got; the cash flows statement tells me about its changes in cash.
When goods are sold FOB shipping point, the buyer usually pays the freight cost. Does this make sense? Why or why not?
Sales discounts and sales returns are accounted for as reductions of revenue. If they were accounted for as expenses, wouldn’t the effect on net income be the same? Why not just treat sales discounts and sales returns as expenses?
Gross profit results from a company’s transactions with its customers and suppliers. What types of transactions affect gross profit? How does the accounting for timing differences between cash flow and accrual measurements of these transactions affect financial statements?
At a meeting of your manufacturing team, a coworker groans: “We were working so hard to get the income for our bonus this year. Then they got all that raw material inventory in—and even paid for it. We don’t need it yet. Why didn’t they wait until January?” Will the raw materials
On December 28, Hadley Company purchased goods FOB destination at a cost of $38,000. The goods arrived at Hadley’s warehouse and were unloaded on January 5. Hadley’s bookkeeper is unsure whether these goods should be included in merchandise inventory on the December 31 balance sheet. Should
A friend notes that when a company uses an accounting method such as LIFO, FIFO, or weighted-average, it is merely estimating (guessing) about the amount of inventory on hand. Is this true?
Some corporations use FIFO to estimate their inventory costs. Others use LIFO. What issues are important to this decision? What effect can the choice have on a company’s net income and cash flow from operating activities?
When inventory prices are rising, the LIFO method yields lower net income and lower values for ending inventory than does FIFO. The opposite is true when prices are declining. Why is this the case?
GAAP require companies to report inventories on a lower of cost or market basis. What is the purpose of this measurement rule? What effect does it have on a company’s financial statements?
You are aware that GAAP require expenditures for research and development to be charged to expense when incurred. This implies that such expenditures do not provide any benefit to future accounting periods. Do research and development expenditures have future economic benefit? If not, why not? If
You are an investor in the common stock of Malapoosa Company. You notice in the firm’s most recent annual report that net income was $3.75 million but that the net income available for common stockholders was only $3.0 million. Explain the difference between the two amounts.
An acquaintance with an interest in investing says, “Earnings per share is so complicated! I really only want one number—how much the company earned on my investment. But this company has earnings per share on income from continuing operations, on a discontinued segment, and on an extraordinary
At December 31, 2004, the general ledger of Hoffman Electric had the following account balances. All adjusting entries (except for income taxes at 35%) have been made. The company had 10,400 shares of common stock outstanding during the year.Prepare an income statement in goodform.
An excerpt from the income statement from the 2001 annual report of Alcoa, Inc. is provided below.For the year ended December 31, ..............2001(In millions except share amounts)RevenuesSales ..........................$22,859Other income, net
San Miguel Company manufactures specialized industrial equipment. The equipment often is sold under credit terms that provide for payment over a two- or three-year period. A substantial prepayment is required before equipment is manufactured. The purchaser accepts title to the equipment at the time
Goodman Company sold merchandise during its 2004 fiscal year. The total sales price of the merchandise was $30 million. Because of quantity sales discounts, the company billed its customers 29.1 million for the merchandise. Goodman sells goods to retailers who have a right to return the merchandise
For each of the following transactions of Yeats Machinery, indicate in which month or months the related revenue or expense should appear in the monthly income statement, and why. a. In January, the firm receives an order for a $200,000 machine, along with a 30% cash deposit. The machine is
During 2004, Abdulla Construction Company started a two-year construction project having a total contract price of $1,800,000. At December 31, 2004, the firm’s construction engineers estimated that the project was 35% completed. To date, 35% of the budgeted $1,250,000 in costs had been incurred.
Sandoval, Inc. signed a $40 million contract to build a new office building. The company expected that the project would take about two and one-half years. During the first year, the company incurred the following costs:Raw materials .................$4 millionDirect labor ....................6
Boris, Inc. purchased an inventory item for $400 on February 27, 2004, and paid the bill on March 12. On April 4, Boris sold the item for $625; the customer paid in full on May 15. Use the format presented in the chapter to identify how each of these events would affect Boris’s account balances.
The Nifty Threads Company, a popular clothing store, had the following transactions for 2004.1. Nifty Threads purchased $600,000 of clothing from several manufacturers, on credit.2. The company sold clothing on credit at prices totaling $855,000.3. The cost of clothing sold to customers was
Yeltsin Company purchased a truckload of 1,000 small motors for an invoice price of $50 each on January 28. Since the company paid the bill within 10 days, on February 6, it received a 2% discount. It then sold the parts to Hi-Lo Manufacturing for $65 each on March 27; since Hi-Lo paid within 10
Think carefully about each of the following statements. For each one, indicate whether you believe it to be always true, generally true, generally false, or always false. For any item you judge to fall into the last three categories, describe your reasoning.a. Sales discounts are reported on the
Ten transactions are shown on the next page as they were entered into the accounting system. For each, explain the event that caused the entry to bemade.
The following information regarding inventory transactions is available for the month of May.Determine the correct balances at May 31 for Merchandise Inventory and Cost of Goods Sold under each of the following inventory methods:(a) Periodic FIFO,(b) Periodic LIFO, and(c) Weighted-average.
Randolph Company is a retailer that sells appliances to institutions such as schools, universities, and state governments. During the month of January, Randolph Company recorded the following information:Assuming Randolph Company uses a perpetual FIFO inventory system, determine the cost of goods
The Hot Aire Company reported the following items on its income statement for 2004.a. Net operating revenues, $956,000b. Cost of goods sold, $312,000c. Selling and administrative expense, $245,000d. Research and development expenses, $122,000e. Net interest expense, $8,500f. Provision for income
Explain whether each of the following would be expensed on the income statement in 2004 or in some later year, and why.a. Inventory purchased in 2004 but sold in 2005.b. Estimated warranty costs for goods sold in 2004; the warranty servicing will take place in 2005 and 2006.c. Bad debts caused by
Several situations in which the timing of revenue is in doubt are listed below.a. An appliance manufacturer sent out a truckload of dishwashers FOB destination in late January; they arrived February 2 and were paid for in March. Monthly income statements are prepared.b. A magazine publisher sold
The following excerpt is from Unisys Corporation’s 2001 annual report. Revenue Recognition. Revenue from hardware sales is recognized upon shipment and the passage of title..Revenue from software licenses is recognized at the inception of the initial license term and upon execution of an
Georgia Company reported accounts receivable of $16.5 million at the end of its 2004 fiscal year. This amount was net of an allowance for doubtful accounts of $1,800,000. During 2005, Georgia sold $56.5 million of merchandise on credit. It collected $57.9 million from customers. Accounts valued at
The following information is taken from the records of the Carolby Company, a manufacturer of lawn furniture. Indicate whether the cost of each item should be included as part of the finished goods cost or should be treated as an expense. For the items that become part of the cost of finished
Modern Industries manufactures a variety of computer parts and accessories in a rapidly changing technological environment. At year-end 2004, it reported the following comparative information regarding inventories.The 2004 income statement reflected cost of sales of $3,165 million. In the operating
Records of the Genesis Corporation reveal the following information about inventory during the year.The company’s accountant is trying to decide whether to determine Cost of Goods Sold using the perpetual inventory system (calculating Cost of Goods Sold after every sale) or the periodic
Worldwide Corporation reported the following income statement for 2005.Required Answer each of the following questions.A. For 2005, calculate the gross profit on product sales and on service sales. Why are these shown separately?B. What is a €œprovision for restructuring€? What
Pelican Enterprises had the following account balances in its general ledger at June 30, 2004, the end of the company’s fiscal year. All adjusting entries (except for the accrual of income taxes at 30%) had been entered. The company had an average of 900,000 shares of common stock
Ginsberg Company is a recently formed, publicly traded company. At the end of its most recent fiscal year, the company reported the following information.a. Sales revenues were $13,680,000, and 360,000 units were sold. Credit sales were $10,000,000. Uncollectible accounts associated with credit
Goose Hollow Company had the following entries to its account system during a recent week.RequiredStudy each entry and write a short description of the event that occurred to cause theentry.
A partial income statement for Half Moon, Inc. is reported below.In addition, the following disclosure was found in the notes to the financial statements.Note 7: Projected benefit obligation ......$1,500,000Fair value of plan assets ............1,300,000Pension liability ...............$
The Book Wermz purchases books for all of its stores through a central purchasing department. Books are then shipped to different stores for sale. One of the company’s largest selling items is an edition of Webster’s dictionary. A large volume of sales occurs in August and September
How do operations create value for our business? Companies use different strategies to earn profits. Successful use of these strategies results in high return on the company’s investment and a high return for its stockholders. A careful review of a company’s financial statements can provide
Sales at Tulip Manufacturing Company are expected to double during the coming year. The company has unused capacity available and should be able to handle the new business. If a large portion of the company’s costs are fixed, what would you expect to happen to profits during the coming year?
Sales at Borderline Insurance Agency are expected to double during the coming year. The company has been growing in recent years but generally has no trouble hiring more agents or leasing additional equipment when needed. If a large portion of the company’s costs are variable, what would you
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