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financial reporting and analysis

Financial Accounting Reporting And Analysis 6th Edition Earl K. Stice, James Stice, Michael Diamond, James D. Stice - Solutions

Appreciate the impact of pension and non-pension postretirement benefit liabilities on reported financial position and operating results. LO68
Know the difference between defined contribution and defined benefit pension plans. LO68
Understand how leases impact the measurement of financial position and operating performance. LO68
Distinguish between leases that are ordinary rentals, and those that are in substance a purchase of assets. LO68
Waco Rubber Co. disclosed the following items in its 1999 financial statements:1999 1998 Current assets Deferred income tax benefit $1,894,550 $4,139,205 Current liabilities Deferred income taxes payable — 236,543 Requireda. Discuss the nature of each of these deferred tax items. How should an
Sigma Designs’ statement of operations is summarized below (dollars in thousands):1995 1994 1993 Net sales $43,700 $ 34,989 $27,058 Costs and expenses:Cost of sales 36,980 27,538 23,045 Restructuring charges (517) 13,654 0 Sales and marketing 9,022 9,448 7,476 Research and development 4,349
The following information was reported by Pfizer, Inc., in its 1997 Financial Report:(Dollars in millions)Income before income taxes $3,088 Provision (expense) for income tax 865 Income taxes paid currently 856 Deferred tax liabilities related to depreciating assets:December 31,1996 253 December
Tyler Corporation’s statement of operations is summarized below (dollars in thousands):2000 1999 1998 Net sales $357,850 $282,403 $286,206 Costs and expenses:Cost of sales 256,195 221,024 223,826 Selling, general, and administrative expense 103,402 57,972 55,667 Interest expense, net 3,820 487
Gottlieb Enterprises is concerned about its balance sheet disclosures of deferred tax liabilities. Gottlieb’s preliminary balance sheet at the end of 2000 is summarized as:Current assets $ 400,000 Current liabilities $ 250,000 Fixed assets, net 1,400,000 Long-term debt 500,000 Shareholders’
Rosty Co. began operations in 2000. The firm recognized $30 million of depreciation expense on its income statement and reported $50 million as depreciation on its 2000 tax return. The firm’s income was taxed at 30%, and pre-tax income was $25 million.Required Determine the following:a. Tax
During 2000, Wilbur Mills, Inc., recognized an additional $12 million of depreciation expense on its income statement and reported $16 million as depreciation on its tax return. During 2000, the statutory income tax rate was reduced from 40 to 35%, effective at the beginning of 2000. Pre-tax income
Wilbur Mills, Inc., began operations in 1999. The firm recognized $12 million of depreciation expense on its income statement and reported $20 million as depreciation on its tax return for 1999. The 1999 income statement shows pre-tax income of $10 million with an income tax rate of 40%.Required
Selected information from the income statements and tax returns of Buchanan Trading Co. are provided below for 1999 and 2000, the firm’s first two years of operations (dollars in millions):Selected Income Statement Items 1999 2000 Income before depreciation and taxes $1000 $1100 Depreciation
Refer to Reebok’s financial statements in Appendix E. Review the balance sheet to determine how and where deferred taxes were reported.Requireda. Read Notes 1 and 14. Identify and discuss any unusual terms. Also trace disclosures of deferred taxes in the notes to corresponding disclosures in the
Refer to Wendy’s financial statements in Appendix D. Review the balance sheet to determine how and where deferred taxes were reported.Requireda. Read Note 6, “Income Taxes.” Identify and discuss any unusual terms. Also trace disclosures of deferred taxes in the notes to corresponding
Many corporations retire part of their long-term debt prematurely (prior to maturity). Two such corporations are Kodak and Scotts Co. For each company, locate the 10-K filing for fiscal 1994 from the EDGAR archives (www.sec.gov./edaux/searches.htm).Required For each company determine:a. Cash
Retrieve the most recent 10-K filings for Kmart, Wal-Mart, Gillette, and Mem Co.from the EDGAR archives (www.sec.gov/edaux/searches.htm). Examine the long-term debt section of the Notes to the Financial Statements:Requireda. Calculate the ratio of long-term debt to total assets for each company for
Tall Tree Timber issued $10 million in bonds with a nominal interest rate of 8%, at a time when the market rate for similar bonds was 4%. The bonds have a fouryear maturity and pay interest semiannually.Requireda. Calculate the premium or discount on the issue date. Indicate how the bonds would be
Tall Tree Timber, Inc., issued $10 million in long-term bonds that contained the following restrictive covenants:• Current ratio must exceed 2.0.• Return on assets must exceed 2%.• Net income ratio must exceed 2%.• Debt composition ratio must be less than 60%.
ALZA Corporation develops, manufactures, and markets therapeutic products that incorporate drugs into advanced dosage forms designed to provide controlled, predetermined rates of drug release for extended time periods. ALZA may be best known for its Nicoderm nicotine transdermal system. It reported
Using a library or other information sources, obtain financial statements or summaries of financial information for one set of three companies in the same industry:1. IBM StorageTek Compaq 2. UAL (United Airlines) American Airlines (AMR) Delta Air Lines 3. General Motors Ford Motor Company Chrysler
The following balance sheets for Eli Lilly and Company and Pfizer, Inc., were extracted from the SEC’s EDGAR database:December 31 1997 1996 --------------------------------------------------------------------------------------Assets Current Assets Cash and cash
Hansel, Inc., is an international company specializing in debt collection with a range of complementary credit management services. It is headquartered in Amsterdam and aims to maintain and enhance its position as Europe’s leading force in debt collection. Its 1999 financial statements list bank
Maggie Markel’s Moving Emporium needs to acquire additional capital in order to purchase new trucks and warehouse storage space, and to conduct a national advertising campaign. Maggie has heard of bonds and thinks that her friends and relatives would buy them if they were especially attractive.
Compare and contrast the 1995 composition ratios for Exabyte and Pfizer (see the preceding two assignments). Which company seems to be the most conservative in managing its liabilities? Why? Which company seems to have the higher default risk? Why? Does the relative difference in size of these two
Exabyte Corporation reported the following subtotals in its 1994 annual report, in thousands of dollars, for the years ending December 31, 1994 and January 1, 1994 (note that these dates still represent two consecutive fiscal years):December 31 January 1 1994 1994 Total current liabilities $ 45,621
Pfizer, Inc. reported these subtotals in its 1997 annual report (dollars in millions):1997 1996 1995 Total current liabilities $ 5,305 $ 5,640 $ 5,187 Total liabilities 7,403 7,713 7,223 Total shareholders’ equity 7,933 6,954 5,506 Total liabilities and equity $15,336 $14,667 $12,729 Requireda.
Contrast the debt management strategies of Oncogene Science and Sigma Designs (see data in the preceding two assignments). Which company seems to be the most conservative in managing its liabilities? Why? Is there anything unusual about changes in their stockholders’ equity accounts that might
Sigma Designs repaid much of its long-term debt between January 31, 1994 and January 31, 1995. Its liabilities and stockholders’equity at January 31 were as follows (dollars in thousands):1995 1994 Total current liabilities $13,564 $ 8,622 Total long-term liabilities 1,102 1,518 Total
Oncogene Science, Inc., reported no long-term debt in its 1994 financial statements. The equity section of its balance sheet can be summarized as:1994 1993 Total current liabilities $ 2,979,555 $ 2,460,060 Total long-term liabilities 405,031 109,875 Total stockholders’ equity 38,656,314
Sally Shrimpton’s pottery business was quite successful and needed to expand further. However, she wanted to avoid paying periodic interest payments to the bank. She saw an ad for discounted notes and decided they were preferable, compared to an interest-bearing note. Show the effects of each of
Dagwood’s issued $800,000 of 10-year, 8% bonds at a time when the market demanded a yield of 4% (on similar bonds). The bonds were issued on January 1, requiring interest payments on each subsequent June 30 and December 31 until maturity.Requireda. Compute the issue price and determine the amount
Zany Sam’s issued $600,000 of six-year, 8% bonds at a time when the market demanded a yield of 12% (on similar bonds). The bonds were issued on January 1, requiring interest payments on each subsequent June 30 and December 31 until maturity.Requireda. Compute the issue price and determine the
Use the balance sheet equation to analyze the effects of the following transactions involving noncurrent liabilities. Set up separate accounts for each liability and use a separate column for cash.1. Sally Shrimpton wanted to expand her pottery business, but had a negative cash flow. She borrowed
Use the balance sheet equation to analyze the effects of the following transactions involving noncurrent liabilities. Set up separate columns as necessary for each liability. Use a separate column for cash.1. A firm signed a long-term note for $5 million for three years at an interest rate of 8%
Assume that a firm has bonds outstanding with a principal amount of $100 million, a carrying value of $105 million, and a current market value of $112 million. What gain or loss would the firm report if the bonds were to be retired at current market values (ignoring transactions costs)? Do you
Use the balance sheet equation to analyze the financial statement effects of the following transactions involving long-term bonds. Assume semiannual compounding. Set up separate columns as necessary and use a separate cash column.a. Issue $20,000,000 of five-year bonds carrying a coupon interest
Use the balance sheet equation to analyze the financial statement effects of the following transactions involving long-term bonds. Assume semiannual compounding. Set up separate columns as necessary. Use a separate cash column.a. Issue $10,000,000 of five-year bonds carrying a coupon interest rate
Use the balance sheet equation to analyze the effects of issuing the following long-term bonds. Assume a market interest rate of 8% and semiannual compounding. Set up separate columns as necessary. Use a separate cash column.a. $10,000,000 bonds for one year at a coupon interest rate of 10%.b.
Use the balance sheet equation to analyze the effects of issuing the following long-term bonds. Assume a market interest rate of 12% and semiannual compounding. Set up separate columns as necessary.a. $10,000,000 bonds for one year at a coupon interest rate of 10%.b. $20,000,000 bonds for three
Use the balance sheet equation to analyze the effects of issuing the following long-term bonds. Assume semiannual compounding and a coupon rate of 8%. Set up separate columns as necessary. Use a separate cash column.a. $10,000,000 bonds for one year at a market interest rate of 8%.b. $20,000,000
Calculate the financial statement effects at the date of issue for each of the following discounted notes (also, refer to Chapter 8, “Accounts Payable, Commitments, Contingencies, and Risks”):a. $10,000,000 note for one year at a 10% market interest rate.b. $20,000,000 note for three years at a
On June 1, 1999, the Brewer Company signed a $450,000, four-year note, discounted at 16% (compounded rate) payable to First Bank. The note matures May 30, 2003.Required Use the balance sheet equation to record the following transactions:a. Cash proceeds received by Brewer Company.b. Interest for
Refer to Reebok’s financial statements in Appendix E. Review the balance sheet to determine how and when long-term liabilities are reported.Requireda. Read Note 8 “Long Term Debt.”Identify and discuss any unusual terms. Trace numerical disclosures of long-term liabilities in the notes to
Refer to Wendy’s financial statements in Appendix D. Review the balance sheet to determine how and where long-term liabilities are reported.Requireda. Read Note 3 “Term Debt.” Identify and discuss any unusual terms. Trace numerical disclosures of long-term liabilities in the notes to
Write a short memo describing the key features of long-term bonds. Include at least the following terms in your memo: par or face value, collateral, restrictive covenants, coupon rate, maturity date, and semiannual compounding.P-698
Consider the following notes from the annual report of Jocko Enterprises. Interpret any unusual terms. How are lines of credit and long-term debt used by Jocko’s managers? Explain how these notes indicate restrictions on managerial decisions. Alternatively, how do such liabilities create
Nuclear Indentures, a firm specializing in providing debt financing to high-tech firms, provided the following information concerning restrictive covenants in its notes to the financial statements:All long-term obligations contain restrictive covenants including, among others, a requirement to
Yellow-Jacket Company, which manufactures imaging and health products for commercial and medical customers, included the following information in a note describing its long-term debt:Long-term debt (partial)Issue: (Dollars in Millions)10.05% notes due 1999 $ 350 77/8% notes due 2001 135 8.55% notes
Cabot Cove’s annual report contained a note on long-term debt. A partial list of the long-term debt follows, exclusive of current maturities (dollars in thousands):2000 1999 Notes due 2001, 9.875% $150,000 $150,000 Notes due 2002-2022, 8.07% 105,000 105,000 Overseas Private Investment Corp.due
If a firm has noncurrent liabilities with floating (variable) interest rates, what will happen to a valuation of the firm’s liabilities when the market rate of interest increases? Decreases? Why is there more consistency in this case than in the case of fixed interest rates?P-698
Current financial accounting standards do not permit the discounting of deferred tax obligations, even in cases where the deferred obligations will not be paid for many years. Evaluate this practice. At minimum, address the following points:a. Is it consistent to discount some long-term debt (such
Assume U.S. nominal or maximum income tax rates are increased from 35 to 40%. How would this increase affect a firm that presently reports a deferred tax liability of $700 million? Specifically, how would the firm’s net income be affected in the period when the rate increase is enacted, and how
Comment on the following observation: “Mammoth Company is not paying its fair share of the national budget.The firm reported income before taxes of $4 billion in 1994, and paid only $40 million in income taxes.That is only 1%of its income. Even the middle class pay more tax than that. I suppose
Evaluate the following proposal: “If an asset is fully depreciated for income tax purposes, it is less valuable than an asset that has a substantial undepreciated cost for tax purposes.This implies that the valuation of assets on the balance sheet should be adjusted as their tax bases are
Provide a reply to the following: “If a firm does not earn taxable income in future periods, then it will not pay taxes.For this reason, it makes no sense to report deferred tax liabilities. These amounts will only be payable if the firm earns future taxable income, and that is an event that has
Discuss the meaning of a deferred income tax liability. At minimum, address the following points:a. Why does a deferral exist?b. Do these obligations satisfy the definition of liabilities that was provided in Chapter 3, “The Balance Sheet”?c. How (if at all) would the carrying value of these
Whether a firm uses straight-line or accelerated depreciation in accounting for a long-lived depreciable asset, the total amount of depreciation expense over the entire service life of the asset will be the same. If so, why is the choice among these depreciation methods for financial statement
Explain the nature of temporary differences between book and tax measurements of assets and liabilities. Why is this concept important for financial reporting of income tax expense? Why is it important for reporting a firm’s liabilities?P-698
Suppose the U.S. Congress decides to stimulate business investment in new plant and equipment by providing a reduction in income taxes equal to 10% of the costs of eligible new investments. If a firm acquires $100 million in new plant and equipment and consequently receives a $10 million dollar
Most firms keep at least two “sets of books,”in the sense that a given transaction can be interpreted differently for “book”(financial reporting) and “tax”(income tax calculations) purposes. Is this ethical? Discuss.P-698
Discuss the purposes of income measurement for financial reporting. Then discuss why income taxes are included in a firm’s financial statements as an expense and as a liability.
Assume that a firm has several long-term bonds outstanding at different interest rates. Explain the relationship between bond coupon rates and current market interest rates that would cause the bonds to sell at par, below par, and above par value.P-698
Discuss why lenders include various restrictive covenants in a lending agreement. Provide several examples of restrictive covenants.P-698
Identify several reasons why managers may prefer to issue long-term bonds to a number of investors, rather than borrow directly from a few financial institutions.P-698
Evaluate the following statement: “When a firm issues bonds at a discount, in effect the firm is paying the lender some of the bond interest expense in advance.The difference between the bond principal and the amount paid to the issuer should be reported on the balance sheet as prepaid interest
If a long-term bond is issued at a premium, both the carrying value of the bond and the recognized interest expense will decrease in each successive period during which the bond is outstanding. Explain why this occurs.P-698
P-698If a long-term bond is issued at a discount, both the carrying value of the bond and the recognized interest expense will increase in each successive period during which the bond is outstanding. Explain why this occurs.
Describe the major differences between a bond discount and a bond premium.Discuss the distinctions between coupon (or nominal) interest rates and market interest rates at the bond issuance date.P-698
Under what circumstances would managers prefer fixed interest rates and when might they prefer to have variable interest rates on their noncurrent liabilities?Discuss several choices that managers might make in these circumstances. What are the financial statement consequences of these choices?
If a firm has noncurrent liabilities with a fixed interest rate, what will happen to the firm’s liabilities when market interest rates increase? Decrease? Although interest rates on a firm’s financial instruments may be fixed, actual current market interest rates can vary on a daily basis. Why
Identify some of the reasons why a firm may prefer to have both current and some noncurrent liabilities.P-698
Define long-term or noncurrent liabilities. What are the differences between current and noncurrent liabilities?P-698
Interpret financial statement measurements of income tax expense and deferred income tax liability?P-698
Understand why the tax basis and the financial reporting basis of assets and liabilities may differ.P-698
Appreciate why income is measured differently for income tax and financial reporting purposes.P-698
Determine periodic interest expense and the valuation of noncurrent obligations in financial reports.P-698
Comprehend features of long-term borrowing contracts, such as notes and bonds payable. P-698
Recognize the types of noncurrent obligations that are reported by business firms.P-698
Sigma Designs is a high-tech software development company specializing in imaging and multimedia computer applications. Sigma Designs’ statement of cash flows is presented below:Sigma Designs, Inc.Statement of Cash Flows For the Years ended January 31, 1995 and 1994(Dollars in thousands)1995 1994
Two firms provided the following information at the end of 1999 (dollars in millions):Adam Co. Zachary Co.Total assets $ 105 $ 210 Total liabilities $ 70 $ 120 Shareholders’ equity $ 35 $ 90 Net income during 1999 $ 15 $ 25 Shares outstanding during 1999 1 million 1.2 million Market price per
Exabyte Corporation reported the following information in its 1994 balance sheet (dollars in thousands and shares in thousands as well):1994 1993 Preferred stock: $0.001 par value; — —14,000 shares authorized, no shares issued and outstanding Common stock: $0.001 par value, 50,000 shares
Pierre’s, headquartered in Paris, reports the following note to its 1999 financial statements:Share Capital: The share capital comprises fully paid shares with a nominal value of 1 FRF [French franc]. Shares at the beginning of the year and changes in the number of shares are as follows:1999 1998
Vicorp Restaurants, Inc., headquartered in Denver, operates or franchises 408 midscale restaurants, primarily under the names Bakers Square and Village Inn.Its 1994 balance sheet included the following shareholders’ equity section (in thousands):1994 1993 1992 Common stock: $0.05 par value,
Gap, Inc. provided the following notes (excerpts) in its 1997 financial statements:Note F: Employee Benefit And Incentive Stock Compensation Plans Retirement Plans The company has a qualified defined contribution retirement plan, called GapShare, which is available to employees who meet certain age
Crown Resources, Inc., an international producer of cardboard packaging, reports the following information in its 1999 financial statements:Stock issued under stock option and employee savings plans: 1,415,711 shares Resulting changes in shareholders’ equity:Paid-in capital increase $23,600,000
A footnote to the 1999 financial statements of General Dynamite, Inc., a major producer of explosive weapons, armored vehicles, and other weapons systems, includes the following information:Stock split: On March 4, 2000, the company’s board of directors authorized a two-for-one stock split in the
Refer to Reebok’s financial statements in Appendix E. Review the financial statements to determine how and where shareholders’ equity has been reported.Requireda. Calculate the financial leverage ratio for each year. Interpret your results.b. Based on the notes, is there any other possible way
Refer to Reebok’s financial statements in Appendix E. Review the balance sheet to determine how and where shareholders’ equity has been reported.Requireda. Read the Consolidated Statement of Stockholders’ Equity. Identify and discuss any unusual terms. Trace any numerical disclosures of
Refer to Wendy’s financial statements in Appendix D. Review the financial statements to determine how and where shareholders’ equity has been reported.Requireda. Calculate Wendy’s financial leverage ratio for each year. Discuss the results.b. Based on the notes, is there any other way to
Refer to Wendy’s financial statements in Appendix D. Review the balance sheet to determine how and where shareholders’ equity has been reported.Requireda. Read the Consolidated Statement of Shareholders’ Equity. Identify and discuss any unusual terms.b. Determine whether Wendy’s has any
Late in 1999, Natalie Attired, a recent MBA graduate, signed a four-year employment contract with Generic Co. that provides her with an annual salary of$90,000. In addition, at the start of each year, 2000 through 2003, Natalie received options to purchase 3,000 shares of Generic’s common stock
Why might a firm prefer to issue shares with no par value (zero stated value)? OL89
Consider Sigma Designs’ balance sheets for 1995 and 1994 (dollars in thousands). Sigma Designs is a high-tech software development company specializing in imaging and multimedia computer applications.Assets Cash and equivalents $ 881 $ 1,808 Marketable securities 7,349 3,514 Accounts receivable,
BF Group, a British company, reported the following components of shareholders’ equity in its 1999 balance sheet (the relative size of each account balance is also shown):• Called- up share capital (large balance)• Share premium account (small balance)• Capital reserve (large balance)•
The Nothing But Cheese (NBC) Company is a small but successful familyowned business that specializes in family photography in wholesome circumstances. The company conducts still and video photography of individuals and amilies in settings that can best be described as “heartwarming.”NBC’s
Scan the recent financial press, such as Business Week, Forbes, or the Wall Street Journal, to identify a company that has recently changed its capital structure. Read one or two recent articles on this company and write a short summary of the restructuring, addressed as a memo to your instructor.
Choose one of the companies whose financial statements appear in Appendixes D or E. Obtain the company’s most recent financial statement, or get its balance sheet on the Internet. Find one or two recent articles that describe the company’s changes in its capital structure.Requireda. Compare the
Choose an industry. Identify the three largest firms in that industry. Obtain their most recent financial statements or summaries thereof. Obtain one or two recent articles on this industry or on the three selected firms.Requireda. Discuss the similarities and differences in the three
Pfizer, Inc. provided the following information in the notes to its 1997 financial statements:12 Common Stock We effected a two-for-one split of our common stock in the form of a 100 percent stock dividend in both 1997 and 1995. Both splits followed votes by shareholders to increase the number of

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