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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
Locate the most recent set of financial statements for the regional telecommunications companies listed below. You may use either the 10-K available at EDGAR (www.sec.gov/edaux/searches.htm) or the annual report available at the company’s homepage. The annual report is usually located in the
Becky’s Courier Service is a one-person, one-bicycle operation. Becky’s only capital equipment is a highly specialized, custom-designed mountain bike that can be used throughout the urban jungle.Requireda. Assume that Becky’s mountain bike broke, what accounting recognition should be given to
Sigma Designs is a diversified graphic systems corporation. Its statement of cash flows is summarized as follows:Sigma Designs, Inc.Statement of Cash Flows For the Years Ended January 31, 1995 and 1994 1995 1994(Dollars in thousands)Cash Flows from Operating Activities Net loss $(8,773)
Assume that you are the manager of a small firm that has an intangible asset valued at $10 million. You believe that the firm’s earnings prospects are quite favorable during the next five years. You also learn that you have a choice in selecting the amortization period for this intangible, which
Refer to Wendy’s financial statements in Appendix D. Review the financial statements to determine how and where any disposals of fixed assets were reported.Also identify how and where any gains or losses on disposals of fixed assets were reported.Requireda. Were the gains or losses on disposals
Refer to Wendy’s financial statements in Appendix D. Review the balance sheet to determine how and where fixed assets and the associated accumulated depreciation were reported.Requireda. Read all notes concerning fixed assets. Identify and discuss any unusual terms. Trace numerical disclosures of
Refer to Reebok’s financial statements in Appendix E. Review the balance sheet to determine how and where fixed assets and the associated accumulated depreciation were reported.Requireda. Read Notes 1 and 4. Identify and discuss any unusual terms. Trace any numerical disclosures of fixed asset
Bishop Corporation had the following intangible assets on December 31, 1999:1. A patent was acquired from another company on January 1, 1999, for$25,000. The patent had been registered with the U.S. Patent Office on January 1, 1993. Assume that the legal life is the useful life.2. On April 2, 1999,
The following financial statement information is from BRN, Inc. BRN is a global company specializing in high-tech components for the automotive, space, and computer industries.Property, plant, and equipment on the basis of cost (in millions)1999 1998 Land $ 104 $ 104 Buildings 1,527 1,461 Machinery
Johns Inc. purchased a canvas stretcher at a cost of $16,000 at the beginning of 1999. Johns estimated that the canvas stretcher would last four years and have no residual value. Johns decided to use straight-line depreciation. Three years later, at the end of 2001, Johns sold the canvas stretcher
Warhol Enterprises purchased a spray painter at the beginning of 1999 at a cost of $150,000. Warhol estimated that the spray painter would last five years and have a residual value of $30,000. The company decided to use straight-line depreciation. Two years later, at the end of 2000, Warhol sold
Swen and Jerry are twins who each own an ice cream company. Four years ago, they each purchased an ice cream mixer. Each mixer was identical in all respects, including the cost of $35,000. Each had an estimated useful life of five years and an estimated residual value of $5,000.The only difference
A firm purchased a computer-controlled drill press for $480,000 at the beginning of 2000. The drill press has an expected useful life of 10 years and zero residual value. Assume that the firm begins the year with the following balance sheet accounts, ignoring depreciation on the existing plant and
A firm purchased computer-aided drafting and machining (CAD-CAM) equipment at the beginning of 1998 for $420,000. The machine has an expected useful life of six years and a $38,000 residual value. Assume that the firm begins the year (before purchasing the CAD-CAM equipment) with the following
Discuss the concept of recognizing a gain or loss at the time an asset is sold. Is such a gain or loss a function of good management, or is it a function of improper estimates of residual values? Why do you think that such gains or losses should be shown on the income statement? How do they affect
A firm acquired a $26,000 computer, including software, with an estimated useful life of four years and an estimated residual value of $6,000. The firm’s financial vice president (CFO) is trying to choose between using straight-line depreciation and double-declining-balance depreciation. It is
Inco Limited, headquartered in Toronto, is one of the world’s premier mining and metals companies. Its 1994 annual report contains the following note:Depreciation and Depletion Depreciation is calculated using the straight-line method and, for the nickel operations in Indonesia, the
Beaubox, one of Europe’s leading packaging manufacturers, is headquartered in Paris. Its 1997 annual report contains the following note.Research and Development Expenditure Such expenditure is charged to the profit and loss account in the year in which it is incurred. Tangible assets related to
Boudreaux Group is an international biochemical and pharmaceutical firm, headquartered in Switzerland. Its 1999 annual report includes the following(Swiss francs in millions):1999 1998 1997 Property, plant, and equipment, net FF 7,010 FF 6,319 FF 5,815 Intangible assets 1,895 2,050 2,200 Other
Spelling Entertainment, which produces films and videos and other entertainment media, lists the following items in its 1994 annual report (dollars in thousands):1994 1993 1992 1991 Property, plant, and equipment net $ 16,161 $ 4,770 $ 4,834 $ 6,331 Other assets 19,678 4,562 6,512 13,879 Net assets
Pfizzel Inc. reported the following information in its property, plant, and equipment note to the 1999 financial statements (dollars in millions):1999 1998 1997 Land $ 85.2 $ 81.8 $ 71.7 Buildings 1,218.6 1,093.8 953.9 Machinery and equipment 2,108.4 1,897.8 1,706.9 Furniture, fixtures, and other
Asset write-ups are permitted in Australia. That is, when managers of an Australian firm believe that an asset’s market value has increased, they are permitted to increase the asset’s reported value on the balance sheet. Defend or refute asset write-ups.
Defend the statement that write-downs are an essential part of the conservative nature of accounting. Defend the notion that write-downs should be permitted whenever the firm or its accountants believe that an asset’s value has been permanently impaired.
Discuss the concept of write-downs, that is, writing down the value of noncurrent assets on the firm’s balance sheet. Why do write-downs provide managers with flexibility to manipulate earnings?
Estimating an asset’s residual value incorporates significant uncertainties into the financial statements. Discuss the proposition that residual values should be ignored when an asset is depreciated.
Answer the following questions:a. How would land owned by a manufacturer be shown on its balance sheet?b. Would land owned by a real estate investment company perhaps have a different purpose than land occupied by a factory? Contrast the balance sheet presentation of land as a fixed asset and as
Draw a freehand graph with dollars on the vertical axis and time (years) on the horizontal axis, showing the pattern of depreciation expenses that would be expected under each of the following depreciation methods:a. Straight-line depreciationb. Double-declining-balance depreciationc.
A firm purchased a computer-controlled drill press at the beginning of 2000 for$360,000. The drill press has an expected useful life of 10 years and a $40,000 residual value. Assume that the firm begins the year prior to the purchase of the drill press with the following balance sheet totals:Plant
Recognize the types of current liabilities reported on the balance sheets of most business firms. LOP9
How do restructuring costs originate? Should costs associated with restructuring activities that will be undertaken in future years be reported as liabilities? Why? LOP9
Various current liabilities reported in the balance sheet require that managers make estimates and assumptions concerning future events. Identify several such liabilities. If some of these estimates and assumptions are subsequently found to be incorrect, how should this be reflected in the
Indicate which, if any, of the following items would be reported as a current liability:a. Advance payments from customers for services to be performed at future dates.b. Agreements signed with suppliers to purchase inventory at future dates.c. Agreements signed with customers to deliver completed
Explain your agreement or disagreement with the inclusion of the following items among a firm’s current liabilities:a. Estimated future expenditures to provide warranty repairs on items sold prior to the balance sheet date.b. Estimated future expenditures for legal costs to be incurred in
Explain why each of the following items should (or should not) be reported as liabilities in the financial statements:a. Estimated future repair and maintenance costs for equipment owned by the firm at the balance sheet date.b. Estimated employee retraining costs related to a plant closing that
A firm has sold one million units of a product that has a one-year warranty. Management estimates that about 5% of the units will require repairs, and the costs per repair will average about $12. What dollar amount of liability would you recognize in this case? LOP9
To reduce insurance costs, a firm insures its sales automobile fleet with a $1,000 deductible per vehicle (in other words, the insurance company only reimburses losses in excess of $1,000 per accident). The firm insures 800 vehicles and estimates that about 50 of these will incur substantial
At the balance sheet date, an airline’s passengers have accumulated 20 million frequent flyer miles, which could be exchanged for about 1,000 “free”domestic round-trip tickets. Similar tickets are sold at an average price of $600, and the company incurs an incremental cost of about $200 for
Deltoid Health Club has received $2.5 million in prepaid annual membership fees from its members and estimates that its cost of providing services to these customers over the coming year will be $1.6 million. How much of a liability should Deltoid report in its financial statements? LOP9
Manuel’s Transmission Shoppe, Inc., is comparing prices from two potential suppliers for a similar component part. The first supplier quotes a price of $100, with payment in cash on delivery. The second supplier quotes a price of $105, with full payment due in 60 days. The second supplier also
Bob’s Steakhouse can either pay its suppliers within 30 days at a 1% discount or pay the full amount due in 60 days. The firm can also borrow from banks by signing short-term notes payable at an interest rate of 10% per year. Pat Forebode, the firm’s treasurer, advises that the firm pay all its
Explain why the matching concept that guides the measurement of periodic net income often entails the reporting of accrued liabilities on the balance sheet. LOP9
Discuss the similarities and differences between notes payable and accounts payable. LOP9
Understand the types of business transactions and events that create current liabilities. LOP9
Appreciate how liability reporting often depends on estimates and judgments. LOP9
Be alert to a variety of other potential liabilities and risks that are not presently reported in the balance sheet.? LOP9
Define a liability. What is the difference between liabilities and other equities? LOP9
If liabilities represent amounts owed to others, why is judgment needed in determining the amount of some liabilities? Identify several cases where the accountant must use judgment because the amount of the liability cannot be readily determined from a bill or other document. LOP9
a. Identify three different types of liabilities.b. Indicate how they are created, and how they are then reduced or eliminated.What does it mean to reduce a liability?c. How else might you describe a reduction of a liability?d. What generally happens when a liability “matures” or reaches its
Why do firms want to have liabilities? Could a firm operate without liabilities?Who would be advantaged or disadvantaged if there were no opportunities for a firm to incur liabilities? Under what circumstances might a firm be unable to obtain credit and incur a liability? LOP9
a. Discuss the differences between current and long-term liabilities.b. Identify three types of each.c. Indicate how such current liabilities reduce a firm’s need for cash.d. Discuss how noncurrent liabilities are used as a source of capital. LOP9
a. Describe how three different types of current liabilities might be established.b. What, or who, restricts the growth of current liabilities?c. How might current liabilities be abused or misused?d. Why are current maturities of long term debt shown as part of current liabilities? LOP9
Describe four separate items that are typically included in the current liability section of the balance sheet. LOP9
Evaluate the following statement: “The success of a firm depends as much on the effective management of its liabilities and shareholders’ equity as it does on the efficient utilization of its assets.” LOP9
Compare and contrast the terms contingencies and commitments. Could a particular firm disclose one and not the other? Why? LOP9
Discuss the fact that many companies disclose many details about contingencies and commitments, but fail, or refuse, to put any dollar valuation on them. LOP9
Use the balance sheet equation to analyze the effects of the following transactions:1. Jill’s Slipper Shop was formed with an original investment of $100,000 in exchange for common stock.2. Jill’s signed a 12-month rental agreement for its retail shop. Jill’s pays a deposit of $2,000, along
What is the long-term effect of not paying employees? What are the possible long-term effects of not paying suppliers? In other words, if Jill’s continues to defer its employees’ salaries and commissions, and if Jill’s fails to pay for its merchandise, what will happen to the shop?
In its first year, Sam’s Subway Emporium engaged in the following transactions.Indicate the effects of each transaction on Sam’s balance sheet by using the balance sheet equation. Total your worksheet at the end of the first year and prepare a simple balance sheet.1. Sam’s was formed with a
The Distraught Novelty Co. reports the following current liabilities in its balance sheet on December 31, 2000:Accounts payable to suppliers $2,500,000 Revenues received in advance 920,000 Income taxes payable 480,000 Warranty obligations 650,000 Total current liabilities $4,550,000 The firm’s
Antic Evenings, a local catering service, had the following transactions during December 2000:1. Purchased decorative paper products on credit for $75,000 to be paid in full in 60 days.2. On December 20, purchased cutlery and chinaware on credit for $120,000, at terms of 2/30, net 90 (a 2% discount
Road Scholars offers a program of study leading to its E.Z. MBA degree. Classes are offered during commuting hours in a leased car traveling from suburban areas to urban business centers. The firm has received $400,000 in tuition payments for classes to be taught during the Fall 1999 and Spring
Tenuous Products provides a two-year warranty for repairs and services of its products. The firm has been operating for four years, and each year’s warranty expense has been estimated at 5% of product sales. A summary of warranty expenses and actual warranty costs is provided below.Product
The following worksheet entries were retrieved from a water-logged worksheet stored in a flooded basement. Identify the transaction to which the worksheet entry refers. Discuss the underlying business reason supporting each transaction.ACCOUNTS PAYABLE, COMMITMENTS, CONTINGENCIES, AND RISKS 339
The annual report of the Jolly Gold Giant, an international food processing and food service firm, included a liability for accrued restructuring costs of $179.3 million. Footnotes contain the following explanation:In 1999, restructuring charges of $88.3 million on a pre-tax basis were reflected in
Refer to the Wendy’s financial statements in Appendix D. Review the balance sheet to determine how and where commitments and contingencies were reported.Requireda. Read Note 10. Identify and discuss any unusual terms. Trace any numerical disclosures of commitments and contingencies in the notes
Refer to Wendy’s financial statements in Appendix D. Review the balance sheet to determine how and where current liabilities are reported.Requireda. Read Note 3. Identify and discuss any unusual terms. Trace any numerical disclosures of current liabilities in this note, or other related notes, to
Set up the following accounts and balances at December 31, 2000, in an accounting equation:Cash $ 5,000,000 Inventory 10,000,000 Warranty obligation 2,250,000 Notes payable 0 Interest payable 0 Common stock 500,000 Retained earnings 12,250,000 Required 1. Show the effects of each of the following
How should the following contingencies be treated in the annual report of Akronite Corporation on December 31, 1997?a. The corporation is presently being sued for patent infringement. The damages are estimated to be $12 million and Akronite’s attorneys feel this will probably be the amount
Choose the best response to the following multiple choice questions:1. All of the following are current liabilities except:a. Unearned revenueb. Accrued liabilitiesc. Prepaid insuranced. Current maturities of long-term debt 2. Jason Company received $5,000 from customers in advance. The company
Use the accounting equation to show the effects of each of the following transactions on the firm’s balance sheet:1. Purchased $250,000 of inventory on account.2. Paid creditors $125,000 on account.3. Purchased $200,000 of inventory on account at a 2% discount.4. Paid creditors the amount due
Use the accounting equation to record the effects of each of the following transactions on the firm’s balance sheet (create separate columns for cash, inventory, and accounts payable):1. Purchased $350,000 of inventory on account, terms 2/10, net 30. The firm records the inventory net of the
Use a balance sheet equation to analyze the effects of the following transactions on Jack’s Shoe Company:1. Jack’s Shoe Company acquired 300 pairs of shoes and is billed $18,000. Jack’s has not yet paid for the shoes.2. Jack’s Shoe Company made a partial payment of $6,000.3. Jack’s Shoe
Use the accounting equation to show the effects of each of the following transactions on the firm’s balance sheet:1. Received subscription orders and cash of $360,000, representing 160,000 magazines.2. Mailed 30,000 magazines (ignore any inventory effects).3. Borrowed $100,000 at 6% annual
Use the accounting equation to analyze the effects of the following transactions on Town Floral, Inc.:1. Acquired 2,000 floral bouquets at a billed cost of $15 per bouquet. Terms of payment are 2/10, n/30. Town Floral records purchases, net of the discount.2. Signed a 120-day note for $15,000. The
Set up column headings as necessary (including a Warranty Payable column) and use the accounting equation to record the effects of each of the following transactions on the firm’s balance sheet:1. Accrued warranties estimated at $1,200,000 on December 31, 2000. (Set up a Warranty Payable
Use the accounting equation to show the effects of each of the following transactions on the firm’s balance sheet:1. Accrued estimated warranties of $3,375,000.2. Paid warranty claims of $1,500,000.3. Designed a new warranty plan that provided “full” coverage or a refund of the purchase price
Jill’s Slipper Shop took out a short-term bank loan of $32,000 to pay for merchandise. This bank loan carried a simple interest rate of 12% per year.Requireda. Use the balance sheet equation to show the effect of this bank loan on Jill’s financial statements.b. Show the effect of using the loan
Maggie’s Millinery Magazine (MMM) is very popular among the jet set, which rely on Maggie’s exotic hats and other fine apparel for every film premiere and Academy Award ceremony. MMM is only available by subscription at an annual rate of $360 for 12 monthly issues. Show the effects of the
MMM has many satisfied subscribers who have now realized their objectives of fame, fortune, and glory. Show the effects of the following transactions on MMM’s balance sheet:1. As a result of its popularity, MMM receives subscription renewals of $36 million, for 1997, at the end of 1996.2. During
Refer to Reebok’s financial statements in Appendix E. Review the balance sheet to determine how and where current liabilities were reported.Requireda. Read Note 6. Identify and discuss any unusual terms. Trace any numerical disclosures of current liabilities in the notes to corresponding
A firm purchased land for $150,000. Broker commissions of $3,000 and other closing costs of $1,800 were paid in acquiring the land. An old building that was on the land was demolished. The demolition costs were $4,500, but some of the demolished building scrap parts were sold for $2,200. In
Discuss two different types of noncurrent assets that may be found on a typical balance sheet.
Discuss three different types of intangible assets, indicating what types of firms might hold such assets.
Why do accountants write off, or reduce, a noncurrent asset? Why might such write-offs be confusing? How could these possibly confusing effects be reduced?How does a “big bath”relate to such write-offs?
Refute the assertion that “depreciation is a source of cash.”
Refute the assertion that “balance sheets reflect ‘true’values (market values) of noncurrent assets.”
When depreciation expense is shown in a firm’s financial statements, how and why is it often shown as a source of cash? How does depreciation expense affect cash flows?
When accumulated depreciation is shown on a balance sheet, how do changes in accumulated depreciation affect cash flows? What events result in changes to accumulated depreciation? Which have an effect on cash flows?
Identify the only transactions involving noncurrent assets that have an effect on cash flows.
Under what circumstances could the sum-of-the-years’-digits depreciation method produce the same pattern of total annual expenses as would the straight-line method?
Discuss the differences between the full cost method and the successful efforts methods when accounting for natural resources. Why might large firms prefer one method and small firms the other?
Discuss the term accumulated depreciation. How does this differ from depreciation expense? Why is accumulated depreciation treated as a contra asset? Why is this often called a “negative”asset?
Explain how to account for the acquisition of these assets.
Describe the procedures for depreciation, amortization, and depletion.
List the factors affecting managers’ selection of a depreciation method.
Determine which postacquisition expenditures should be expensed and which should be capitalized.
Explain the accounting issues associated with asset write-downs and disposals.
How are current assets different from noncurrent assets?
Interpret financial statement disclosures about noncurrent assets.Define the following terms related to non-current assets:a. Depreciation expenseb. Intangiblesc. Amortizationd. Straight-line method versus sum-of-the-years’-digits methode. Wasting assetsf. Depletion Discuss the differences
Current assets, such as inventory, are not depreciated. Why should noncurrent assets be depreciated, amortized, or depleted?
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