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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
Conduct a vertical analysis of the income statement for Hahn Automotive Warehouse in Exhibit 4-4. Discuss Hahn’s profitability (or lack thereof).. LOP95
Describe the nature of a big bath reported in the income statement. How would a big bath affect reported income in later years? What is the likely effect of a big bath on a firm’s stock price in the year that the losses are reported?. LOP95
The chapter states that “accounting income does not strictly measure changes in wealth.”Provide two examples of changes in wealth that would not be reported currently in the income statement. In each case, evaluate whether reporting these changes would improve the usefulness of the income
The ratios discussed in this chapter include return on assets, return on shareholders’equity, and times interest earned. In each case, a different measure of income is used. Identify and discuss those differences. Explain why income is measured differently in each of these ratio calculations..
Provide two examples of ratios that link the income statement and the balance sheet. In each case, explain why it is useful to relate the items that appear in the numerator and the denominator of the ratio.. LOP95
Distinguish between vertical analysis and trend analysis of the income statement. Describe two ways of implementing a trend analysis.. LOP95
Discuss several reasons why a firm’s net income percentage might change over time. Discuss how financial statements help explain the reasons for changes in the net income percentage over time?. LOP95
Identify three reasons why a firm’s gross profit (gross margin) percentage might change over time.. LOP95
Describe the construction of a common-size income statement. Why is the selection of the base (the number selected as the 100% figure) so important? Discuss how common-size statements are used in a vertical analysis of the income statement.. LOP95
Discuss the meaning of a “restructuring charge” and explain why you believe that such charges should (or should not) be reported as extraordinary items in the income statement. How does the concept of sustainability affect how extraordinary items are reported on the income statement?. LOP95
Under what circumstances might an income statement report a tax benefit?. LOP95
Explain why GAAP requires that income taxes be allocated to each major section of the income statement.. LOP95
Define the accounting principle of conservatism. Why would a manager or owner prefer conservative profits? When would a manager or owner prefer that income or profit not be measured conservatively?. LOP95
Discuss the differences between profits and profitability. In what context might they be used interchangeably? When must they be kept separate?. LOP95
Discuss the differences between revenues and profits. Where do each appear on the income statement? Why is it important to keep these two separate?. LOP95
Why are extraordinary items reported separately in the income statement? Identify an event that would be classified by one firm as an ordinary item and by another firm as an extraordinary item? Discuss.
Income statements are often used in order to provide a historical measure of a firm’s performance, and are also used as a basis for predicting future profitability. How are income statements useful for both purposes? Discuss.. LOP95
Determine how the matching principle would affect recognition of the following items: (a) cost of inventory sold, (b) depreciation expense of production equipment, and (c) expenditures for new product development.. LOP95
Discuss the purpose of the matching principle, and explain the three ways in which this principle is implemented.. LOP95
Explain the two criteria that must be met for a firm to recognize revenue in its income statement. Discuss how these criteria might be applied to revenue recognition by (a) a fast-food restaurant and (b) a home appliance merchandiser.. LOP95
Identify and discuss the kinds of information that investors in a firm’s debt and equity securities may seek when reading the income statement. What decisions will usually be of interest to such investors?. LOP95
Identify and discuss several decisions that managers make based on information from the income statement. Include a discussion of the basic purpose and objectives of an income statement.. LOP95
Distinguish between a single-step and a multiple-step income statement. Why is a multiple-step format usually more informative to the reader?. LOP95
Explain why interest expense is not considered to be an operating expense by most firms. Identify several types of businesses where interest expense might be reported as an operating expense?. LOP95
Why do most companies disclose the cost of goods sold as a separate item on the income statement? How might this item differ for merchandising firms versus manufacturing firms? Why might some firms not want to disclose this item?. LOP95
Often the first item on a firm’s income statement is labeled “Net sales” or “Sales revenue.” Discuss the measuring of these terms. Why do you think this is displayed so prominently on the income statement? Why are managers concerned with determining when the earnings process is
In deciding which items to disclose on the income statement, managers are guided by the materiality principle. Explain how this principle would affect a decision about whether to disclose a firm’s research expenses separately.. LOP95
Explain why a firm might elect to report its annual income using a fiscal year-end that doesn’t end on December 31. LOP95
Describe the differences between revenues and gains. Also distinguish between expenses and losses. Explain why these items are usually disclosed separately on income statements. LOP95
Describe the effects that reported earnings have on managers’ wealth and, consequently, on their accounting policy decisions. LOP95
Analyze income statement information using various ratios. LOP95
Interpret the components of the income statement. LOP95
Explain when to recognize expenses. LOP95
Explain when to recognize revenues. LOP95
Explain when to recognize revenues. p-635
Explain when to recognize expenses. p-635
Interpret the components of the income statement. p-635
Analyze income statement information using various ratios. p-635
Describe the effects that reported earnings have on managers’ wealth and, consequently, on their accounting policy decisions. p-635
Describe the differences between revenues and gains. Also distinguish between expenses and losses. Explain why these items are usually disclosed separately on income statements. p-635
Explain why a firm might elect to report its annual income using a fiscal year-end that doesn’t end on December
p-635
In deciding which items to disclose on the income statement, managers are guided by the materiality principle. Explain how this principle would affect a decision about whether to disclose a firm’s research expenses separately. p-635
Often the first item on a firm’s income statement is labeled “Net sales” or “Sales revenue.” Discuss the measuring of these terms. Why do you think this is displayed so prominently on the income statement? Why are managers concerned with determining when the earnings process is
Why do most companies disclose the cost of goods sold as a separate item on the income statement? How might this item differ for merchandising firms versus manufacturing firms? Why might some firms not want to disclose this item? p-635
Explain why interest expense is not considered to be an operating expense by most firms. Identify several types of businesses where interest expense might be reported as an operating expense? p-635
Distinguish between a single-step and a multiple-step income statement. Why is a multiple-step format usually more informative to the reader? p-635
Identify and discuss several decisions that managers make based on information from the income statement. Include a discussion of the basic purpose and objectives of an income statement. p-635
Identify and discuss the kinds of information that investors in a firm’s debt and equity securities may seek when reading the income statement. What decisions will usually be of interest to such investors? p-635
Explain the two criteria that must be met for a firm to recognize revenue in its income statement. Discuss how these criteria might be applied to revenue recognition by (a) a fast-food restaurant and (b) a home appliance merchandiser. p-635
Discuss the purpose of the matching principle, and explain the three ways in which this principle is implemented. p-635
Determine how the matching principle would affect recognition of the following items: (a) cost of inventory sold, (b) depreciation expense of production equipment, and (c) expenditures for new product development. p-635
Income statements are often used in order to provide a historical measure of a firm’s performance, and are also used as a basis for predicting future profitability. How are income statements useful for both purposes? Discuss. p-635
Why are extraordinary items reported separately in the income statement? Identify an event that would be classified by one firm as an ordinary item and by another firm as an extraordinary item? Discuss. p-635
Discuss the differences between revenues and profits. Where do each appear on the income statement? Why is it important to keep these two separate? p-635
Discuss the differences between profits and profitability. In what context might they be used interchangeably? When must they be kept separate? p-635
Define the accounting principle of conservatism. Why would a manager or owner prefer conservative profits? When would a manager or owner prefer that income or profit not be measured conservatively?p-635
Explain why GAAP requires that income taxes be allocated to each major section of the income statement. p-635
Under what circumstances might an income statement report a tax benefit? p-635
Discuss the meaning of a “restructuring charge” and explain why you believe that such charges should (or should not) be reported as extraordinary items in the income statement. How does the concept of sustainability affect how extraordinary items are reported on the income statement? p-635
Describe the construction of a common-size income statement. Why is the selection of the base (the number selected as the 100% figure) so important? Discuss how common-size statements are used in a vertical analysis of the income statement. p-635
Identify three reasons why a firm’s gross profit (gross margin) percentage might change over time. p-635
Discuss several reasons why a firm’s net income percentage might change over time. Discuss how financial statements help explain the reasons for changes in the net income percentage over time?p-635
Distinguish between vertical analysis and trend analysis of the income statement. Describe two ways of implementing a trend analysis. p-635
Provide two examples of ratios that link the income statement and the balance sheet. In each case, explain why it is useful to relate the items that appear in the numerator and the denominator of the ratio. p-635
The ratios discussed in this chapter include return on assets, return on shareholders’equity, and times interest earned. In each case, a different measure of income is used. Identify and discuss those differences. Explain why income is measured differently in each of these ratio calculations.
The chapter states that “accounting income does not strictly measure changes in wealth.”Provide two examples of changes in wealth that would not be reported currently in the income statement. In each case, evaluate whether reporting these changes would improve the usefulness of the income
Describe the nature of a big bath reported in the income statement. How would a big bath affect reported income in later years? What is the likely effect of a big bath on a firm’s stock price in the year that the losses are reported? p-635
Conduct a vertical analysis of the income statement for Hahn Automotive Warehouse in Exhibit 4-4. Discuss Hahn’s profitability (or lack thereof). p-635
For each numbered item, indicate (by letter) where in the income statement it belongs.a. Revenuese. Other Income and Expensesb. Cost of Goods Soldf. Separate Line Item, Net of Taxc. Selling Expenses After Income from Continuingd. General and Administrative Operations Expenses g. Not on the Income
Commissions expense _____
Gain on sale of land _____
Dividends declared and paid _____
Prepaid rent _____
Depreciation expense for office equipment _____
Interest expense _____
Tornado loss (business located in Kansas)_____
Merchandise inventory _____
Income tax payable _____
Loss on discontinued operations p-635
Woodway Company’s annual report contained the following data (dollars in millions) on its income statement Interest expense $ 2,489 Investment income 11,218 Other income 9,033 Depreciation 1,257 Revenues 591,762 Other expenses 8,482 Cost of sales 482,355 Operating expenses 98,576 Income taxes 522
The Woodway Company included the following note in its 2000 annual report:In June 2000, Woodway Company and its principle subsidiaries filed for protection under Chapter 11 of the United States Bankruptcy Code. Woodway recorded a provision for possible impairment of $24 million at December 31,
James Hardie Industries Ltd. is an Australian company specializing in building materials. It also has several plants in the USA specializing in producing fibrecement roofing materials. It reported the following financial results on its 1998 income statement:Requireda. Calculate adjusted income by
Sort the following account titles according to whether they would appear on the income statement or the balance sheet:
Answer each of the following independent questions:a. The return on equity for the Hammond Corporation for the year ended December 31, 1999, is 9%. The owners’ equity balances on December 31, 1998 and 1999 were $180,000 and $200,000, respectively. What is the net income for 1999?b. The Beachfront
The following data were provided by Bluebird Company for calendar year 1999:Sales $350,000 Gross margin percentage 45%Net income percentage 8%Income tax percentage 25%
Spinner Sewing Corporation was incorporated on January 1, 2000. Three investors each invested $150,000 in exchange for $150,000 of common stock of the corporation. The following transactions took place during 2000:
Purchased merchandise inventory on account, $200,000.
Rent paid on January 2 for a two-year period, $48,000.
Borrowed $100,000 on March 31 at a 10% annual interest rate for one year.
Sold goods at retail, $300,000; half for cash, half on account. The cost of goods sold was $135,000.
Paid $120,000 on outstanding bills owed to inventory suppliers.
Received $80,000 from receivables customers.
Incurred operating expenses of $36,000, of which $14,000 was paid in cash and the balance on account.Requireda. Record the above transactions, including the initial investment, in the accounting equation. Set up separate account columns for assets, liabilities, and shareholders’ equity.b. Record
Expired portion of prepaid rent
Accrued interest expense
Accrued income tax. Assume 20% tax rate.c. Prepare a multiple-step income statement for the year ended December 31, 2000.d. Calculate:
Gross profit percentage
Operating income percentage
Net income percentagee. Calculate:
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