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business
financial reporting and analysis
Financial Reporting And Analysis Using Financial Accounting Information 9th Edition Charles H Gibson, Patricia A Frishkoff - Solutions
The Aerco Company acquired equipment in exchange for $50,000 in common stock. Should this trans- action be on the statement of cash flows?
Pickerton started the year with $50,000 in accounts receivable. The firm ended the year with $20,000 in accounts receivable. How did this decrease influence cash from operations?
Depreciation is often considered a major source of funds. Do you agree? Explain.
A member of the Board of Directors is puzzled by the fact that the firm has had a very profitable year but does not have enough cash to pay its bills on time. Explain to the director how a firm can be profitable, yet not have enough cash to pay its bills and dividends.
A firm owed accounts payable of $150,000 at the beginning of the year and $250,000 at the end of the year. What influence will the $100,000 increase have on cash from operations?
For the current year, a firm reported net income from operations of $20,000 on its income statement and an increase of $30,000 in cash from operations on the statement of cash flows. Explain some likely reasons for the greater increase in cash from operations than net income from operations.
Fully depreciated equipment costing $60,000 was discarded, with no salvage value. What effect would this have on the statement of cash flows?
Would a write-off of uncollectible accounts against allowance for doubtful accounts be disclosed on a cash flow statement? Explain.
Why is it important to disclose certain noncash investing and financing transactions, such as exchanging common stock for land?
What is the purpose of the statement of cash flows?
What is the meaning of the term cash in the statement of cash flows?
Describe these two methods. Depreciation expense, amortization of patents, and amortization of bond discount are examples of items that are added to net income when using the indirect method of presenting cash flows from operating ac- tivities. Amortization of premium on bonds and a reduction in
There are two principal methods of presenting cash flow from operating activities-the direct method and the indirect method.
Indicate the three techniques that may be used to complete the steps in developing the statement of cash flows.
The land account may be used only to explain a use of cash, but not a source of cash. Comment.
Using the descriptions of assets, liabilities, and stockholders' equity, summarize the changes to these ac- counts for cash inflows and changes to these accounts for cash outflows.
Into what three categories are cash flows segregated on the statement of cash flows?
If a firm presents an income statement and a balance sheet, why is it necessary that a statement of cash flows also be presented?
Explain how outstanding stock appreciation rights could increase reported income in a particular year.
Why can a relatively small number of stock appreciation rights prove to be a material drain on future earn- ings and cash of a company?
Why should an investor read the footnote concerning stock options? How might stock options affect prof- itability?
Why is book value often meaningless? What improvements to financial statements would make it more meaningful?
Why would an investor ever buy stock in a firm with a low dividend yield?
Why does a firm with a substan- tial growth record and/or substantial growth prospects often have a low dividend payout ratio?
Why is the price/earnings ratio considered a gauge of future earning power? Why does a relatively new firm often have a low dividend payout ratio?
Given a set level of earnings before interest and tax, how will a rise in interest rates affect the degree of fi- nancial leverage?
Define financial leverage. What is its effect on earnings? When is the use of financial leverage advanta- geous and disadvantageous?
Why do many firms try to maintain a stable percentage of earnings retained?
Retroactive recognition is given to stock dividends and stock splits on common stock when computing earnings per share. Why?
Preferred dividends decreased this year because some preferred stock was retired. How would this influ- ence the earnings per share computation this year?
The denominator of the earnings per share computation includes the weighted average number of com- mon shares outstanding.Why use the weighted average instead of the year-end common shares out- standing?
Dividends on preferred stock total $5,000 for the current year. How would these dividends influence earn- ings per share?
Keller & Fink, a partnership, engages in the wholesale fish market. How would this company disclose earnings per share?
Assume that the corporation is a nonpublic company. Comment on the requirement for this firm to dis- close earnings per share.
Give a simple definition of earnings per share.
Why can pro forma financial information be misleading?
Why may comprehensive income fluctuate substantially more than net income?
Speculate on why accounting standards do not mandate full financial statements in interim reports.
Since interim reports are not audited, they are not meaningful. Comment.
G. Herrich Company and Thomas, Inc. are department stores. For the current year, they reported a net income after tax of $400,000 and $600,000, respectively. Is Thomas, Inc. a more profitable company than G. Herrich Company? Discuss.
What is return on investment? What are some of the types of measures for return on investment? Why is the following ratio preferred?Net Income Before Minority Share of Earnings and Nonrecurring Items +[(Interest Expense) X (1 - Tax Rate)]Average (Long-Term Debt + Equity)Why is the interest
How is return on investment different from return on total equity? How does return on total equity dif- fer from return on common equity?
Explain how return on assets could decline, given an increase in net profit margin.
Why are equity earnings usually greater than cash flow generated from the investment? How can these equity earnings distort profitability analysis?
How does operating income differ from net income? How do operating assets differ from total assets?What is the advantage in removing nonoperating items from the DuPont analysis?
What is DuPont analysis, and how does it aid in financial analysis?
The ratio return on assets has net income in the numerator and total assets in the denominator. Explain how each part of the ratio could cause return on assets to fall.
Would you expect the profit margin in a quality jewelry store to differ from that of a grocery store? Com- ment.
If profits as a percent of sales decline, what can be said about expenses?
What is the advantage of segregating extraordinary items in the income statement?
Profits might be compared to sales, assets, or stockholders' equity. Why might all three bases be used? Will trends in these ratios always move in the same direction?
Comment on the significance of disclosing the fair value of financial instruments.
Comment on the significance of disclosing off-balance-sheet risk of accounting loss.
Speculate on why the disclosure of the concentrations of credit risk is potentially important to the users of financial reports.
Indicate why comparing firms for postretirement benefits other than pensions can be difficult.
There is a chance that a company may be in a position to have large sums transferred from the pension fund to the company. Comment.
When examining financial statements, a footnote that describes contingencies should be reviewed closely for possible significant liabilities that are not disclosed on the face of the balance sheet. Comment.
When a firm guarantees a bank loan for a joint venture that it participates in and the joint venture is handled as an investment, then the overall potential debt position will not be obvious from the face of the bal- ance sheet. Comment.
Comment on what this tentatively indicates. Comment on the implications of relying on a greater proportion of short-term debt in relation to long- term debt.
A firm has a high current debt/net worth ratio in relation to prior years, competitors, and the industry.
Explain why deferred taxes that are disclosed as long-term liabilities may not result in actual cash outlays in the future.
Consider the accounts of bonds payable and reserve for rebuilding furnaces. Explain how one of these ac- counts could be considered a firm liability and the other could be considered a soft liability.
Consider the debt ratio. Explain a position for including short-term liabilities in the debt ratio. Explain a position for excluding short-term liabilities from the debt ratio. Which of these approaches would be more conservative?
What portion of net worth can the federal government require a company to use to pay for pension obli- gations?
Operating leases are not reflected on the balance sheet, but they are reflected on the income statement in the rent expense. Comment on why an interest expense figure that relates to long-term operating leases should be considered when determining a fixed charge coverage.
Indicate the risk to a company if it withdraws from a multiemployer pension plan or if the multiemployer pension plan is terminated.
Why is the vesting provision an important provision of a pension plan? How has the Employee Retire- ment Income Security Act influenced vesting periods?
Indicate the status of pension liabilities under the Employee Retirement Income Security Act.
Capital leases that have not been capitalized will decrease the times interest earned ratio. Comment.
A firm with substantial leased assets that have not been capitalized may be overstating its long-term debt- paying ability. Explain.
How should lessees account for operating leases? Capital leases? Include both income statement and bal- ance sheet accounts.
Why is it important to compare long-term debt ratios of a given firm with industry averages?
Explain how the debt/equity ratio indicates the same relative long-term debt-paying ability as does the debt ratio, only in a different form.
For a given firm, would you expect the debt ratio to be as high as the debt/equity ratio? Explain.
One of the ratios used to indicate long-term debt-paying ability compares total liabilities to total assets. What is the intent of this ratio? How precise is this ratio in achieving its intent?
Is it feasible to get a precise measurement of the funds that could be available from long-term assets to pay long-term debts? Discuss.
Why is it difficult to determine the value of assets?
Discuss how noncash charges for depreciation, depletion, and amortization can be used to obtain a short- run view of times interest earned.
Why should capitalized interest be added to interest expense when computing times interest earned?
Would you expect a telephone company to have a high debt ratio? Discuss.
Would you expect an auto manufacturer to finance a relatively high proportion of its long-term funds from debt? Discuss.
What type of times interest earned ratio would be desirable? What type would not be desirable?
List the two approaches to examining a firm's long-term debt-paying ability. Discuss why each of these approaches gives an important view of a firm's ability to carry debt.
Is profitability important to a firm's long-term debt-paying ability? Discuss.
The cost of inventory at the close of the calendar year of the first year of operation is $40,000, using LIFO inventory, resulting in a profit before tax of $100,000. If the FIFO inventory would have been $50,000, what would the reported profit before tax have been? If the average cost method would
Why does LIFO result in a very unrealistic ending inventory figure in a period of rising prices?
Indicate the objective of the sales to working capital ratio.
List three situations in which the liquidity position of the firm may not be as good as that indicated by the liquidity ratios.
List three situations in which the liquidity position of the firm may be better than that indicated by the liquidity ratios.
A relatively low sales to working capital ratio is a tentative indication of an efficient use of working capi- tal. Comment. A relatively high sales to working capital ratio is a tentative indication that the firm is un- dercapitalized. Comment.
Indicate the single most important factor that motivates a company to select LIFO.
Which inventory costing method results in the highest balance sheet amount for inventory? (Assume in- flationary conditions.)
Before computing the acid-test ratio, compute the accounts receivable turnover. Comment.
Before computing the current ratio, the accounts receivable turnover and the inventory turnover should be computed. Why?
Why could a current asset such as "net assets of business held for sale" distort a firm's liquidity, in terms of working capital or the current ratio?
When a firm faces an inflationary condition and the LIFO inventory method is based on a periodic basis, purchases late in the year can have a substantial influence on profits. Comment.
Does the allowance method for bad debts or the direct write-off method result in the fairest presentation of receivables on the balance sheet and the fairest matching of expenses against revenue?
Is the profitability of the entity considered to be of major importance in determining the short-term debt- paying ability? Discuss.
Would a firm with a relatively long operating cycle tend to charge a higher markup on its inventory cost than a firm with a short operating cycle? Discuss.
Discuss why some firms have longer natural operating cycles than other firms.
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