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financial reporting and analysis

Financial Reporting And Analysis Using Financial Accounting Information 9th Edition Charles H Gibson, Patricia A Frishkoff - Solutions

Discuss some benefits that may accrue to a firm from reducing its operating cycle. Suggest some ways that may be used to reduce a company's operating cycle.
In determining the short-term liquidity of a firm, the current ratio is usually considered to be a better guide than the acid-test ratio, and the acid-test ratio is considered to be a better guide than the cash ratio.Discuss when the acid-test ratio would be preferred over the current ratio and
Both current assets and current liabilities are used in the computation of working capital and the current ratio, yet the current ratio is considered to be more indicative of the short-term debt-paying ability. Explain.
Discuss how to use working capital in analysis.
Several comparisons can be made to determine the short-term debt-paying ability of an entity. Some of these are:a. Working capitalb. Current ratioc. Acid-test ratiod. Cash ratio 1. Define each of these terms.2. If the book figures are based on cost, will the results of the preceding computations
Define current liabilities.
Define working capital.
Explain the influence of the use of LIFO inventory on the inventory turnover.
One of the computations used to determine the liquidity of inventory determines the inventory turnover. In this computation, usually the average inventory is determined by using the beginning-of-the-year and the end-of-the-year inventory figures, but this computation can be misleading if the
Some firms do not report the cost of goods sold separately on their income statements. In such a case, how should you proceed to compute days' sales in inventory? Will this procedure produce a realistic days' sales in inventory?
The days' sales in inventory is an estimate of the number of days that it will take to sell the current in- LW/AG DAYS COGS ventory.a. What is the ideal number of days' sales in inventory?b. In general, does a company want many days' sales in inventory?c. Can days' sales in inventory be too low?
The number of days' sales in inventory relates the amount of the ending inventory to the average daily cost of goods sold. Explain why this computation may be misleading under the following conditions: The company uses a natural business year for its accounting period.a. b. The company closes the
During times of inflation, which of the inventory costing methods listed below would give the most re- alistic valuation of inventory? Which method would give the least realistic valuation of inventory? Ex- plain.a. LIFOb. Average FIFO c.
Describe the difference in inventories between a firm that is a trading concern and a firm that is a manu- facturing concern.
If a company has substantial cash sales and credit sales, is there any meaning to the receivable liquidity computations that are based on gross sales?
A company that uses a natural business year, or ends its year when business is at a peak, will tend to dis- tort the liquidity of its receivables when end-of-year and beginning-of-year receivables are used in the computation. Explain how a company that uses a natural business year or ends its year
T. Melcher Company uses the calendar year. Sales are at a peak during the holiday season, and T. Melcher Company extends 30-day credit terms to customers. Comment on the expected liquidity of its receivables, based on the days' sales in receivables and the accounts receivable turnover.
Would a company that uses a natural business year tend to overstate or understate the liquidity of its re- ceivables? Explain.
List the two computations that are used to determine the liquidity of inventory.
List the two computations that are used to determine the liquidity of receivables.
Arrow Company has invested funds in a supplier to help ensure a steady supply of needed materials. Would this investment be classified as a marketable security (current asset)?
A. B. Smith Company has guaranteed a $1,000,000 bank note for Alender Company. How would this in- fluence the liquidity ratios of A. B. Smith Company? How should this situation be considered?
Rachit Company has cash that has been frozen in a bank in Cuba. Should this cash be classified as a cur- rent asset? Discuss.
List the major categories of items usually found in current assets.
Define current assets.
Define the operating cycle.
What is the reason for separating current assets from the rest of the assets found on the balance sheet?
Jones Wholesale Company has been one of the fastest growing wholesale firms in the United States for the last five years in terms of sales and profits. The firm has maintained a current ratio above the average for the wholesale industry. Mr. Jones has asked you to explain possible reasons why the
It is proposed at a stockholders' meeting that the firm slow its rate of payments on accounts payable in order to make more funds available for operations. It is contended that this procedure will enable the firm to expand inventory, which will in turn enable the firm to generate more sales.
The Interpublic Group of Companies income statement from its 2001 annual report is presented in Exhibit 5-4.
The Interpublic Group of Companies balance sheet from its 2001 annual report is presented in Exhibit 5-4.Requireda. Using the balance sheet, prepare a vertical common-size analysis for 2001 and 2000. Use total assets as a base.b. Using the balance sheet, prepare a horizontal common-size analysis
The Walgreen Co. and subsidiaries statements of earnings from its 2001 annual report is presented in Exhibit 5-3.Requireda. Using the income statement, prepare a vertical common-size analysis for 2001, 2000, and 1999. Use net sales as a base.b. Using the income statement, prepare a horizontal
The Walgreen Co. and subsidiaries balance sheets from its 2001 annual report are presented in Exhibit 5-3.Requireda. Using the balance sheets, prepare a vertical common-size analysis for 2001 and 2000. Use total assets as a base.b. Using the balance sheets, prepare a horizontal common-size analysis
You want to determine if there is a fairly recent brokerage house assessment report on a company that you are analyzing. Which reference may aid you?
Indicate some sources that contain an appraisal of the outlook for particular industries.
You would like to determine the principal business affiliations of the president of a company you are analyzing. Which reference service may have this information?
You read in your local newspaper that an executive of a company that you are interested in is giving a presentation to financial analysts in New York. How could you learn the content of the presentation without getting in touch with the company?
You need to research articles on a company that you are analyzing. Which source will aid you?
You want to know the trading activity (volume of its stock sold) for a company. Which service provides this information?
You are considering buying the stock of a large publicly traded company. You need an opinion of timeliness of the industry and the company. Which publication could you use?
You want to compare the progress of a given company with a composite of that company's industry group for selected income statement and balance sheet items. Which library source will aid you?
You want to know if there have been any reported deaths of officers of a company you are researching.What library source will aid you in your search?
a. What is the SIC number? How can it aid in the search of a company, industry, or product?b. What is the NAICS number? How can it aid in the search of a company, industry, or product?
Using the Department of Commerce Quarterly Financial Report discussion in the text, answer the following:a. Could we determine the percentage of total sales income after income taxes that a particular firm had in relation to the total industry sales? Explain.b. Could we determine the percentage of
Answer the following concerning the Almanac of Business and Industrial Financial Ratios:a. This service presents statistics for how many size categories of firms?b. Indicate the industries covered by this service.
You want profile information on the president of a company. Which reference book should be consulted?
Using these results for a given ratio, compute the median, upper quartile, and lower quartile. 14%, 13.5% 13%, 11.8%, 10.5% 9.5% 9.3% 9%, 7%.
Sometimes manufacturing firms have only raw materials and finished goods listed on their balance sheets.This is true of Avon Products, a manufacturer of cosmetics, and it might be true of food canners also. Explain the absence of work in process.
Differentiate between the types of inventory typically held by a retailing firm and a manufacturing firm.
Refer to Exhibits 5-3, 5-4, and 5-5 to answer the following questions:a. For each of the firms illustrated, what is the single largest asset category? Does this seem typical of this type of firm?b. Which of the three firms has the largest amount in current assets in relation to the amount in cur-
Briefly describe how each of these groups might use financial reports: managers, investors, and creditors.
Are managers the only users of financial reports? Discuss.
Suppose you are comparing two firms within an industry. One is large and the other is small. Will relative or absolute numbers be of more value in each case? What kinds of statistics can help evaluate relative size?
What is trend analysis? Can it be used for ratios? For absolute figures?
Differentiate between horizontal and vertical analysis. Using sales as a component for each type, give an example that explains the difference.
Why? Differentiate between absolute and percentage changes. Which is generally a better measure of change?
Brown Company earned 5.5% on sales in 2003. What further information would be needed to evaluate this result?
What does each of the following categories of ratios attempt to measure? (a) liquidity; (b) long-term borrowing capacity; (c) profitability. Name a group of users who might be interested in each category.
What is a ratio? How do ratios help to alleviate the problems of size differences among firms?
Required The following information for Gaffney Corporation covers the year ended December 31, 2003: GAFFNEY CORPORATION Income Statement For the Year Ended December 31, 2003 Revenue: Revenues from sales Other Total revenue Expenses: Cost of products sold Selling expenses Administrative and general
Each of the following statements represents a decision made by the accountant of Growth Industries:a. A tornado destroyed $200,000 in uninsured inventory. This loss is included in the cost of goods sold.b. Land was purchased 10 years ago for $50,000. The accountant adjusts the land account to
Uranium Mining Company, founded in 1970 to mine and market uranium, purchased a mine in 1971 for $900 million. It estimated that the uranium had a market value of $150 per ounce. By 2003, the market value had increased to $300 per ounce. Records for 2003 indicate the following: Requireda.
The income statement of Jones Company for the year ended December 31, 2003 follows. Revenue from sales Cost of products sold $790,000 410,000 Gross profit Operating expenses: 380,000 Selling expenses General expenses Operating income Equity in earnings of non-consolidated subsidiaries (loss)
The income statement of Tawls Company for the year ended December 31, 2003 shows: Revenue from sales Cost of products sold $980,000 510,000 Gross profit 470,000 Operating expenses: Selling expenses $110,000 General expenses 140,000 250,000 Operating income 220,000 Equity on earnings of
List where each of the following items may appear. Choose from (A) income statement, (B) balance sheet, or (C) reconciliation of retained earnings.a. Dividends paid k. Unrealized exchange gains and lossesb. Notes payable C. Minority share of earningsd. Accrued payrollse. Loss on disposal of
1. m.c. Gross profit n. 0. List the statement on which each of the following items may appear. Choose from (A) income statement, (B) balance sheet, or (C) neither.a. Net incomeb. Cost of goods soldd. Retained earnings Interest payable Loss from flood Land Taxes payablee. Paid-in capital in excess
You were recently hired as the assistant treasurer for Victor, Inc. Yesterday the treasurer was injured in a bicycle accident and is now hospitalized, unconscious. Your boss, Mr. Fernandes, just informed you that the financial statements are due today. Searching through the treasurer's desk, you
The following information applies to Bowling Green Metals Corporation for the year ended December 31, 2003. Total revenues from regular operations Total expenses from regular operations Extraordinary gain, net of applicable income taxes Dividends paid Number of shares of common stock outstanding
Required At the end of 2003, vandals destroyed your financial records. Fortunately, the controller had kept certain statistical data related to the income statement, as follows:a. Cost of goods sold was $2,000,000.b. Administrative expenses were 20% of the cost of sales but only 10% of sales. C.
The income statement of Rawl Company for the year ended December 31, 2003 shows: Net sales Cost of sales $360,000 190,000 Gross profit 170,000 Selling, general, and administrative expense Income before unusual write-offs Provision for unusual write-offs Earnings from operations before income taxes
The following items are from Taperline Corporation on December 31, 2003. Assume a flat 40% corpo- rate tax rate on all items, including the casualty loss. Sales Rental income Gain on the sale of fixed assets General and administrative expenses Selling expenses Interest expense Depreciation for the
The following information for Lesky Corporation covers the year ended December 31, 2003:Required Change this statement to a multiple-step format, as illustrated in this chapter.P4-3. The accounts of Consolidated Can contain the following amounts at December 31, 2003:
The following information for Decher Automotives covers the year ended 2003: Administrative expense Dividend income Income taxes $ 62,000 10,000 100,000023.Requireda. Prepare a multiple-step income statement.b. Assuming that 100,000 shares of common stock are outstanding, calculate the earnings per
Management does not usually like to tie comprehensive income closely with the income statement. Com- ment.
Comment on your ability to determine a firm's capacity to make distributions to stockholders, using pub- lished financial statements.
Melcher Company reported earnings per share in 2003 and 2002 of $2.00 and $1.60, respectively. In 2001 there was a 2-for-l stock split, and the earnings per share for 2004 were reported to be $1.40. Give a threeyear presentation of earnings per share (2002-2004).
An income statement is a summary of revenues and expenses and gains and losses, ending with net income for a specific period of time. Indicate the two traditional formats for presenting the income statement.Which of these formats is preferable for analysis? Why?
Describe the following items:a. Minority share of earningsb. Equity in earnings of nonconsolidated subsidiaries
A balance sheet represents a specific date, such as "December 31," while an income statement covers a period of time, such as "For the Year Ended December 31, 2003." Why does this difference exist?
List the three types of appropriated retained earnings accounts. Which of these types is most likely not a detriment to the payment of a dividend? Explain.
Explain the relationship between the income statement and the reconciliation of retained earnings.
Why is minority share of earnings deducted before arriving at net income?
What is the difference in the impact on financial statements of a stock dividend versus a stock split?
How does the declaration of a cash dividend affect the financial statements? How does the payment of a cash dividend affect the financial statements?
In 2003, Jensen Company decided to change its depreciation method from units-of-production to straight- line. The cumulative effect of the change to the new method, prior to 2003, was to increase depreciation by $30,000 before tax. How would the change be presented in the financial statements?
Why are unusual or infrequent items disclosed before tax?
A health food distributor selling wholesale dairy products and vitamins decides to discontinue the division that sells vitamins. How should this discontinuance be classified on the income statement?
Why is the equity in earnings of nonconsolidated subsidiaries sometimes a problem in profitability analy- sis? Discuss with respect to income versus cash flow.
Give three examples of unusual or infrequent items that are disclosed separately. Why are they shown separately? Are they presented before or after tax? Why or why not?
Which of the following would be classified as extraordinary?a. Selling expensee. Income tax expenseb. Interest expensef. Loss from prohibition of red dyec. Gain on the sale of marketable securities g. Loss from the write-down ofd. Loss from flood inventory
What are extraordinary items? How are they shown on the income statement? Why are they shown in that manner?
An item of equipment acquired on January 1 at a cost of $50,000 has an estimated life of five years and an estimated salvage of $10,000. Requireda. From a management perspective, from among the straight-line method, declining-balance method, and the sum-of-the-years'-digits method of depreciation,
An item of equipment acquired on January 1 at a cost of $60,000 has an estimated use of 25,000 hours. During the first three years, the equipment was used 5,000 hours, 6,000 hours, and 4,000 hours, respec- tively. The estimated salvage value of the equipment is $10,000. Required Determine the
An item of equipment acquired on January 1 at a cost of $100,000 has an estimated life of 10 years. Assuming that the equipment will have a salvage value of $10,000, determine the depreciation for each of the first three years by the:a. Straight-line methodb. Declining-balance methodc.
The Rosewell Company has had 5,000 shares of 9%, $100 par-value preferred stock and 10,000 shares of $10 par-value common stock outstanding for the last two years. During the most recent year, dividends paid totaled $65,000; in the prior year, dividends paid totaled $40,000. Required Compute the
The Aggarwal Company has had 10,000 shares of 10%, $100 par-value preferred stock and 80,000 shares of $5 stated-value common stock outstanding for the last three years. During that period, dividends paid totaled $0, $200,000, and $220,000 for each year, respectively. Compute the amount of
Corvallis Corporation owns 80% of the stock of Little Harrisburg, Inc. At December 31, 2003, Little Harrisburg had the following summarized balance sheet: Current assets Property, plant, and equipment (net) LITTLE HARRISBURG, INC. Balance Sheet December 31, 2003 $100,000 Current liabilities $
You have just started as a staff auditor for a small CPA firm. During the course of the audit, you discover the following items related to a single client firm: RETAINED EARNINGSa. During the year, the firm declared and paid $10,000 in dividends.b. Your client has been named defendant in a legal
The following is the balance sheet of McDonald Company. McDONALD COMPANY December 31, 2003 Assets Current assets: Cash (including $10,000 restricted for payment of note) Marketable equity securities Accounts receivable, less allowance for doubtful accounts of $12,000 Inventory Total current assets
The following is the balance sheet of Rubber Industries.

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