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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 10-K filing by Gillette Corporation from the EDGAR archives (www.sec.gov/edaux/searches.htm). The “Notes to the Financial Statements”contains detailed segment information.Requireda. Identify the major business (industry) segments in which Gillette is involved.b. What is
TRW, Inc., is a global company that specializes in producing automotive, spacecraft, and information system products. The following (partial) segment data was reported (dollars in millions):December 31 1994 1993 Sales:Automotive $5,679 $4,538 Space and defense 2,812 2,792 Information systems 596
Examine notes from the financial statements of two different companies to determine how they report segments of their operations. Evaluate the level of disclosure for each firm in terms of the usefulness and relevance of the notes provided by each firm.
Assume you have just conducted a preliminary analysis of your firm’s 1999 financial statements. The firm has not prospered in recent years, and you are particularly concerned about violating a provision of a loan agreement you have with a local bank. Your firm has a $200,000, nine percent bank
Locate the most recent 10-K filing by Bank One and Time-Warner from the EDGAR archives (www.sec.gov/edaux/searches.htm). Refer to the note on significant accounting policies in “Notes to the Financial Statements” to identify changes in accounting policies. Identify any changes the companies
Review the prior chapters in this text and compile a list of at least five areas where estimates are required as part of the accounting measurement process.Determine through your review or through interviews with accounting professionals whether these estimates can generally be made in a reliable
Discuss why the effects of a change in an accounting estimate are not reported using the “cumulative effects” rule. Discuss the differences between the “cumulative effects”method and the “prospective”method.
Why would a change from FIFO, or some other inventory method, to LIFO not require a retroactive adjustment of a firm’s financial statements? What would be the cumulative effect of such an adjustment?
Identify an accounting change (other than a change in depreciation method)that requires a cumulative adjustment. Create a numerical example of this accounting change and show the effects on net income and retained earnings during the year when the change occurs.
U. S. Shoe Corporation reported the following income statement information:U.S. Shoe Corporation Consolidated Statement of Earnings (Partial)(Dollars in Thousands)1991 1990 1989 Earnings (loss) before cumulative effect of accounting change ($27,662) $49,187 $12,965 Cumulative effect of accounting
Central Air Conditioning, Inc. purchased machinery for installing air conditioners. The purchase price of the machine on July 1, 2000, was $35,000. The company chose a seven-year life, a sum-of-the-years’ digits (SYD) depreciation, and no salvage value. Unfortunately, the weather during 2000,
Mesple Music, Inc. purchased musical instrument equipment on January 1, 1999, for $25,000. Mesple depreciated it on the straight-line basis over five years with no salvage value. However, on January 1, 2001, the company realized that the productive capacity of this equipment is declining, so it
IDQ’s income statement data for the years ended November 30, 2000 and 2001, are presented below (dollars in millions).11/30/00 11/30/01 Net sales $1061 $1154 Cost of goods sold 792 830 Gross profit 269 324 Selling, general, and administrative 111 134 Income before depreciation 158 190
IDQ’s income statement data for the year ended November 30, 1999, is presented below (dollars in millions).11/30/99 Net sales $340 Cost of goods sold 249 Gross profit 91 Selling, general, and administrative 40 Income before depreciation 51 Nonoperating income 2 Income before tax 53 Provisions for
The Sisters Coffee Emporium has been researching and developing new exotic coffee flavors and innovative coffee equipment. During 1998, it spent over$250,000 on R&D costs. It is now year-end and the company is preparing its balance sheet. Sisters would like the most relevant information to be
What are the implications of earnings management? As an external financial analyst, what can be done to combat earnings management?
Identify some methods that might be used to manage earnings that were not described in this chapter. Are these new methods more appropriate or more ethical than the methods already described in the chapter? Why?
Describe each of the methods used to manage earnings. Which seem appropriate and ethical? Why?
Discuss each of the motivations for earnings management. Under what circumstances would you support the use of these techniques? Why?
What is earnings management? Why would a manager engage in earnings management? Would an investor or creditor approve of such activities? Under what circumstances would an investor or creditor approve? Why?
Identify the differences between relevance and reliability. Which would a manager emphasize? A financial analyst?
Why should financial analysts not be willing to accept all the information in a firm’s financial statements at face value?
Discuss how economic consequences can affect various users of financial statements. How should those who are affected by economic consequences participate in the development of accounting principles?
How do a firm’s accounting principles affect contracts that are based on the financial statements?
Describe financial accounting’s two primary roles. Discuss the major criteria that financial accounting must adopt as part of its informational role? What other roles or criteria would you suggest? Why?
Why do price-to-earnings (P/E) ratios differ between firms?
Assume that a firm changes from FIFO to LIFO during a period of rising prices.Would a proponent of the EMH predict an increase or decrease in the firm’s share price as a result of the change in inventory valuations? Why?
Describe the efficient market hypothesis (EMH). How does it affect financial statement analysis as described in this text?
Why are interim reports less reliable and less useful than annual reports? In what major ways do interim reports differ from annual reports?
Why does a firm’s annual report contain so much information in such a variety of formats? Under what circumstances would a more condensed format be more useful?
Describe why a firm with more foreign operations or more large customers(greater than 10 percent of its volume) might be viewed as having higher risk than a domestic company with many small customers (less than 10 percent).
Why is information about a firm’s major customers reported as part of the notes on the firm’s segment? Why not use a threshold higher than 10 percent as the criterion for determining who is a major customer?
Why are domestic and foreign operations separately disclosed? How would this information be helpful to an investor or creditor? P-*96
Why are profits for each segment shown as part of segment reporting? P-*96
Why are the identifiable assets for each segment shown as part of segment reporting? P-*96
Describe what is meant by an industry segment and the types of information that must be reported for each segment. P-*96
Identify three types of segment reporting. Where is this information reported?Why have such types of segment reporting been required? P-*96
Why is a change in reporting entity shown as a retroactive adjustment and not as a prospective adjustment? P-*96
In general, how are the financial statements changed when two firms merge or engage in some similar restructuring? P-*96
Where are the effects of changes in accounting estimates reported? Why should the financial statement user often not be aware of many of these changes? P-*96
When the effects of a change in an accounting estimate are recognized, can prior financial statements be restated retroactively? Why? P-*96
Why does the FASB require that firms make retroactive adjustments when a new reporting standard has been issued? P-*96
Why would a firm that is issuing its first public financial statements have more latitude in using retroactive adjustments for the effects of accounting changes? P-*96
Under what circumstances are prior years’financial statements retroactively restated? Why do you suppose these exceptions exist? P-*96
Are financial statements that include an accounting change more comparable with those of prior years or of subsequent years? Why? P-*96
Discuss any inconsistencies that are introduced when accounting principle changes occur. P-*96
Under the general rule dealing with accounting principle changes, have the firm’s retained earnings changed? How has the firm gained or lost some of its prior (accumulated) retained earnings? Why? P-*96
Discuss the general rule in reporting the effects of an accounting principle change. What is meant by a “cumulative effect”adjustment? P-*96
What is the financial statement user’s first indication that an accounting change has occurred? Why should this source be examined first when reading a financial statement? P-*96
Discuss why financial statement users prefer a firm to consistently use the same accounting principles. P-*96
Describe three different types of accounting changes. Under what circumstances should each be reported? P-*96
How does comprehensive income differ from the concept of sustainable income, as described earlier in the text? Under what circumstances might an investor or creditor prefer sustainable income, as compared to comprehensive income? P-*96
Under what circumstances would a manager prefer comprehensive income or net income? An investor? A creditor? P-*96
Describe comprehensive income. How does it differ from net income? P-*96
Identify the exchange rate (current, historical, or average) that would be used to translate each of the following elements of a foreign subsidiary’s financial statements to U.S. dollars: LPO8a. Accounts receivableb. Property, plant, and equipmentc. Total liabilitiesd. Paid-in capitale. Salesf.
The balance sheets of foreign firms,prepared in their local currencies,must be in balance (assets equal liabilities plus shareholders’equity).Yet when such balance sheets are translated to U.S. dollars, they usually require a “translation adjustment”in order to balance. Explain why this is
Explain why the financial statements of U.S.firms’foreign subsidiaries must be translated to U.S.dollars in order to prepare consolidated financial statements. LPO8
Distinguish between spot rates and forward rates of foreign currency exchange.Which rate would a U.S.firm use in order to report its balance sheet accounts receivable in foreign currencies? LPO8
Assume that a U.S.firm has an account receivable in Swiss francs,with payment due in 90 days,and wishes to hedge its exposure to currency rate fluctuations.Explain the actions the U.S. firm would take to accomplish such a hedge. Describe how the U.S. firm’s financial statements would be affected
Explain what is meant by a hedge of a foreign currency-denominated account receivable or payable. LPO8
Explain whether a U.S.firm would experience a gain or a loss related to its unhedged accounts receivable or payable in each of the following cases:a. A U.S. firm has accounts receivable in British pounds, and the pound strengthens relative to the U.S. dollar.b. A U.S. firm has accounts payable in
Which of the following events is a foreign currency transaction from the point of view of the U.S. firm?a. A U.S. firm purchases inventory from a British firm, with payment to be made in British pounds.b. A U.S. firm sells to an Italian firm, with payment to be made in U.S. dollars.c. A U.S. firm
Describe what is meant by a foreign currency transaction. LPO8
It is sometimes argued that consolidation may result in a loss of information and may produce aggregations in the financial statements that are difficult to interpret. Do you agree or disagree? In what areas, other than consolidations, are accounting numbers too aggregated to serve investment
Is it necessary for one firm to own more than 50 percent of the voting stock of another firm in order to exert control over the investee firm? If not, how should control be defined for purposes of deciding on the preparation of consolidated financial statements? LPO8
Respond to the following remarks: I just read in the financial pages that Whale company owns 60 percent of Minnow Inc.’s shares.Whale Company includes all of Minnow’s assets and liabilities and all of Minnow’s revenues and expenses in its consolidated financial statements. It seems to me that
Indicate how each of the following financial ratios changes after a consolidation of a parent firm and its subsidiaries: LPO8a. Debt-to-total assets ratiob. Net income-to-shareholders’ equity ratioc. Net income-to-total assets ratiod. Net income-to-sales ratioe. Current ratio
Which of the following items would differ on a firm’s financial statements before and after consolidation of its subsidiaries? Explain your answers. LPO8a. Total assetsb. Total liabilitiesc. Shareholders’ equityd. Salese. Expensesf. Net income
Discuss why the following items may require adjustments when preparing a consolidated income statement:a. Income from a subsidiary (on the parent’s income statement)b. Salesc. Cost of goods soldd. Depreciation and amortization expenses? LPO8
Consolidation is mainly a process of adding together the financial statement elements of a parent and its controlled subsidiaries with certain necessary adjustments. Discuss why the following items may require adjustments in preparing a consolidated balance sheet:a. Investment in a subsidiary (on
Describe what is meant by consolidated financial statements. In what circumstances should a parent company’s financial statements be prepared on a consolidated basis? LPO8
Suppose that Psycho Company buys all of Somatic Inc.’s outstanding shares directly from Somatic’s existing shareholders. Describe how Somatic’s balance sheet would be affected by the acquisition. LPO8
Evaluate the following statements:Accounting for goodwill makes no sense.If a firm generates goodwill internally, the costs are written off as expenses, and no related asset appears on the balance sheet. If, on the other hand, a firm purchases goodwill by acquiring another firm, the amount paid for
What advantages might a business acquisition offer as opposed to a merger or a consolidation? LPO8
Business combinations usually occur in the form of mergers,consolidations,or acquisitions. How do each of these types of combinations differ? LPO8
Explain how a firm might attempt to diversify risks by combining with other business firms. LPO8
Distinguish between business growth through internal and external expansion.Discuss several reasons why a firm might seek to expand externally,rather than internally. LPO8
Appreciate the wide diversity of international accounting practices. LPO8
Determine how financial statements prepared initially in foreign currencies are translated to U.S. dollars. LPO8
Understand how foreign exchange rate fluctuations affect the financial reporting of transactions conducted in foreign currencies. LPO8
Appreciate how affiliated firms construct and report their consolidated financial statements. LPO8
Understand the reasons for reporting consolidated financial statements. LPO8
Prepare and post journal entries. P-698
Calculate account balances. P-698
Prepare and post adjusting entries. P-698
Prepare and post closing entries. P-698
Generate balance sheets and income statements from general ledger accounts.? P-698
Define the terms debit and credit. P-698
Draw a diagram reflecting the parts of the accounting cycle, showing how journals, ledgers, and so on, are used to record transactions. P-698
Define the term posting. P-698
Discuss why a firm might use subsidiary ledgers. P-698
Why are adjusting entries used?
Would a cash-based system have a need for adjusting entries? Why? P-698
Why are closing entries used? P-698
If a firm never prepared periodic financial statements, would it need to prepare adjusting or closing entries? Why? P-698
What are some of the conditions that might cause a trial balance not to be “in balance”? P-698
Describe each of the steps in the accounting process, as shown below: P-698 1. Identify transactions and events 2. Analyze transactions and events in terms of the basic accounting equation.3. Translate the transaction analysis into debits and credits.4. Prepare journal entries and post to the
(Similar to Exercise 2-16) John Hasty opened his bakery on March 1, 1999. The following transactions took place in early March:1. Deposited $10,000 into a checking account in the name of the Hasty Bakery.2. Leased a small kitchen for one year at $500 per month. One month’s rent was paid at this
(Similar to Problem 2-23) The following account balances are shown on November 30, 1999, for the Clever Bookstore:Cash $ 8,000 Accounts payable $ 4,000 Accounts receivable 9,000 Salaries payable 2,000 Inventory 60,000 Notes payable 35,000 Supplies 3,000 J. Clever, capital 39,000 Total $80,000 Total
(Similar to Problem 2-20) The following transactions all occurred on January 2 of the current year:1. A company paid a $2,000 bill for a fire insurance policy that covers the current year and next year.2. A company purchased for $200 a trash compactor that has an expected life of five years.3. Two
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