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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

Review Reebok’s financial statements in Appendix E.Requireda. Read Notes 1 and 13. Identify any unfamiliar or unusual terms. Match the terms presented in this chapter to the terms used by Reebok.b. Does the firm’s treatment of foreign currency translations seem to have any significant effect on
On October 1, 1999, the Keaton Company, a U.S. firm, sold merchandise to Chaplin, Inc., a British firm. The sales agreement specifies that Chaplin will make a payment of £500,000 to Keaton in 120 days on February 1, 1999. Relevant exchange rates are shown in the following table:Date Rate
In each of the following cases, determine the amount of gain or loss to be reported in 1999 due to unhedged accounts receivable or payable that are denominated in foreign currencies.All exchange rates are stated as the number of U.S. dollars required to obtain one unit of foreign currency.a.
In each of the following examples, determine the gain or loss resulting from foreign exchange transactions.All exchange rates are shown as the number of U.S. dollars required to obtain one unit of foreign currency.a. Shipley Company purchases supplies and records an account payable of 82,000
In each of the following examples, determine the gain or loss resulting from foreign exchange transactions.All exchange rates are shown as the number of U.S. dollars required to obtain one unit of foreign currency.a. Bancroft Company purchases supplies and records an account payable of 100,000
Access the EDGAR archives (www.sec.gov/edaux/searches.htm) and locate the 8-K report filed by Disney Enterprises Inc. (formerly Walt Disney Co.)on February 9, 1996.This report was filed on the successful acquisition of a communications corporation. Examine the 8-K report and answer the following
a. In the takeover battle between Viacom and QVC over Paramount, the potential cost of acquiring Paramount varied between $8 and $11.5 billion.How do you suppose a potential buyer (Viacom) would determine how much to pay in order to acquire another firm (Paramount)? To what extent would the assets
On January 1, 1999,Tipper Company purchased all of Albert Inc.’s outstanding stock.The post-combination balance sheets of both firms are listed below (dollars in millions):Tipper Company Albert Inc.Cash $ 20 $ 5 Accounts receivable 120 65 Other assets 950 330 Investment in Albert, Inc. 410
Ronco,Inc.purchased all of the outstanding voting stock of Nanco,Ltd.on January 1, 1999, at a cost of $750 million paid in cash. On the acquisition date, Nanco had the following assets and liabilities (dollars in millions):Book Value Fair Market Value Cash $ 55 $ 55 Other assets 820 950 Liabilities
Selected items from the unconsolidated financial statements of Mammoth Motors Company and its wholly owned subsidiary, Chattel Credit Corp., are provided below. Mammoth uses the equity method to account for its investment in Chattel, and the investment cost is equal to Chattel’s book value of
Cabot Corporation, a producer of specialty chemicals and materials, reported the following accounting policies for intercorporate investments:Principles of Consolidation:The Consolidated Financial Statements include the accounts of Cabot Corporation and majority-owned and controlled domestic and
Selected items from the unconsolidated financial statements of Tipton Financial Services, Inc., and its wholly owned subsidiary are provided below.Tipton accounts for its investment in Smartcom, Inc., using the equity method. Its investment cost is equal to Smartcom’s net asset book value
Presented below are condensed balance sheets for the ASAP Company and its wholly owned subsidiary, BYOB Inc., at December 31, 1999 (dollars in millions):ASAP Company BYOB Inc.Current assets $ 30 $ 55 Noncurrent assets 210 95 Total$240 $150 Liabilities $110 $ 85 Shareholders’ equity 130 65
Presented below are condensed income statements for the MHL Company and its wholly owned subsidiary, PTE Inc., for the year ended December 31, 2000(dollars in millions). MHL acquired its ownership of PTE in 1989.MHL Company PTE Inc.Sales $260 $180 Cost of sales (110) (75)Other operating expenses
On January 1,1999,Maplegrove Deli,Inc.purchased all of the outstanding stock of Bizno’s Sub Shops,Inc.for $4,500,000.Maplegrove paid $2,000,000 cash and issued 25,000 shares of its common stock, no par value, currently selling for$100 per share.The estimated fair value and carrying value of
Goliath Corporation purchased all of Masonry Corporation’s outstanding stock on January 1,1999,for $6,000,000.The purchase price was paid as follows:Goliath Corporation issued 40,000 shares of its own common stock, par $1, with a market price of $102/share,and cash paid of $1,920,000.The
The following excerpt is from the acquisitions note contained in Tyler Corporation’s 1994 annual report:On January 7, 1994, the company completed the purchase of Institutional Financing Services,Inc.(IFS) ...IFS was acquired for approximately $50,000,000 and the assumption of seasonal working
Identify several areas of accounting practice where there are substantial differences among nations. In each case, defend what you consider to be the superior practice. P-968
Describe how taxation rules can influence the types of financial accounting standards that are developed.How might this influence differ in nations where there is no difference between income measurements for investor and taxation purposes? P-968
Explain how the prevailing financial structure of business firms can affect the types of financial reports that are published. P-968
Explain how the legal system of a nation can influence the types of accounting standards that are established. P-968
Is worldwide harmonization of accounting standards a desirable objective? If so, prepare a memo indicating how such accounting standards should be developed and enforced. If not, prepare a memo identifying the major reasons why the costs of standardization outweigh its benefits. P-968
Describe the main factors that cause differences in accounting standards across nations. P-968
Assume that a foreign subsidiary of a U.S.firm acquired a parcel of land in 1998, and that each year thereafter the functional currency of the foreign subsidiary continues to weaken against the U.S.dollar.Describe how the carrying value of the land would change on successive translated balance
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: P-968a. 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. P-968
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? P-968
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. P-968
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. P-968
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? P-968
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:a. Debt-to-total assets ratiob. Net income-to-shareholders’ equity ratioc. Net income-to-total assets ratiod. Net income-to-sales ratioe. Current ratio P-968
Which of the following items would differ on a firm’s financial statements before and after consolidation of its subsidiaries? Explain your answers.a. Total assetsb. Total liabilitiesc. Shareholders’ equityd. Salese. Expensesf. Net income? P-968
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? P-968
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? P-968
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. P-968
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? P-968
Business combinations usually occur in the form of mergers,consolidations,or acquisitions. How do each of these types of combinations differ?
Explain how a firm might attempt to diversify risks by combining with other business firms. P-968
Distinguish between business growth through internal and external expansion.Discuss several reasons why a firm might seek to expand externally,rather than internally. P-968
Appreciate the wide diversity of international accounting practices. P-968
Determine how financial statements prepared initially in foreign currencies are translated to U.S. dollars. P-968
Understand how foreign exchange rate fluctuations affect the financial reporting of transactions conducted in foreign currencies. P-968
Appreciate how affiliated firms construct and report their consolidated financial statements. P-968
Understand the reasons for reporting consolidated financial statements. P-968
Access the EDGAR archives (www.sec.gov/edaux/searches.htm) and locate the most recent 10-K filing by Kmart. Information about Kmart’s pension plan can be found in the Notes to the Financial Statements.Requireda. What are the total pension assets and liabilities?b. What is the funding status of
Bethany Iron, Inc.’s 2000 annual report provided the following information regarding postretirement benefits:Bethany Iron, Inc.Pension Liability Recognized in Consolidated Balance Sheet(2000 Annual Report)We have noncontributory defined benefit pension plans that provide benefits for
Mercury,Inc.designs,develops,and markets human and animal health products and specialty chemicals.The following information has been abstracted from the notes to Mercury’s 2000 financial statements:Pension Other Postretirement Benefits Benefits 2000 1999 2000 1999(Dollars in Millions) (Dollars in
Adolph Coors Company included the following two notes in its 1997 annual report as follows on the next page. LO68
Review Reebok’s financial statements in Appendix E.Requireda. Scan the notes and the rest of the financial statement for information pertaining to Reebok’s retirement benefits. Identify any unfamiliar or unusual terms. Match the terms presented in this chapter to the terms used by Reebok.b. Why
Review Wendy’s financial statements in Appendix D.Requireda. Read Note 11.Identify any unfamiliar or unusual terms.Match the terms presented in this chapter to the terms used by Wendy’s.b. Determine the firm’s total obligations for pension benefits.c. Determine the amount of the firm’s
Public Service Company of Colorado, a major supplier of natural gas and electricity in Colorado, included the following amounts in its 1993 balance sheet(dollars in thousands):1993 1992 Deferred Charges Employees’ postretirement benefits, other than pensions (Note 10) $ 25,855 —Pension benefits
Spelling Entertainment Group (SEI), specializing in film and video entertainment, reported the following liabilities on its 1993 balance sheet:• Accounts payable, accrued expenses, and other liabilities• Accrued participation expense• Deferred revenue• Bank and other debts• Income
Access the EDGAR archives (www.sec.gov/edaux/searches.htm) and locate the most recent 10-K filings for US Air Group and Southwest Airlines.Both these companies rely extensively on the use of leased assets.Requireda. For each company, determine the total minimum lease payments for operating leases
Movie Madness, Inc., sells and rents movies, video games, and VCRs.The company wanted to lease some video editing equipment in order to expand its market. They are also considering signing either an operating lease for the video editing equipment or a lease that meets one of the four criteria of a
Whole Foods Market,Inc.reported the following information about leases in its 1997 annual report:Whole Foods Market, Inc. and Subsidiaries Notes to Consolidated Financial Statements(8) Leases The Company and its subsidiaries are committed under certain capital leases for rental of equipment and
The following note was provided by Adolph Coors Company in its 1997 annual report:NOTE 3:Leases The Company leases certain office facilities and operating equipment under cancelable and non-cancelable agreements accounted for as operating leases.On December 28, 1997, the minimum aggregate rental
Triangle Air Lines is one of the largest airlines in the world. It provides scheduled passenger service, airfreight, mail, and other related aviation services. Selected balance sheet information from Triangle’s 1999 annual report is given here, along with Note 4 to the financial statements,
Identify any unfamiliar or unusual terms and match the terms presented in this chapter to the terms used by Reebok.b. Does the firm have any capital leases?c. Do the firm’s operating leases have any significant effect on its balance sheet? How?d. What other impact might leases have on the
Review Reebok’s financial statements in Appendix E.Requireda. Read Note
Review Wendy’s financial statements in Appendix D.Requireda. Read Note 5.Identify any unfamiliar or unusual terms.Match the terms presented in this chapter to the terms used by Wendy’s.b. Do the firm’s capital leases (the firm is the lessee) have any significant effect on its balance sheet?
Consider the following summary financial statements at the beginning of the period:Current assets $1,050,000 Current liabilities $ 650,000 Other assets 2,450,000 Other liabilities 1,500,000 Capital stock 100,000 00,000,000 Retained earnings 1,250,000 Total $3,500,000 Total $3,500,000 Net income
Consider the following summary financial statements at the beginning of the period:Current assets $ 40,000 Current liabilities $ 15,000 Other assets 110,000 Other liabilities 113,150 Capital stock 10,000 0000,000 Retained earnings 11,850 Total $150,000 Total $150,000 Net income during the period
L’alpane is a transportation company headquartered in Paris.Its 1999 annual report includes the following liabilities (all in French francs):Payables to:Affiliated companies 38,642,541 8,325,461 Third parties 5,162,034 3,705,679 Accrued expenses and provisions 22,655,420 37,042,469 Total
Hannah Steel Corporation signed a five-year lease agreement on January 2, 2000,for the lease of equipment.The annual lease payment required at the end of each year is $4,000.The useful life of the equipment is five years and the fair market value is $18,000.Requireda. Assume that Hannah’s (the
Schott Sausages, in trying to lease a sausage machine, is concerned about whether the machine will be reported as a capital or operating lease.Consider the following facts in your deliberations:• Annual lease payment required, $30,000• Term of lease and useful life of machine, five years•
Consider the following terms:• Annual payments, end of each year, $30,000• 12-year useful life• Eight percent borrowing rate• Straight-line benefit pattern• Zero residual value• Lease purchase• Initial fees paid upon signing agreement, $20,000• Eight-year lease term• Lessor’s
Consider the following terms:• Annual payments, end of each year, $40,000• 10-year useful life• 10 percent borrowing rate• Straight-line benefit pattern• Zero residual value• Lease purchase• Initial deposit upon signing agreement, $20,000, refundable upon satisfying all purchase
Determine the first year’s financial statement impact of the following lease terms:• Annual payments, at year-end, $15,000• Five-year useful life• 10 percent borrowing rate• Straight-line benefit pattern• Zero residual value• Five-year lease term• Lessor’s fair value of property,
Determine the first year’s financial statement impact of the following purchase terms:• Annual payments, at year-end, $15,000• Five-year useful life and note term• 10 percent borrowing rate • Straight-line benefit pattern • Zero residual value LO68 • Installment purchase
Many firms provide their employees with other, nonpension postretirement benefits, primarily medical plans. Outline the similarities and differences in accounting for pensions and nonpension postretirement benefits with respect to:a. Liability measurementb. Balance sheet reportingc. Expense
Present accounting standards report only the amount of unfunded pension obligations on the balance sheet.Gross pension assets and liabilities are not reported on the financial statements.This practice is based on the premise that the pension fund is an entity distinct from the employer firm.a.
Distinguish between the actuarial assumptions and the economic assumptions that underlie the measurement of pension liabilities and expenses.Which of these types of assumptions is more controversial? Why? LO68
Pension expense includes three main components: service cost, interest cost, and a reduction in expense for the return on plan assets. Explain how each of these amounts is determined. LO68
Accounting standards require that firms report their unfunded pension liabilities on the balance sheet. Describe what is meant by an unfunded pension liability. Explain why such an amount should (or should not) be included on the balance sheet. LO68
Firms with defined benefit pension plans report three separate liability amounts in the notes to the financial statements.These are the obligations for vested benefits, accumulated benefits, and projected benefits.a. Describe how these amounts differ.b. Identify which of these amounts best measures
A typical defined benefit pension plan involves three entities: the employer firm, the pension plan, and the covered employee. Describe the relationships among these three entities. LO68
Distinguish between defined contribution and defined benefit pension plans.Which arrangement is riskier for the employee? Which is riskier for the employer? Explain. LO68
When should the costs of postretirement benefits be reported as expenses on the income statement? LO68
Why do firms provide postretirement benefits to employees? LO68
What types of postretirement benefits are usually provided to employees by larger-sized business firms? LO68
For a capital lease, the amounts that are initially recorded as leased assets and lease obligations depend on the interest rate used to discount the lease payments. In addition, the discount rate also affects the periodic amounts of expense reported for capital leases.a. Assume that a manager
Notes to financial statements cover disclosures about operating leases, including minimum rental commitments,disclosed by year for the ensuing five years, and in the aggregate for later years.How should a financial analyst use this supplementary (note) information when evaluating a firm’s total
Respond to the following statements:Firms have many different types of contracts that obligate them to make a series of cash payments at dates well into the future.For example, CEOs and other top managers often have multiyear contracts that guarantee substantial salaries even if the manager is
Evaluate the following statement: Capitalizing a lease creates a fictitious asset.The lessee does not own the leased asset, because the lessor retains title and will repossess the asset at the end of the lease term.A lease is simply a rental, and this is true regardless of the length of the lease
Explain why the total annual expenses associated with capital leases are higher in the earlier years,and lower in the later years,of the lease term.Why is it necessary that the total expense over the entire life of the lease be the same for capital and operating leases? LO68
Assume that a given lease contract qualifies as a capital lease.a. How would the lease be reported in the balance sheet as an asset?b. How would this dollar amount change over successive balance sheets?c. How would the lease be reported in the balance sheet as a lease obligation?d. How would the
Contrast the effects that capital leases and operating leases have on the following financial statement elements and relationships. Discuss how each of these effects might influence a manager’s decision about how to design a lease contract..a. Total assetsb. Total liabilities LO68c. Net income,
Which criteria are used in deciding whether a given lease agreement constitutes a capital lease or an operating lease? Do these criteria make economic sense? Discuss. LO68
Distinguish between capital leases and operating leases as the terms are used in financial reporting. Is the distinction meaningful? Discuss. LO68
Describe the key features that are normally found in a long-term lease agreement. LO68
Discuss several reasons why a firm’s managers might choose to lease rather than purchase operating assets (such as buildings and equipment). LO68
Understand the key assumptions necessary to measure postretirement obligations and expenses. LO68

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