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financial reporting
Financial Reporting And Analysis Using Financial Accounting Information 11th Edition Charles H. Gibson - Solutions
This case consists of a letter from Dennis R. Beresford, chairperson of the Financial Accounting Standards Board, to Senator Joseph I. Lieberman. The specific issue was proposed legislation relating to the accounting for employee stock options.Permission to reprint the following letter was obtained
Even though accounting records go back hundreds of years, there was little effort to develop accounting standards until the 1900s. The first major effort to develop accounting standards in the United States came in 1939 when the American Institute of Certified Public Accountants formed the
Listed below are phrases with the appropriate acronym. Match the letter that goes with each definition.a. Generally accepted accounting principles (GAAP)b. Securities and Exchange Commission (SEC)c. Financial Reporting Releases (FRRs)d. American Institute of Certified Public Accountants (AICPA)e.
The following data relate to Jones Company for the year ended December 31, 2007:Sales on credit $80,000 Cost of inventory sold on credit 65,000 Collections from customers 60,000 Purchase of inventory on credit 50,000 Payment for purchases 55,000 Cash collections for common stock 30,000 Dividends
Statement of Financial Accounting Concepts No. 1, “Objectives of Financial Reporting by Business Enterprises,” includes all of the following objectives, except one. Which objective does it not include?1. Financial accounting is designed to measure directly the value of a business enterprise.2.
Which of the following indicates how revenue is usually recognized?1. Point of sale 2. End of production 3. Receipt of cash 4. During production 5. Cost recovery
SFAC No. 5 identifies five different measurement attributes currently used in practice. Which of the following is not one of the measurement attributes currently used in practice?1. Historical cost 2. Future cost 3. Current market value 4. Net realizable value 5. Present, or discounted, value of
SFAC No. 5 indicates that an item, to be recognized, should meet four criteria, subject to the cost-benefit constraint and the materiality threshold. Which of the following is not one of the four criteria?1. The item fits one of the definitions of the elements.2. The item has a relevant attribute
According to SFAC No. 6, expenses can be defined by which of the following?1. Inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s
According to SFAC No. 6, assets can be defined by which of the following?1. Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.2.
Which of the following does the Financial Accounting Standards Board not issue?1. Statements of Position (SOPs)2. Statements of Financial Accounting Standards (SFASs)3. Interpretations 4. Technical bulletins 5. Statements of Financial Accounting Concepts (SFACs)
Which pronouncements are not issued by the Financial Accounting Standards Board?1. Statements of Financial Accounting Standards 2. Statements of Financial Accounting Concepts 3. Technical bulletins 4. Interpretations 5. Opinions
Which statement is not true?1. The Securities and Exchange Commission is a source of some generally accepted accounting principles.2. The American Institute of Certified Public Accountants is a source of some generally accepted accounting principles.3. The Internal Revenue Service is a source of
What is the underlying concept that supports the immediate recognition of a loss?1. Matching 2. Consistency 3. Judgment 4. Conservatism 5. Going concern
The primary current source of generally accepted accounting principles for nongovernment operations is the 1. New York Stock Exchange 2. Financial Accounting Standards Board 3. Securities and Exchange Commission 4. American Institute of Certified Public Accountants 5. None of the above
According to FASB Statement of Concepts No. 2, which of the following is an ingredient of the quality of relevance?1. Verifiability 2. Representational faithfulness 3. Neutrality 4. Timeliness 5. None of the above
Which of the following is not an objective of financial reporting?1. Financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions.2. Financial reporting should provide
Which of the following is a characteristic of information provided by external financial reports?1. The information is exact and not subject to change.2. The information is frequently the result of reasonable estimates.3. The information pertains to the economy as a whole.4. The information is
Certain underlying considerations have had an important impact on the development of generally accepted accounting principles. Following is a list of these underlying considerations, as well as a list of statements describing them.a. Going concern or continuity i. Industry practicesb. Monetary unit
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 capital.Comment. A relatively high sales to working capital ratio is a tentative indication that the firm is undercapitalized.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 inflationary 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 debtpaying 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.
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 inventory.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:a. The company uses a natural business year for its accounting period.b. The company closes the
During times of inflation, which of the inventory costing methods listed below would give the most realistic valuation of inventory? Which method would give the least realistic valuation of inventory? Explain.a. LIFOb. Averagec. FIFO
Describe the difference in inventories between a firm that is a trading concern and a firm that is a manufacturing 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 distort 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 receivables? 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 influence 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 current 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.
What source contains a comprehensive reference for products and services, company profiles, and a catalog file?
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?
What source includes comprehensive statistics on many industries?
Indicate some sources that contain a dividend record of payments.
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 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 total
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 some of 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
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.
Differentiate between absolute and percentage changes. Which is generally a better measure of change? Why?
Brown Company earned 5.5% on sales in 2007. 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 problem of size differences among firms?
Management does not usually like to tie comprehensive income closely with the income statement. Comment.
Comment on your ability to determine a firm’s capacity to make distributions to stockholders, using published financial statements.
Melcher Company reported earnings per share in 2008 and 2007 of $2.00 and $1.60, respectively. In 2009, there was a 2-for-1 stock split, and the earnings per share for 2009 were reported to be $1.40. Give a three-year presentation of earnings per share (2007–2009).
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, 2008.” 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?
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