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financial reporting

Financial Reporting And Analysis Using Financial Accounting Information 11th Edition Charles H. Gibson - Solutions

• The study of annual reports reviewed in this chapter indicated that wide differences of opinion exist on how many ratios should be computed. Comment.
• The study of annual reports reviewed in this chapter showed that earnings per share was disclosed in every annual report. Why?
• According to a study of annual reports reviewed in this chapter, what type or types of financial ratios are most likely to be included in annual reports? Speculate on the probable reason for these ratios appearing in annual reports.
• List the sections of annual reports where ratios are most frequently located, in order of use.
• Financial ratios are used extensively in annual reports to interpret and explain financial statements.Comment.
• CPAs regard which two financial ratios as the most significant? The highest rated profitability ratio? The highest debt ratio?
• List the top five financial ratios included in corporate objectives according to the study reviewed in this book. Indicate what each of these ratios primarily measures.
• The commercial loan officers did not list the dividend payout ratio as a highly significant ratio, but they did indicate that the dividend payout ratio appeared frequently in loan agreements. Speculate on the reason for this apparent inconsistency.
• During 2006, net LIFO inventory adjustments increased segment operating profit for Performance Chemicals and Decorative Products by how much, respectively?
Go to the SEC Web site (http://www.sec.gov).Under “Filings & Forms (EDGAR),” click on“Search for Company Filings.” Click on“Companies & Other Filers.” Under Company Name, enter “Omnova Solutions” (or under Ticker Symbol, enter “OMN”). Select the 10-K filed January 26, 2007.a.
Go to the SEC Web site (http://www.sec.gov).Under “Filings & Forms (EDGAR)”, click on“Search for Company Filings.” Click on“Companies & Other Filers.” Under Company Name, enter “Baldor Electric Company” (or under Ticker Symbol, enter “BEZ”). Select the 10-K filed
Webster Corporation’s statement of cash flows for the year ended December 31, 2007, was prepared using the indirect method, and it included the following items:Net income $100,000 Noncash adjustments:Depreciation expense 20,000 Decrease in accounts receivable 8,000 Decrease in inventory 25,000
The following information was taken from the 2007 financial statements of Jones Corporation:Accounts receivable, January 1, 2007 $ 30,000 Accounts receivable, December 31, 2007 40,000 Sales (all credit sales) 480,000 Note: No accounts receivable were written off or recovered during the
Consider the following data for three different companies:The patterns of cash flows for these firms differ. One firm is a growth firm that is expanding rapidly, another firm is in danger of bankruptcy, while another firm is an older firm that is expanding slowly.Required Select the growth firm,
Szabo Company presented the following data with its 2007 financial statements:Requireda. Prepare a statement of cash flows with a three-year total column for 2005–2007.b. Comment on significant trends you detect in the statement prepared in (a).c. Prepare a statement of cash flows, with
The purchase of land by the issuance of bonds payable should be presented in a statement of cash flows in which of the following sections?1. Cash flows from operating activities 2. Supplemental schedule of noncash investing and financing activities 3. Cash flows from investing activities 4. Cash
Management should use the statement of cash flows for which of the following purposes?1. Determine the financial position 2. Determine cash flow from investing activities 3. Determine the balance in accounts payable 4. Determine the balance in accounts receivable 5. None of the above
Working capital is defined as 1. Current assets less current liabilities.2. Cash equivalent accounts less current liabilities.3. Current assets less notes payable.4. Total assets less current liabilities.5. Current assets less cash equivalent accounts.
A transaction that will increase working capital is 1. Purchase of marketable securities.2. Payment of accounts payable.3. Collection of accounts receivable.4. Sale of common stock.5. None of the above.
Which of the following is not a typical cash flow under operating activities?1. Cash inflows from sale of goods or services 2. Cash inflows from interest 3. Cash outflows to employees 4. Cash outflows to suppliers 5. Cash inflows from sale of property, plant, and equipment
How would short-term investments in marketable securities be classified?1. Operating activities 2. Financing activities 3. Investing activities 4. Noncash activities 5. Cash and cash equivalents
What type of account is inventory?1. Investing 2. Financing 3. Operating 4. Noncash 5. Sometimes operating and sometimes investing
How would revenue from services be classified?1. Investing inflow 2. Investing outflow 3. Operating inflow 4. Operating outflow 5. Financing outflow
Which of the following represents an internal source of cash?1. Cash inflows from financing activities 2. Cash inflows from investing activities 3. Cash inflows from selling land 4. Cash inflows from operating activities 5. Cash inflows from issuing stock
Which of the following items is not included in the adjustment of net income to cash flows from operating activities?1. Increase in deferred taxes 2. Amortization of goodwill 3. Depreciation expense for the period 4. Amortization of premium on bonds payable 5. Proceeds from selling land
Which of the following current asset or current liability accounts is not included in the computation of cash flows from operating activities?1. Change in accounts receivable 2. Change in inventory 3. Change in accounts payable 4. Change in accrued wages 5. Change in notes payable to banks
Which of the following would not contribute to bankruptcy of a profitable firm?1. Substantial increase in inventory 2. Substantial increase in receivables 3. Substantial decrease in accounts payable 4. Substantial decrease in notes payable 5. Substantial decrease in receivables
Which of the following could lead to cash flow problems?1. Tightening of credit by suppliers 2. Easing of credit by suppliers 3. Reduction of inventory 4. Improved quality of accounts receivable 5. Selling of bonds
The Ladies Store presented the following statement of cash flows for the year ended December 31, 2007:Requireda. Prepare a statement of cash flows in proper form.b. Comment on the major flows of cash. Cash received: THE LADIES STORE Statement of Cash Flows For Year Ended December 31, 2007 From
Zaro Company’s balance sheets for December 31, 2007 and 2006, income statement for the year ended December 31, 2007, and the statement of cash flows for the year ended December 31, 2007, follow:The president of Zaro Company cannot understand how the company was able to pay cash dividends that
The balance sheet for December 31, 2007, income statement for the year ended December 31, 2007, and the statement of cash flows for the year ended December 31, 2007, of Bernett Company are shown below and on the following page.The president of Bernett Company cannot understand why Bernett is having
Arrowbell Company is a growing company. Two years ago, it decided to expand in order to increase its production capacity. The company anticipates that the expansion program can be completed in another two years. Financial information for Arrowbell is shown below:Requireda. Comment on the short-term
Sampson Company’s balance sheets for December 31, 2007 and 2006, as well as the income statement for the year ended December 31, 2007, are shown below.Other data:1. Dividends paid in cash during 2007 were $21,000.2. Depreciation is included in the cost of sales.3. The change in the accumulated
The income statement and other selected data for Boyer Company follow:Requireda. Prepare a schedule of change from an accrual basis to a cash basis income statement.b. Using the schedule of change from accrual basis to cash basis income statement computed in (a), present the cash provided by
The income statement and other selected data for Frish Company follow:Requireda. Prepare a schedule of change from accrual basis to cash basis income statement.b. Using the schedule of change from accrual basis to cash basis income statement computed in (a), present the cash provided by operations,
BBB Company’s balance sheet and income statement follow:Requireda. Prepare a statement of cash flows for the year ended December 31, 2007. (Present the cash flows from operations, using the indirect method.)b. Comment on the statement of cash flows. BBB COMPANY Balance Sheet December 31, 2007 and
Place an X in the appropriate columns for each of the situations. Data a. Net income b. Paid cash dividend c. Increase in receivables d. Retirement of debt-paying cash e. Purchase of treasury stock f. Purchase of equipment g. Sale of equipment h. Decrease in inventory i. Acquisition of land, using
• The following material relates to Darrow Company:Required Place an X in the appropriate columns for each of the situations. Data a. Net loss b. Increase in inventory C. Decrease in receivables d. Increase in prepaid insurance e. Issuance of common stock f. Acquisition of land, using notes
• Hornet Company had operating cash flow of $60,000 during a year in which it paid dividends of$11,000. What does this indicate about Hornet’s dividend-paying ability?
• Operating cash flow per share is a better indicator of profitability than is earnings per share. Do you agree?Explain.
• Aerco Company acquired equipment in exchange for $50,000 in common stock. Should this transaction 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?
• 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 activities. Amortization of premium on bonds and a reduction in deferred taxes are examples
• There are two principal methods of presenting cash flow from operating activities—the direct method and the indirect method. Describe these two methods.
• 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 accounts 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?
Go to the SEC Web site (http://www.sec.gov).Under “Filings & Forms (EDGAR),” click on“Search for Company Filings.” Click on“Companies & Other Filers.” Under Company Name, enter “AnnTaylor Stores Corp” (or under Ticker Symbol, enter “ANN”). Select the 10-K submitted March
Go to the SEC Web site (http://www.sec.gov).Under “Filings & Forms (EDGAR),” click on“Search for Company Filings.” Click on“Companies & Other Filers.” Under Company Name, enter “Molson Coors Brewing Co.” (or under Ticker Symbol, enter “TAP”). Select the 10-K submitted March 1,
Go to the SEC Web site (http://www.sec.gov).Under “Filings & Forms (EDGAR),” click on“Search for Company Filings.” Click on“Companies & Other Filers.” Under Company Name, enter “Dell Inc” (or under Ticker Symbol, enter “DELL”). Select the 10-K filed April 4, 2007.a. Describe
Go to the SEC Web site (http://www.sec.gov).Under “Filings & Forms (EDGAR),” click on“Search for Company Filings.” Click on“Companies & Other Filers." Under Company Name, enter "Northrop Grumman Corp" (or under Ticker Symbol, enter “NOC”). Select the 10-K submitted February 21,
With this case, we review the investor view of several restaurant companies. The restaurant companies reviewed and the year-end date are as follows:1. Yum Brands, Inc. (December 30, 2006; December 30, 2005)“Yum consists of six operating segments: KFC, Pizza Hut, Taco Bell, LJS/A&W, Yum
The Gannett Co., Inc.,∗ presented this selected financial data with its 2006 annual report.Requireda. 1. For net operating revenues, prepare a horizontal common-size analysis for 2002–2006. Use 2002 as the base.2. Comment on the results in (1).b. 1. For net operating revenues, prepare a
In its financial statements for the year ended January 31, 2003, Met-Pro disclosed the following:Net income $5,888,379 Earnings per share:Basic $0.95 Diluted $0.95“Met-Pro . . . manufactures and sells product recovery/pollution control equipment for purification of air and liquids, and fluid
Book value per share may not approximate market value per share because 1. Investments may have a market value substantially above the original cost.2. Land may have substantially increased in value.3. Market value reflects future potential earning power.4. The firm owns patents that have
The ratio that represents dividends per common share in relation to market price per common share is 1. Dividend payout.2. Dividend yield.3. Price/earnings.4. Book value per share.5. Percentage of earnings retained.
A firm has a degree of financial leverage of 1.3. If earnings before interest and tax increase by 10%, then net income 1. Will increase by 13.0%.2. Will increase by 13.3. Will decrease by 13.0%.4. Will decrease by 13.5. None of the above.
Increasing financial leverage can be a risky strategy from the viewpoint of stockholders of companies having 1. Steady and high profits.2. Low and falling profits.3. Relatively high and increasing profits.4. A low debt/equity ratio and relatively high profits.5. None of the above.
The earnings per share ratio is computed for 1. Convertible bonds.2. Redeemable preferred.3. Common stock.4. Nonredeemable preferred.5. None of the above.
Which of the following ratios gives a perspective on risk in the capital structure?1. Book value per share 2. Dividend yield 3. Dividend payout 4. Degree of financial leverage 5. Price/earnings ratio
Which of the following ratios usually reflects investor’s opinions of the future prospects for the firm?1. Dividend yield 2. Book value per share 3. Price/earnings ratio 4. Earnings per share 5. Dividend payout
In 2008, Zello Company declared a 10% stock dividend. In 2007, earnings per share was$1.00. When the 2007 earnings per share is disclosed in the 2008 annual report, it will be disclosed at 1. $1.00.2. $1.10.3. $1.20.4. $0.91.5. $0.81.
The degree of financial leverage for Zorro Company was 1.50 when EBIT was reported at $1,000,000.If EBIT goes to $2,000,000, the accompanying change in net income will be 1. $2,500,000.2. $3,000,000.3. $2,000,000.4. $1,500,000.5. $1,000,000.
a. In 2005 and 2006, Zoret Company reported earnings per share of $0.80 and $1.00, respectively. In 2007, Zoret Company declared a 4-for-1 stock split. For the year 2007, Zoret Company reported earnings of $0.30 per share. The appropriate earnings per share presentation for a three-year comparative
Consecutive five-year balance sheets and income statements of Donna Szabo Corporation are shown below and on the following page.Requireda. Compute or determine the following for the years 2003–2007.1. Degree of financial leverage 2. Earnings per common share 3. Price/earnings ratio 4. Percentage
Maple Corporation’s stockholders’ equity at June 30, 2007, consisted of the following:Preferred stock, 10%, $50 par value; liquidating value,$55 per share; 20,000 shares issued and outstanding $1,000,000 Common stock, $10 par value; 500,000 shares authorized; 150,000 shares issued and
A company has only common stock outstanding.Required Answer the following multiple-choice question. Total stockholders’ equity minus preferred stock equity divided by the number of shares outstanding represents the 1. Return on equity.2. Stated value per share.3. Book value per share.4.
On December 31, 2007, Farley Camera, Inc., issues 5,000 stock appreciation rights to its president to entitle her to receive cash for the difference between the market price of its stock and a preestablished price of$20. The date of exercise is December 31, 2010, and the required service period is
Smith and Jones, Inc., is primarily engaged in the worldwide production, processing, distribution, and marketing of food products. The following information is from its 2007 annual report:Requireda. Based on these data, compute the following for 2007 and 2006:1. Percentage of earnings retained 2.
Assume the following facts for the current year:Net income $200,000 Common dividends $20,000 Preferred dividends (The preferred stock is not convertible.) $10,000 Common shares outstanding on January 1 20,000 shares Common stock issued on July 1 5,000 shares 2-for-1 stock split on December 31
Cook Company shows the following condensed income statement information for the year ended December 31, 2007:Income before extraordinary gain $30,000 Plus: Extraordinary gain, net of tax expense of $2,000 5,000 Net income $35,000 The company declared dividends of $3,000 on preferred stock and
XYZ Corporation reported earnings per share of $2.00 in 2006. In 2007, XYZ Corporation reported earnings per share of $1.50. On July 1, 2007, and December 31, 2007, 2-for-1 stock splits were declared.Required Present the earnings per share for a two-year comparative income statement that includes
Assume the following facts for the current year:Common shares outstanding on January 1, 50,000 shares July 1, 2-for-1 stock split October 1, a stock issue of 10,000 shares Required Compute the denominator of the earnings per share computation for the current year.
Dicker Company has the following pattern of financial data for Years 1 and 2:Required Calculate earnings per share and comment on the trend. Net income Preferred stock (5%) Weighted average number of common shares outstanding Year 1 $40,000 $450,000 38,000 Year 2 $42,000 $550,000 38,000
The following data relate to Edger Company:Requireda. Compute the following for 2007, 2006, and 2005:1. Percentage of earnings retained 2. Price/earnings ratio 3. Dividend payout 4. Dividend yield 5. Book value per shareb. Comment on your results from (a). Include in your discussion the data on
The following information was in the annual report of Rover Company:Requireda. Based on these data, compute the following for 2007, 2006, and 2005:1. Percentage of earnings retained 2. Price/earnings ratio 3. Dividend payout 4. Dividend yield 5. Book value per shareb. Discuss your findings from the
A firm has earnings before interest and tax of $1,000,000, interest of $200,000, and net income of$400,000 in Year 1.Requireda. Calculate the degree of financial leverage in base Year 1.b. If earnings before interest and tax increase by 10% in Year 2, what will be the new level of earnings,
McDonald Company shows the following condensed income statement information for the current year:Required Calculate the degree of financial leverage. Revenue from sales Cost of products sold Gross profit Operating expenses: Selling expenses General expenses Operating income Other income Interest
Why can a relatively small number of stock appreciation rights prove to be a material drain on future earnings and cash of a company?
Why is the price/earnings ratio considered a gauge of future earning power?
Given a set level of earnings before interest and tax, how will a rise in interest rates affect the degree of financial leverage?
Define financial leverage. What is its effect on earnings? When is the use of financial leverage advantageous and disadvantageous?
Retroactive recognition is given to stock dividends and stock splits on common stock when computing earnings per share. Why?
The denominator of the earnings per share computation includes the weighted average number of common shares outstanding. Why use the weighted average instead of the year-end common shares outstanding?
Dividends on preferred stock total $5,000 for the current year. How would these dividends influence earnings 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 disclose earnings per share.
Go to the SEC Web site (http://www.sec.gov).Under “Filings & Forms (EDGAR),” click on“Search for Company Filings.” Click on“Companies & Other Filers.” Under Company Name, enter “ICT Group Inc” (or under Ticker Symbol, enter “ICTG”). Select the 10-K submitted March 9,
Go to the SEC Web site (http://www.sec.gov).Under “Filings & Forms (EDGAR),” click on“Search for Company Filings.” Click on“Companies & Other Filers.” Under Company Name, enter “Boeing Co” (or under Ticker Symbol, enter “BA”). Select the 10-K submitted February 16, 2007.For the

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