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financial statement analysis
Financial Statement Analysis 11th Edition K. R. Subramanyam - Solutions
It is important that an analyst understand the activities that comprise the statement of cash flows, including the disclosure of their individual elements.Required:a. Practice requires the classification of cash inflows and outflows into three categories. Identify and describe those categories.b.
Refer to the financial statements of Campbell Soup Company in Appendix A.Required:Explain how Campbell Soup Company can have net income of $401.5 million, but generate$805.2 million in cash from operations in Year 11. Explain this in language understood by a general businessperson. Illustrate your
List insights that the statement of cash flows can provide to our analysis.
Describe the computation of free cash flow. What is its relevance to financial analysis?
Discuss the importance to analysis of the statement of cash flows. Identify factors entering into the interpretation of cash flows from operations.
Contrast the purpose of the income statement with that of cash flow from operations.
Describe the two methods of reporting cash flow from operations.
Explain the three categories of adjustments in converting net income to cash flows from operations.
Describe the three major activities the statement of cash flows reports. Cite examples of cash flows for each activity.
What information can a user of financial statements obtain from the statement of cash flows?
What is the meaning of the term cash flow? Why is this term subject to confusion and misrepresentation?
Beta Company’s net income for the year is $4 million and the number of common shares out- A standing is 3 million (there is no change in shares outstanding during the year). Beta has options and warrants outstanding to purchase 1 million common shares at $15 per share.Required:a. If the average
The financial data below should be used to answer the following two questions.1. Basic earnings per share for Year 7 is (choose one of the following):a. $2.41c. $2.60b. $2.57d. $2.50 2. Diluted earnings per share for Year 7 is (choose one of the following):a. $2.43c. $2.54b. $2.55d. $2.60 WRESTLING
Stead Corporation is formed in Year 4 to take over the operations of a small business. This business proved very stable for Stead, as is evidenced here ($ in thousands):Year 4 Year 5 Year 6 Sales. . . . . . . . . . . . . . . . . . $10,000 $10,000 $10,000 Expenses (except taxes) . . . 9,000 9,000
Answer the following questions using the annual report of Colgate in Appendix A.Required:a. For 2009, 2010, and 2011 identify Colgate’s (1) tax payment/obligation if it paid the statutory tax rate, (2) tax provision made in the books, and (3) the actual tax payment/obligation. Broadly quantify
Cendant was formed on December 18, 1997, via the merger of CUC Inter-national and HFS, Inc. The company owns the rights to franchises and brands including Avis, Century 21 Real Estate, Coldwell Banker, Days Inn, Howard Johnson, and Ramada. The consolidated entity got off to a bad start when it was
In preparing its Year 9 adjusting entries, the Singapore Company neglected to adjust rental fees received in advance for the amount of rental fees earned during Year 9. What is the effect of this error?a. Net income is understated, retained earnings are understated, and liabilities are
The accountant of Gourmet Foods had not made any entries regarding the sale of this division.The tax accountant opined that 35% of the gain on sale would be taxable.Required:a. Gourmet Foods’ auditor decides that the sale of the meat-packing division should be treated as a discontinued operation.
The unaudited income statement and balance sheet of Gourmet Foods Corporation for the years 2012 and 2011 are given below (in $ million):INCOME STATEMENT BALANCE SHEET 2012 2011 2012 2011 Revenues. . . . . . . . . . . . . . . . . 2,026 1,578 Operating assets . . . . . . . . . 4,450 4,000 Operating
Refer to the annual report of Campbell Soup Company in Appendix A.Required:a. Compute all of the expense categories as a percentage of sales for each of the three years shown. Analyze and comment on the percentages computed.b. Comment on the extent to which each component in (a) is expected to
Refer to the annual report of Colgate in Appendix A at the back of this book.Required:a. Compute all of the expense categories as a percentage of sales for each of the three years shown. Analyze and comment on the percentages computed.b. Comment on the extent to which each component in (a) is
Champion had 2 million shares outstanding on December 31, Year 7, its year-end. On March 31, A Year 8, Champion paid a 10% stock dividend. On June 30, Year 8, Champion sells $10 million of 5% convertible debentures, convertible into common shares at $5 per share. The AA bond rate on the issue date
Publicly traded companies are required to report earnings per share data on the face of the income statement.Required:Compare and contrast basic earnings per share with diluted earnings per share for each of the following:a. The effect of dilutive stock options and warrants on the number of shares
Companies sometimes use earnings management techniques to increase reported earnings per share by as little as 1 cent.Required:Explain why a 1 cent change in reported earnings per share would be insignificant for some companies but significant for other companies. Include in your answer references
Primrose Co. uses the deferred method for interperiod tax allocation. Primrose reports depreciation expense for machinery purchases for the current year using the modified accelerated cost recovery system (MACRS) for income tax purposes and the straight-line basis for financial reporting. The tax
Some research shows that the price of stock is likely to fall in the days leading up to the fixing of the exercise price for employee stock options. It is suggested that the price decreases are the result of selective news releases from managers. Specifically, managers are asserted to delay the
On August 1, 2003, the board of directors of Incent.Com approved a stock option plan for its middle managers and software design professionals (100 employees). The plan awards 1,000 shares of$5 par value common stock to each employee. The grant date is January 1, 2004. The option(exercise) price of
Current accounting rules specify that companies must recognize the cost of compensating EXERCISE 6–11 employees through stock options (ESOs) on the income statement as part of share-based compensation expense.Required:a. Briefly describe the accounting for ESOs.b. Why is there a cost when a
The annual research and development costs for Frontier Biotech for years 2002 through 2006 are shown here ($ millions):2002 2003 2004 2005 2006$5.1 $5.9 $6.0 $6.2 $3.3 Required:a. Comment on the manner in which research and development costs impact net income in both the current year and in future
An analyst must be familiar with the concepts involved in determining income. The amount of income reported for a company depends on the recognition of revenues and expenses for a given time period. In certain cases, costs are recognized as expenses at the time of product sale; in other situations,
Lookhere.Com and StopIn.Com enter into a reciprocal agreement whereby (1) StopIn.Com is given valuable advertising space on the home page of Lookhere.Com and (2) Lookhere.Com is given valuable advertising space on the home page of StopIn.Com. The main source of revenue for both StopIn.Com and
Crime Control Co. accounts for a substantial part of its alarm system sales under the sales-type(capitalized) lease method. Under this method the company computes the present value of the total receipts it expects to get (over periods as long as eight years) from a lease and records this present
Michael Company accounts for a long-term construction contract using the percentage-ofcompletion method. It is a four-year contract currently in its second year. Recent estimates of total contract costs indicate the contract will be completed at a profit to Michael Company.Required:a. What
Revenue is usually recognized at the point of sale. Under special circumstances, dates other than the point of sale are used for timing of revenue recognition.Required:a. Why is point of sale usually used as the basis for the timing of revenue recognition?b. Disregarding special circumstances when
Harvatin Group reported net income totaling $1,000,000 for the year 2006. The following is EXERCISE 6–4 additional information obtained from the Harvatin Group’s financial reports:The Company purchased 100,000 shares of Micron Specialists for $10 per share during the fourth quarter of 2006. The
There are various types of accounting changes requiring different types of reporting treatments.Understanding the different changes is important to analysis of financial statements.Required:a. Under what category of accounting changes is the change from sum-of-the-years’-digits method of
The following quote is taken from an article (by L. Bernstein) scrutinizing use of reserves to recognize future costs and losses.The growing use of reserves for future costs and losses impairs the significance of periodically reported income and should be viewed with skepticism by the analyst of
Many companies report discontinued operations in their income statements and balance sheets.Required:a. What is your best estimate of the summary journal entry recording the disposal of discontinued operations.b. What is included in the income (expense) items relating to discontinued operations as
In estimating the value of common stock, the amount of EPS is considered an important element.a. Explain why EPS is important in the valuation of common stock.b. Is EPS equally important in valuing a preferred stock? Why or why not?
Accounting for earnings per share has certain weaknesses that our analysis must consider for interpreting EPS data. Identify and discuss at least two weaknesses.
EPS can affect a company’s stock prices. Can a company’s stock prices affect EPS?
How does the payment of dividends on preferred stock affect the EPS computation?
What is the purpose underlying the reporting of diluted EPS?
Discuss uses of EPS and reasons or objectives for the current method of reporting EPS.
Why is a thorough understanding of the principles governing computation of EPS important to our analysis?
Identify and explain at least one flaw to which tax allocation procedures are subject.
What are the disclosure requirements when accounting for income taxes?
List four general cases giving rise to temporary differences between financial reporting and tax reporting.
What are the main requirements of accounting for income taxes?
What factors cause the effective tax rate to differ from the statutory rate?
Net income computed on the basis of financial reporting often differs from taxable income due to permanent differences. What are permanent differences and how do they arise?
What is option overhang? What does it measure? How is it determined?
What are the economic costs to issuing employee stock options at the prevailing market price?
Describe the calculation of compensation expense associated with employee stock options. Is it necessary for a company to charge option-related compensation expense to income? Where in the income statement is compensation expenses reported?
List and discuss the factors that affect the fair value of an option.
Distinguish between the intrinsic value and the fair value of an option.
a. What is the main provision of accounting for capitalization of interest, and what are its objectives?b. How is interest to be computed, and how is the interest rate to be ascertained?c. What restrictions to capitalization are imposed in practice and when does the capitalization period begin?
Contrast the computation of total interest costs of a bond issue with warrants attached to an issue of convertible debt.
What aspects of the valuation and the amortization of goodwill must analysts be alert to?
What information does our analysis need regarding R&D outlays, especially in light of the limited disclosure requirements in practice?
Discuss the accounting standards that govern R&D costs. What are the disclosure requirements?
Describe aspects of revenue recognition that an analyst must be especially alert to.
Distinguish between the two major methods used to account for revenue under long-term contracts.
Explain how accounting practice defines a product financing arrangement.
An ability to estimate future returns (when right of return exists) is an important consideration in revenue recognition. Identify factors impairing the ability to predict future returns.
Identify the conditions that are usually required before a sale with right of return is recognized as a sale and the resulting receivable is recognized as an asset.
Describe the conditions that are usually required before revenue is considered realized.
How should an analyst treat special items?
How do companies use special charges to influence investors’ perceptions regarding company value?
Explain what special items are. Give three examples of special items.
Accounting practice distinguishes among different types of accounting changes. Identify three different types of accounting changes.
For each of the three items, (1) depreciation, (2) inventory, and (3) installment sales, explain:a. Two acceptable accounting methods for reporting purposes.b. How each of the two acceptable accounting methods identified affect current period income.(CFA Adapted)
Identify some accounting sources of income distortion.
What conditions are necessary for an item to qualify as a prior period adjustment?
Describe the accounting treatment for discontinued operations. How should an analyst treat discontinued operations?
How does accounting define an extraordinary item? Cite three examples of such an item. What are the analysis implications of such an item?
Operating vs. nonoperating and recurring vs. nonrecurring are two distinct dimensions of classifying income. Explain this statement and discuss whether or not you agree with it.
Distinguish between operating and nonoperating income. Cite examples of items that are typically included in each category.
Analysts often refer to the core income of a company. What is meant by the term core income?
Although comprehensive income is the bottom line income number, it is rarely reported in the income statement. Where will you typically find details regarding comprehensive income?
Distinguish between net income, comprehensive income, and continuing income. Cite examples of items that create differences between these three income measures.
Explain how accountants measure income.
What are the two basic economic concepts of income? What implications do they have for analysis?
Define income. Distinguish income from cash flow.
Explain why an analyst attaches great importance to evaluation of the income statement.
Refer to the financial statements of Campbell Soup Company in Appendix A at the end of the book.Required:a. As of July 28, Year 11, Campbell owned 33% of Arnotts Limited. Explain where Campbell reports the amounts representing this investment.b. Note 18 contains disclosures regarding the market
Your supervisor asks you to analyze the potential purchase of Drew Company by your firm, Pierson, Inc. You are provided the following information (in millions):Required:a. Prepare a pro forma combined balance sheet using purchase accounting. Note that Pierson pays $180 million in cash for Drew
The following data are from the annual report of Francisco Company, a specialized packaging manufacturer:Potter Company, a manufacturer of glassware, made the following acquisitions of Francisco common shares:January 1, Year 6 10 shares at $10 per share January 1, Year 7 290 shares at $11 per
Burry Corporation acquires 80% of Bowman Company for $40 million on January 1, Year 6. At the time of acquisition, Bowman has total net assets with a fair value of $25 million. For the years ended December 31, Year 6, and December 31, Year 7, Bowman reports net income (loss) and pays dividends as
The following data are taken from the December 31 annual report of Bailey Company:($ in thousands) 2004 2005 2006 Sales. . . . . . . . . . . . . $50,000 $60,000 $70,000 Net income . . . . . . . . 2,000 2,200 2,500 Dividends paid . . . . . 1,000 1,200 1,500 Bailey had 1,000,000 common shares
Cited here are four unrelated cases involving marketable equity securities:1. A noncurrent portfolio of available-for-sale equity securities with an aggregate market value in excess of cost; includes one particular security whose market value has declined to less than one-half of the original
Munger.Com began operations on January 1, 2006. The company reports the following information about its investments at December 31, 2006:Required:a. Show how each of these investments are reported on the Munger.Com balance sheet.b. For assets that are marked to market, indicate where the unrealized
Bethel Company has a foreign wholly owned subsidiary, Home Brite Company. The parent uses the current rate method to compute the cumulative translation adjustment.Required:Explain how the use of the current rate method affects each of the following:a. Reported sales and income of Home Brite.b.
The diagram below portrays Company X (the parent or investor company), its two subsidiaries C1 and C2, and its “50% or less owned” affiliate C3. Each of the companies has only one type of stock outstanding, and there are no other significant shareholders in either C2 or C3. All four companies
Spellman Company acquires 90% of Moore Company in a business combination. The total consideration is agreed upon, but the exact nature of Spellman’s payment is not yet fully specified. This business combination is accounted for as a purchase. It is expected that at the date of the business
A company can have passive interest (noninfluential) investments, significant influential investments, or controlling interests. Passive interest investments can be trading, available-for-sale, or held-to-maturity securities.Required:a. Describe the valuation basis at which each of these types of
Refer to Exhibit 5.5 to answer the following ques-tions about Microsoft Corporation investments.a. Microsoft reports unrealized gains and unrealized losses on securities. Accordingly, the investment cost basis is marked to market. What type of account is increased or decreased as a result (asset
An important element in accounting for investment securities concerns the distinction between its noncurrent and current classification.Required:a. Why do most companies maintain an investment portfolio consisting of both current and noncurrent securities?b. What factors should an analyst consider
Identify and discuss at least three implications for analysis of financial statements that result from the accounting for foreign currency translation.
Discuss the major objectives of current accounting practice involving foreign currency translation.
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