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financial statement analysis

Financial Statement Analysis 11th Edition K. R. Subramanyam - Solutions

Identify and discuss the major provisions of accounting for foreign currency translation.
Indicate factors that can alter estimates for the benefit periods of intangible assets.
When a balance sheet reports a substantial dollar amount for goodwill, discuss what we should be concerned with in our analysis.
Resources, Inc., is engaged in an aggressive program of acquiring competing companies through the exchange of common stock.a. Explain how an acquisition program might contribute to the rate of growth in earnings per share of Resources, Inc.b. Explain how the income statements of prior years might
When an acquisition accounted for as a purchase is effected for stock or other equity securities, discuss what our analysis should be alert to.
Assume a company appropriately determines the total cost of a purchased entity. Explain how the company allocates this total cost to the following assets.a. Goodwill. g. Raw materials.b. Negative goodwill (bargain purchase). h. Plant and equipment.c. Marketable securities. i. Land and mineral
From an analysis point of view, is pooling accounting or purchase accounting for a business combination preferable? Explain with reference to the balance sheet and income statement.
Describe how you determine the valuation of assets acquired in a purchase when:a. Assets are acquired by incurring liabilities.b. Assets are acquired in exchange of common stock.
The following note appears in the financial statements of Best Company for the period ending December 31, Year 1:Event subsequent to December 31, Year 1: In January Year 2, Best Company acquired Good Products, Inc., and its affiliates by the issuance of 48,063 shares of common stock. Net assets of
Identify and explain some of the important limitations of consolidated financial statements.
Describe important information potentially disclosed in the individual parent and subsidiary companies’financial statements that is not found in their consolidated statements.(CFA Adapted)
Evaluate the following statement from an analysis viewpoint: “A parent company is not responsible for the liabilities of its subsidiaries nor does it own the assets of its subsidiaries. As such, consolidated financial statements distort legal realities.”
Describe the accounting treatment for speculative derivatives.
Describe the accounting treatment for both fair value hedges and cash flow hedges.
Give an example of a cash flow hedge and an example of a fair value hedge.
When does a derivative security qualify for hedge accounting?
What is a hedge transaction?
Describe an option contract. When is an option likely to be exercised?
Describe a swap contract. How are swaps typically used by companies?
Describe a futures contract.
Distinguish between hedging and speculative activities with regard to derivatives.
Many investors view noninfluential stock investments (stock purchased to earn return versus stock purchased to gain influence over another entity for strategic purposes) as a signal to sell a stock. Why might a noninfluential stock investment be perceived as a negative signal about the prospects of
Describe weaknesses and inconsistencies in accounting for noncurrent security investments that are relevant for analysis purposes.
a. Evaluate the accounting for investments when holding between 20 and 50% of equity securities of an investee from the view of an analyst of financial statements.b. When are losses in noncurrent security investments recognized? Evaluate the accounting governing recognition of these losses.
Describe accounting procedures governing valuation and presentation of noncurrent investments.Distinguish between accounting for investments in equity securities of an investee when holding (a) less than 20% of voting shares outstanding and (b) 20% or more of voting shares outstanding.
On June 30, Year 1, your client, the Vandiver Corp., is granted two patents covering plastic cartons that it has been producing and marketing profitably for the past three years. One patent covers the manufacturing process, and the other covers related products. Vandiver executives tell you that
Jay Manufacturing, Inc., began operations five years ago producing probos, a new medical instru-ment it hoped to sell to doctors and hospitals. The demand for probos far exceeded initial expectations, and the company was unable to produce enough probos to meet demand. The company was manufacturing
Mirage Resorts, Inc., recently completed construction of Bellagio Hotel and Casino in Las Vegas.Total cost of this project was approximately $1.6 billion. The strategy of the investors is to build a gambling environment for “high rollers.” As a result, they paid a premium for property in
Among the crucial events in accounting for property, plant, and equipment are acquisition and disposition.Required:a. What expenditures should be capitalized when a company acquires equipment for cash?b. Assume the market value of equipment acquired is not determinable by reference to a similar
Assume that a machine costing $300,000 and having a useful life of five years (with no salvage value) generates a yearly income before depreciation and taxes of $100,000.Required:Compute the annual rate of return on this machine (using the beginning-of-year book value as the base) for each of the
Sports Biz, a profitable company, built and equipped a $2,000,000 plant brought into operation early in Year 1. Earnings of the company (before depreciation on the new plant and before income taxes) is projected at $1,500,000 in Year 1, $2,000,000 in Year 2, $2,500,000 in Year 3,$3,000,000 in Year
Trimax Solutions develops software to support e-commerce. Trimax incurs substantial computer software development costs as well as substantial research and development (R&D) costs related to other aspects of its product line. Under GAAP, if certain conditions are met, Trimax capitalizes software
Refer to the financial statements of Campbell Soup Company in Appendix A.Required:a. By means of T-account analysis, explain the changes in Campbell’s Property, Plant, and Equipment account for Year 11. Provide as much detail as the disclosures enable you to provide. (Hint: Utilize information
Excerpts from the annual report of Lands’ End follow ($ in thousands):Required:a. What would ending inventory have been at Year 9 and Year 8 had FIFO been used?b. What would net income for the year ended Year 9 have been had FIFO been used?c. Discuss the usefulness of LIFO to FIFO restatements
BigBook.Com uses LIFO inventory accounting. Notes to BigBook.Com’s Year 9 financial state- PROBLEM 4–2 ments disclose the following (it has a marginal tax rate of 35%):Inventories Year 8 Year 9 Raw materials . . . . . . $392,675 $369,725 Finished products . . . 401,342 377,104 794,017 746,829
Assume you are analyzing the financial statements of ABEX Chemicals. Your analysis raises concerns with certain accounting procedures that potentially distort its operating results.Required:a. Data for ABEX Corp. is reported in Case 10–5. Using the data in Exhibit I of that case, describe how
Refer to the financial statements of Campbell Soup Company in Appendix A.Required:Campbell Soup mainly uses the LIFO cost assumption in determining its cost of goods sold and inventory amounts. Compute both ending inventory and gross profit of Campbell Soup for Year 11 assuming the company uses
Which of the following items are classified as assets on a typical balance sheet? a. Depreciation. b. CEO salary. c. Cash. d. Deferred income taxes. e. Installment receivable (collectible in three years). f. Capital withdrawal (dividend). g. Inventories. h. Prepaid expenses. i. Deferred charges. j.
Refer to the financial statements of Campbell Soup Company in Appendix A.Required:a. Compute the following analytical measures applied to Campbell Soup for both Years 10 and 11:(1) Average total life span of plant and equipment.(2) Average age of plant and equipment.(3) Average remaining life of
Refer to the financial statements of Colgate in Appendix A.Required:a. Compute the following analytical measures applied to Colgate for 2006:(1) Average total life span of plant and equipment.(2) Average age of plant and equipment.(3) Average remaining life of plant and equipment.b. Discuss the
An analyst must be familiar with the determination of income. Income reported for a business entity depends on proper recognition of revenues and expenses. In certain cases, costs are recognized as expenses at the time of product sale; in other situations, guidelines are applied in capitalizing
A balance sheet, which is intended to present fairly the financial position of a company, frequently is criticized for not reflecting all assets under the control of a company.Required:Cite five examples of assets that are not presently included on the balance sheet. Discuss the implications of
During a period of rising inventory costs and stable output prices, describe how net income and total assets would differ depending upon whether LIFO or FIFO is applied. Explain how your answer would change if the company is experiencing declining inventory costs and stable output prices.
Refer to the financial statements of Campbell Soup Company in Appendix A.Required:a. Compute Year 10 cost of goods sold and gross profit under the FIFO method. (Note: At the end of Year 9, LIFO inventory is $816.0 million, and the excess of FIFO inventory over LIFO inventory is $88 million.)b.
Inventory and cost of goods sold figures prepared under the LIFO cost flow assumption versus the FIFO cost flow assumption can differ dramatically.Required:a. Would an analyst consider ending inventory asset value more useful if computed using LIFO or FIFO? Explain.b. Would an analyst consider cost
Cost for inventory purposes should be determined by the inventory cost flow method best reflecting periodic income.Required:a. Describe the inventory cost flow assumptions of (1) average-cost, (2) FIFO, and (3) LIFO.b. Discuss management’s usual reasons for using LIFO in an inflationary
K2 Sports, a wholesaler that has been in business for two years, purchases its inventories from various suppliers. During these two years, each purchase has been at a lower price than the previous purchase. K2 uses the lower-of-(FIFO)-cost-or-market method to value its inventories. The original
On December 31, Year 1, Carme Company reports its accounts receivable from credit sales to customers. Carme Company uses the allowance method, based on credit sales, to estimate bad debts. Based on past experience, Carme fails to collect about 1% of its credit sales. Carme expects this pattern to
a. Describe at least two assets not recorded on the balance sheet.b. Explain how an analyst evaluates unrecorded assets.
Identify five types of deferred charges and describe the rationale of deferral for each.
Describe analysis implications for goodwill in light of current accounting procedures.
a. Identify the basic accounting procedures governing valuation of intangible assets.b. Distinguish between accounting for internally developed and purchased goodwill (and intangibles).c. Discuss the importance of distinguishing between identifiable intangibles and unidentifiable intangibles.d.
From the view of a user of financial statements, describe objections to using historical cost as the basis for valuing tangible assets.
The net income of companies that explore for natural resources can sometimes bear little relation to the asset amounts reported on the balance sheet for natural resources.a. Explain how the lack of a relation between income and natural resource assets can occur.b. Describe circumstances when a more
Distinguish between a “hard asset” and a “soft asset.” Cite several examples.
Explain when an expenditure should be capitalized versus when it should be expensed.
Analysts must be alert to what aspects of goodwill in their analysis of financial statements?
Identify analytical tools useful in evaluating deprecation expense. Explain why they are useful.
Analysts cannot unequivocally accept the depreciation amount. One must try to estimate the age and efficiency of plant assets. It is also useful to compare depreciation, current and accumulated, with gross plant assets, and to make comparisons with similar companies. While an analyst cannot adjust
Comment on the following: Depreciation accounting is imperfect for analysis purposes.
Manufacturers report inventory in the form of raw materials, work-in-process, and finished goods. For each category, discuss how an increase might be viewed as a positive or a negative indicator of future performance depending on the circumstances that led to the inventory build up.
Compare and contrast the effects of LIFO and FIFO inventory costing methods on earnings in an inflationary period.
Companies typically apply the lower-of-cost-or-market (LCM) method for inventory valuation.a. Define cost as it applies to inventory valuation.b. Define market as it applies to inventory valuation.c. Discuss the rationale behind the LCM rule.d. Identify arguments against the use of LCM.
Discuss current disclosures for inventory valuation methods and describe how these disclosures are useful in our analysis. Identify additional types of inventory disclosures that would be useful for analysis purposes.
Explain the major objective(s) of LIFO inventory accounting. Discuss the consequences of using LIFO in both measurement of income and the valuation of inventories for the analysis of financial statements.
a. Describe the importance of the level of activity on the unit cost of goods produced by a manufacturer.b. Allocation of overhead costs requires certain assumptions. Explain and illustrate cost allocations and their links to activity levels with an example.
a. Discuss the consequences for each of the acceptable inventory methods in recording costs of inventories and in determination of income.b. Comment on the variation in practice regarding the inclusion of costs in inventories. Give examples of at least two sources of such cost variations.
a. What is meant by the factoring or securitization of receivables?b. What does selling receivables with recourse mean? What does it mean to sell them without recourse?c. How does selling receivables (particularly with recourse) potentially distort the balance sheet?
a. Identify the main concerns in analysis of accounts receivable.b. Describe information, other than that usually available in financial statements, that we should collect to assess the risk of noncollectibility of receivables.
a. Explain the concept of a company’s operating cycle and its meaning.b. Discuss the significance of the operating cycle to classification of current versus noncurrent items in a balance sheet. Cite examples.c. Is the operating cycle concept useful in measuring the current debt-paying ability of
Companies typically report compensating balances that are required under a loan agreement as unrestricted cash classified within current assets.a. For purposes of financial statement analysis, is this a useful classification? Explain.b. Describe how you would evaluate compensating balances.
What is Colgate’s cash flow with respect to postretirement plans? What is the estimated cash flow for 2012?
What are the key actuarial assumptions that Colgate makes? Has Colgate changed any assumptions during 2011? What effects will the changes have on Colgate’s economic and reported position and cost?
Identify how the reported cost is articulated with the net position included in the balance sheet. (Hint: How are the net deferrals recognized—or not recognized—on the balance sheet?)
What is Colgate’s actual return on plan assets? How much does it recognize for the year (when determining reported benefit cost)?
Identify and quantify the nonrecurring amounts that are deferred during the year.
What is the reported benefit cost that is included in net income for the year? What are its components?
What is the closing value of plan assets? Which asset classes does Colgate invest in and what proportions?
What is the net economic position of each plan if it is terminated?
Identify the amount of accumulated benefit obligation (ABO) and the projected benefit obligation (PBO).Which amount is recognized in the balance sheet? Which is closer to Colgate’s legal obligation?
Where in the balance sheet are the reported amounts included?
What is the closing amount reported in the balance sheet? Is it a net asset or net liability?
What is the closing net economic position of the plan? Is it a net asset or net liability?
Xenix Inc. issued $100 million of 10-year zero coupon convertible bonds. For every $1,000 of face value of the bond, the holder was entitled to 25 shares of the company’s common stock. It was determined that a pure bond with maturity and risk profile similar to the convertible bond would have an
The weighted-average discount rate used in determining General Energy Co.’s actuarial present value of its pension obligation is 8.5%, and the assumed rate of increase in future compensation is 7.5%. The expected long-term rate of return on its plan assets is 11.5%. Its pension obligation at the
Refer to the financial statements of Campbell Soup Company in Appendix A. The Note on Pension Plans and Retirement Benefits describes computation of pension expense, projected benefit obligation (PBO), and other elements of the pension plan (all amounts in millions).Required:a. Explain what the
The U.S. government actively seeks the identification and cleanup of sites that contain hazardous materials. The Environmental Protection Agency (EPA)identifies contaminated sites under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). The government will force
Westfield Capital Management Co.’s equity investment strategy is to invest in companies with low price-to-book ratios, while considering differences in solvency and asset utilization. Westfield is considering investing in the shares of either Jerry’s Departmental Stores ( JDS) or Miller
Cybernetics Inc. issued $60 million of 5% three-year bonds, with coupon paid at the end of every year. The effective interest rate at the beginning of Years 1, 2, and 3 was 8%, 5%, and 2%.Required:a. Determine what Cybernetics would have raised from the bond issue.b. Assume Cybernetics decides to
Refer to the financial statements of Campbell Soup Company in Appendix A.Required:a. Campbell Soup Company has zero coupon notes payable outstanding.(1) Indicate the total amount due noteholders on the maturity date of these notes.(2) The liability for these notes is lower than the maturity value.
Carson Company sponsors a defined benefit pension plan. The plan provides pension benefits determined by age, years of service, and compensation. Among the components included in the recognized net pension cost for a period are service cost, interest cost, and actual return on plan
IBM recently announced its intention to begin offering a cash balance pension plan.A cash balance pension plan is a form of defined contribution pension plan. IBM is not alone as there is a distinct trend in favor of defined contribution pension plans.Required:a. Describe the ramifications for
The purchase of treasury stock (commonly called stock buybacks) is being done with increasing frequency in lieu of dividend payments.Required:a. Explain why stock buybacks are similar to dividends from the company’s viewpoint.b. Explain why managers might prefer the purchase of treasury shares to
Presidential Realty Corporation reports the following regarding its distributions paid on common stock: “Cash distributions on common stock were charged to paidin surplus because the parent company has accumulated no earnings (other than its equity in undistributed earnings of certain
Capital stock is a major part of a corporation’s equity. The term capital stock embraces both common and preferred stock.Required:a. Identify the basic rights inherent in ownership of common stock and explain how owners exercise them.b. Describe preferred stock. Discuss various preferences often
Ownership interests in a corporation are reported both in the balance sheet under shareholders’equity and in the statement of shareholders’ equity.Required:a. List the principal transactions and events reducing the amount of retained earnings. (Do not include appropriations of retained
Refer to the financial statements of Campbell Soup Company in Appendix A.Required:a. Identify the cause of the $101.6 million increase in shareholders’ equity for Year 11.b. Compute the average price at which treasury shares were repurchased during Year 11.c. Compute the book value of common
Lawsuits are one type of contingent loss, where the loss is contingent upon an adverse settlement or verdict in the case. Domestic tobacco companies are currently facing lawsuits from several states. The tobacco litigation loss contingency should be accrued if a loss is probable and can be
Nearly all companies confront loss contingencies of various forms.Required:a. Describe what conditions must be met for a loss contingency to be accrued with a charge to income.b. Explain when disclosure is required, and what disclosures are necessary, for a loss contingency that does not meet the
Consider the following excerpt from an article published in Forbes:The article went on to list 92 companies reporting no more than 5% of total capitalization in noncurrent debt on their balance sheets.Required:Explain how so-called debt-free companies (in the sense used by the article) can possess

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