The Analysis And Use Of Financial Statements 3rd Edition Gerald I. White, Ashwinpaul C. Sondhi, Haim D. Fried - Solutions

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3. Is there any necessity to regulate corporate reporting in the context of present world economic scenario ? Give reasons.
4. Explain the meaning and importance of 'Full of Disclosure'.
5. Give a brief note on mandatory and voluntary disclosures as reported in annual reports of companies.
6. What are statutory disclosures ? Write a detailed note.
7. What are the information conveyed through the annual reports of companies ?
8. Explain the meaning and need of segment reporting.
9. Discuss the initiatives taken in India to make corporate information more transparent in recent days.
10. How much transparency in corporate reporting do you expect ? Explain with reasons.
11. Discuss the current status of corporate reporting in India.
12. Why and in what way is corporate financial disclosure so important for investors ?
14. [Derivatives and hedges] The Resh Company borrows using variable-rate debt and invests the proceeds in fixed-rate mort- gages. On January 1, 2000, the company entered into an interest rate swap maturing December 31, 2001 with a notional amount of $10 million The company agreed to pay a fixed
13. [Hedging foreign currency cash flows]. Holmen exports much of its paper, paperboard, and timber pro- duction to other European countries. Panel A of Exhibit 16P-2 contains data from Holmen's 2001 financial nsk management discussion. Holmen reports in Swedish krona (SEK).a. Discuss why Holmen
12. [Foreign currency hedges] Amerada Hess [AHC] reports in its 2001 financial statements that The Corporation uses foreign exchange contracts to re- duce its exposure to fluctuating foreign currency rates, principally the pound sterling. At December 31, 2001, the Corporation has $136 million of
b. Explain the likely reason for the change in hedge quantities from 2000 to 2001.c. State the additional information you would need to evaluate the impact of these hedges on Amerada's earnings and ex- plain how that information would be useful.d. Describe the effect of Amerada's 2001 hedges on
11. [Hedging output prices] Amerada Hess [AHC) reported in its 2001 financial statements (Note 14) that: The corporation produced 109 million barrels of crude oil and natural gas liquids and 296 million Mef of nat- ural gas in 2001. At December 31, 2001, the Corpora- tion's crude oil and natural
f. Discuss whether Delta's fuel price hedging program has been more successful than AMR's program. State the additional information you need to provide a definitive answer, explain- ing how that additional data would help. g. Discuss the trend in the percentage of fuel needs hedged by Delta and the
e. Compute Delta's average fuel price per gallon for 1999-2001 (i) As reported (II) Excluding hedging gains
d. Compute the change in net income before accounting change for 2000 and 2001 using (i) Reported income (ii) Income excluding hedging gains
c. Compute the effect of Delta's fuel hedging on each of the fol- lowing for the years 1999-2001: (i) Fuel expense (ii) Operating income (i) Net income before accounting change
b. Compare the information provided by AMR and Delta. State which data provided by Delta regarding its fuel price hedging activities you would wish to have for AMR. State which data provided by AMR regarding its fuel price hedging activities you would wish to have for Delta Explain why.
10. (Hedging inputs] Exhibit 16P-1 contains extracts from the 2001 financial statements of Delta Airlines [DAL]. Exhibit 16-4 and the related discussion of AMR are also needed to answer portions of the problem.a. Compare Delta's fuel price hedging strategy with that of AMR. Your answer should
9. [Cash flow classification] Black & Decker [BDK] reports the cash effects of its derivative financial instruments as fol- lows Except as noted below, cash flow from operating activi- ties includes the cash effects of the Corporation's inter- est rate swaps and caps, foreign currency transaction
8. [Embedded derivatives] Holmen issued convert- ible bonds in 1998.a. Describe how the proceeds from the bond issue would be accounted for under SFAS 133 and IAS 39.b. Describe how income in the years following the bond issue would differ from the accounting treatment that ignores the conversion
7. [Economic and accounting effects of hedges] American Ex- press [AXP] describes the following economic hedges in its 2001 Form 10-K report: I. Foreign currency forward sales... were contracted to manage a portion of anticipated cash flows from oper- ations in major overseas markets for the
6. Economic hedge] On July 12, 2001, Tokio Manne and Fire Insurance (now Millea Holdings [8766]) and Swiss Reinsurance [RUKN] announced a catastrophe risk exposure swap. Tokio Marine exchanged: ' $150 million of Japanese earthquake risk for an equal amount of California earthquake risk $150 million
5. [Foreign currency hedges] Aracruz [ARA], a Brazilian com- pany, maintains its accounting records in $U.S. The company's 2001 Form 20-F reports that At December 31, 2001. the Company had entered into five forward foreign-exchange contracts to protect its for- eign currency denominated accounts
4. [Hedging commodity price risk] Kemet [KMT] manufac- tures electronic products that use precious metals such as palla- dium and tantalum. The company reported that The increase in demand for tantalum capacitors during fiscal year 2001, along with the limited number of tan- talum powder suppliers,
3. [Hedging commodity price risk] PepsiCo [PEP] reports that it is subject to market risk with respect to the cost of com- modities because our ability to recover increased costs through higher prices may be limited by the competitive environment in which we operate. We manage this sk primarily
2. [Interest rate swap] PepsiCo [PEP] had long-term debt of $3,460 million at December 31, 2000 and $2,970 million at De- cember 31, 2001. The company reports the following informa- tion regarding interest rate swaps: $1,077 Receive fixed-pay variable Notional amount ($millions) 2000 $1,335 2001
1. [Interest rate swap] The following data were extracted from a table provided by American Express [AXP] showing the effect of interest rate swaps on its long-term debt At December 31, 2000 Interest Rate Description Balance Outstanding Notional Swap Stated Effective Notes due 8/12/02 $400 $400
7. Explain how financial statement disclos~res can be u;ed to gain insight tnto risks faced by the firm, its risk management activtties, and the impact of these activities on reported financial statements.
6. Explain fhe significance of hedge effectiveness in the accounting and analysts or hedge transactions_
S. Define, illustrate, and explain the accounting for embedded denvativcs.
4. Dtscuss the recognition and measurement issues connected with hedge accounting, including the treatment uf both realized and uruca!ized gains and los~.es.
3. Define and illustrate the types of hedge tr~nsactions:• fair value hedge.
2. Examine the hed~;ing techniques used to maaag~these rish, including forward contracts, options, and economic hedges.
I. Define and illllstrale the primary risb thJt tinns may hedge. including Jorctgn currency risk. int~re,t rat~risk, commodity price risk, nsk of changes in market value, and event risk.
11. [Analysis of foreign operations] Exhibit (5P-4 contains extracts from the 1991 Annual Report of Commercial Intertech regarding its foreign operations. The effect of exchange rate changes on cash for 1991 was $(2,075,000); inventories at October 31, 1990 and 1991 were $59,762.000 and
10. [Disaggregating operating and exchange rate effects] Con- solidated income statements for the E&O Corporation follow (in Smilhons): Revenues 2000 200: 2002 $100.0 $110.0 $120.0 Operating expenses (70.0) (72.0) (74.0) Income taxes (9.0) (11.4) (13.8) Net income $ 21.0 $ 26.6 $ 32.2 These
9. [Disaggregating operating and exchange rate effects] West- vaco's consolidated subsidiary. Rigesa, operates in Brazil. As discussed in the text, Westvaco uses the Brazilian real (BRL) as the functional currency for Rigesa Westvaco's segment data in- clude Rigesa for the three fiscal years ended
8. [Disaggregating operating and exchange rate effects] Roche, a drug multinational headquartered in Switzerland, is great y af- fected by exchange rate changes, as can be seen from its 2000 fi- nancial statements. Before answering the questions that follow, examine the "for- eign exchange rate"
7. [Balance sheet effects of currency changes] Lucent Tech- nologies [LU] has substantial foreign operations. The company's annual report for the year ended September 30, 2001 includes the following data (in $millions): Years Ending September 30 1999 2000 2001 Change in currency translation
e. The Swedish krona declined 4% against the British pound. sterling in 2000, but gained more than 1% against the Euro. Discuss how you would use this information to forecast 2000 sales in Great Britain, France, and Holland.f. Holmen's footnote 10 shows the effect of exchange rates on its fixed
d. Discuss the pitfalls of using the "local currency" data to draw conclusions about relative growth rates. Consider that much of Holmen's output consists of commodity products that are easily transported from one market to another.
c. Compare the percentage changes in local currencies (partb) with those in Swedish krona and discuss the differences.
b. Using the exchange rate data provided, compute sales for Great Britain and France in their local currencies and the per- centage change from 1998 to 1999.
6. [Currency effect on revenues and balance sheet accounts] Holmen reports net turnover (sales), operating profit. and capital expenditures by country. The 1999 annual report shows the following net turnover (in Skr millions): Sweden Great Britain France Holland All other net* 1998 1999 17,612
5. [Effect of exchange rates on foreign sales] Note 12 of Takeda's fiscal 1999 annual report shows geographic data for sales to customers outside of Japan. The sales in North America and average exchange rates for the fiscal years ended March 31 were: Sales (yen millions) Exchange rate 1998 1999
b. Assume that the U.S. dollar is the subsidiary functional cur- rency. Calculate the cost of goods sold and closing inventory in U.S. dollars using both the FIFO and LIFO methods.c. Briefly discuss how both the choice of inventory method and the choice of functional currency impact reported income
4. [Interaction of inflation, inventory valuation, and foreign ex- change effects, CFA adapted] The Emerald Company has a wholly owned subsidiary in Hibernia, whose currency is the hib. Emerald reports its financial results in U.S. dollars. The ex- change rate between the dollar and the hib follows
b. Describe the impact of the change in Fl's functional currency to the pont on FI's U.S. dollar: (i) Balance sheet as of December 31, 2000 (ii) 2000 income statement (ii) Financial ratios for 2000
3. [Effects of functional currency choice; CFAO adapted] On December 31, 2000, US Dental Supplies [USDS] created a wholly owned foreign subsidiary, Funimuni, Inc. [FI]. located in the country of Lumbara. The balance sheet of FI as of December 31. 2000, stated in local currency (the pont). follows:
c. Indicate whether the following five ratios are the same or dif- ferent under the temporal method compared to the all-current method. No calculations are necessary. (i) Return on assets (i) Debt to total assets (iii) Net profit margin (iv) Accounting receivable turnover (V) Quick ratio
2. [Effects of functional currency choice: ratio effects; CFAC adapted] Telluride has a wholly owned foreign subsidiary, Fuente. Ltd., whose functional currency is the local currency (LC). The 1999 balance sheet and income statement for Fuente are shown in Exhibit 15P-2. The relevant exchange rates
b. Calculate the 1998 balance sheet and income statement in $U.S (showing the cumulative translation adjustment).c. Explain how the decline in the value of the yen relative to the U S. dollar affected Nippon MT's earnings in the reported currency in 1998.d. Identify the alternative method for
1. [Effects of functional currency choice. CFAC adapted] Master Toy has a foreign subsidiary, Nippon M1, that makes and sells toys in Japan. All of Nippon MT's operations and sales take place in Japan. transactions are denominated in Japanese yen. and the books and records are maintained in yen.
5. [Comparison of cost and equity methods; CFA adapted] Buny acquired 19% of Bowman for $10 million on January 1. 2000. Bowman's securities are not publicly traded. On January 1, 2001, Burry purchased an additional 1% share in Bowman for $500,000. For the years ended December 31, 2000, and December
b. Based on the accounting choices made in parta, how would Burry's financial statements be affected by Bowman's oper- ating results for 2000 and 2001?
c. Repeat partb. assuming that Burry applied SFAS 115 in both 2000 and 2001
d. Repeat partb, assuming that Burry used the equity method in both 2000 and 2001.e. State and justify which of the three answers (partsb. c, ord) provides the most useful information in Burry's financial statements regarding its investment in Bowman..
6. [Marketable securities comparison of cost, equity method, and consolidation; CFAO adapted] The following data are de- rived from the annual report of the San Francisco Company, a manufacturer of cardboard boxes: Sales 2001 $25,000 Net income 2,000 Dividends paid 1.000 2002 $30,000 $35,000 2,200
7. [Marketable securities: assessing investment performance]a. P's investment in marketable secunties" consists of an available-for-sale portfolio and an affiliate carried on the eq- uity basis. Show how the (balance sheet) carrying value for the total investment portfolio was determined.
b. Disaggregate HP's reported income for 1999 and 2000 into the following components: (i) Income from operations (ii) Income from marketable securities (iii) Income from affiliates carried on equity basisc. Calculate the reported ROA for each component of income calculated in part b (for each year)
d. Discuss the usefulness of the results of parts a and b in ex- plaining IP's operating results for the two years.
c. Calculate cach of the following for HP's available-for-sale portfolio for 1999 and 2000: (i) Dividends and interest earned (ii) Realized gains and losses (iii) Unrealized gains and lossesf. Calculate the mark-to-market retum and ROA for IIP's avail- able-for-sale portfolio for 1999 and 2000. g.
8. [Equity method: tax rate assumption] HP has one affiliate, Atwood [ATW]. which is 24% owned and for which it uses the equity method. In the period 1998 2000. IP did not change its investment in ATW and did not receive any dividends from ATW. Equity income from ATW is reported net of income
b. Determine HP's assumption as to how it would eventually re- ceive income earned by Atwood. (Hint: Compute the effec- tive tax rate used for equity income)
c. Suggest why HP reported its net-of-tax equity in Atwood's income separately, below after-tax income from other oper- ations
10. Finance subsidiaries; cash flow analysis) MMF's finance (credit) receivables anse from long-term financing provided by MMF to Moore's customers. MMI "pays" Moore, and the cus- tomer repays the loan plus interest 10 MMF.a. Discuss Moore's classification of the cash received from such
b. In Chapter 3, we argue that interest payments should be in cluded in financing cash flows rather than operating cash flows. Evaluate this argument as appled to Moore's (consoh- dated) interest payments.
c. Moore's consolidated cash flow statement combines cash flows from Moore's manufacturing and MMF's financing ac- tivities, sing the data in Exhibit 13P-3 and your answers to parts a andb, prepare 2002 statements of cash flows (using the direct method) for: (i) MMI (ii) Moore's manufacturing
11. [Control requirement for consolidation] On April 12, 1996. Ford Motor Company [F] announced an increase in its owner- ship of Mazda Motor [7261], a Japanese company, from 25 to 33.4%. The infusion of $481 million of additional equity was re- quired by Mazda's weak financial condition. The
b. Discuss whether the new definition of control in the FASB exposure draft (Box 13-3) would change the answer to parta. Your answer should include a discussion of any additional in- formation required
c. Regardless of GAAP requirements, discuss whether the analysis of Ford would be improved by: (i) Applying proportionate consolidation to the investment in Mazda (ii) Fully consolidating Mazda
12. [Consolidation versus equity method]. On Oc- tober 1. 1999 Holmen merged its fine paper opera- tions with those of SCA [SCAB] to form Modo Paper, a joint venture owned 50% by cach companya. Explain how this transaction affected Holmen's financial statements, citing the financial statements and
b. Describe the effect of the Modo transaction on the following Holmen ratios: (i) Current ratio (ii) Fixed-asset turnover (iii) Return on equity
13. [Proportionate consolidation] ExxonMobil [XOM] uses the equity method to account for its investments in affiliates owned 50% or less Exhibit 13P-4 contains condensed financial state- ments for ExxonMobil and summarized financial information for its unconsolidated equity affiliates.a. Prepare a
c. Summarize the impact on ExxonMobil of the pro forma ad- justments, using the results of part b.
14. [Minority interest] The following data were obtained from the 1999 Annual Report of Nucor Corporation [NUE], which has a 51%-owned consolidated subsidiary. Minority interest at December 31, 1998 Minority interest at December 31, 1999 Distribution to minority interest (1999 financing cash flow).
15. Analysis of segment data] Exhibit 13P-5 contains industry segment data reported by Lumex (now Cybex [CYB]) in its 1994 Annual Report Lise these data to answer the following questions.a. Compute the following ratios for each segment for the years 1992 to 1994: (i) Operating profit margin (ii)
b. For each ratio calculated in parta, discuss what information the level and trend of that ratio convey about the business segment.
c. Discuss the limitations of segment data, both in terms of trends within the company over time and comparisons with similar segments of other companies.d. Discuss what additional information you would require to improve your analysis of segment operations.e. In 1996, Lumex sold its Lumex segment
16. [Analysis of geographic segment data] Exhibit 13P-6 con- tains geographic segment data from the 2000 Annual Report of Coca-Cola [KO]. Use the exhibit data to answer the following questions.a. Compute the following ratios for each segment for the years 1998 to 2000: (i) Operating profit margin
b. For each ratio calculated in parta, discuss what information the level and trend of that ratio convey about the business segment.
c. Use footnotes (a) through (e) in Exhibit 13P-6 to compute ad- justed operating profit and pretax income for the affected seg- ments.d. Use the results of part c to recompute the following ratios for the affected segments: (i) Operating profit margin (ii) Return on assets
e. Discuss the limitations of segment data, both in terms of trends within the company over time and comparisons with similar segments of other compames.
f. Discuss what additional information you would require to improve your analysis of segment operations.
5. Consider the analytical significance of acquisition goodwill.
6. Discuss international differences in acquisition ac- counting and the treatment of goodwill.
7. Review factors that affect management motivations when choosing an acquisition accounting method.
8. Explain how push-down accounting affects financial statements and ratios.
9. Describe the effects of a spinoff on a firm's financial statements.
1. Examine operating trends using data that excludes goodwill amortization or impair- ment charges.
2. Compute measures of solvency and other ratios using balance sheet data that exclude goodwill
3. Evaluate prospective acquisitions by considering the price paid relative to the assets and earnings prospects of the acquired firm, regardless of the accounting method used.
4. In subsequent years, compare the earnings of the acquired firm with the price paid, regardless of whether the purchase or pooling method was used.
1. [Purchase versus pooling; CFA adapted] Martin Manufac- turing, Inc., and Green Precision Machinery are two small metal casting and milling companies serving the aerospace and defense industry. On June 30, 2001, Martin acquired Green at a price per share equal to two times Green's book value per
Assume that sales are generated evenly throughout the year for both com- panies.a. Calculate the sales reported by Martin Manufacturing in its 2001 and 2002 financial statements for 2000, 2001, and 2002 using both the purchase and pooling-of-interests methods of accounting. Show all calculations.b.
2. [Pooling versus purchase] Ace Co. and Tar Co. merged on January 1 of year 2, forming the Acctar Co Ace issued stock worth $1,500 to effect the merger. The merger was accounted for as a pooling of interests Balance sheets for the individual companies at the end of year 1 and for the combined
a. Using the data in Exhibit 14P-3, compute each of the follow- ing ratios for PepsiCo, Quaker Oats, and the combined firms: (i) Return on total capital (operating income to long-term debt plus equity) (i) Pretax return on equity (iii) After-tax return on equity (iv) After-tax return on equity

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The Analysis And Use Of Financial Statements 3rd Edition Gerald I. White, Ashwinpaul C. Sondhi, Haim D. Fried - Solutions

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