A Further Look at Financial Statements

Financial Accounting Tools for Business Decision Making 6th Edition Solutions Manual and Test Bank

Solutions Manual and Test Bank Financial Accounting Tools for Business Decision Making 6th Edition   -- $35

Click here download the sample chapter.

* Contact us if you need help.


____________________________________________________________

Sample Chapter 2 A Further Look at Financial Statements  

Questions 
1. What is meant by the term operating cycle?  
2. 
Define current assets. What basis is used for ordering individual items within the current assets section?  
3. Distinguish between long-term investments and property, plant, and equipment.  
4. How do current liabilities differ from long-term liabilities?  
5. Identify the two parts of stockholders’ equity in a corporation and indicate the purpose of each.  
6. (a) Julia Alter believes that the analysis of financial statements is directed at two characteristics of a company: liquidity and profitability. Is Julia correct? Explain. (b) Are short-term creditors, long-term creditors, and stockholders primarily interested in the same characteristics of a company? Explain.  
7. Name ratios useful in assessing (a) liquidity, (b) solvency, and (c) profitability.  
8. Jon Baird, the founder of Waterboots Inc., needs to raise $500,000 to expand his company’s operations. He has been told that raising the money through debt will increase the riskiness of his company much more than issuing stock. He doesn’t understand why this is true. Explain it to him. 
9. 
What do these classes of ratios measure? (a) Liquidity ratios. (b) Profitability ratios. (c) Solvency ratios.  
10. 
Holding all other factors constant, indicate whether each of the following signals generally good or bad news about a company. (a) Increase in earnings per share. (b) Increase in the current ratio. (c) Increase in the debt to total assets ratio. (d) Decrease in free cash flow. 
11. 
Which ratio or ratios from this chapter do you think should be of greatest interest to: (a) a pension fund considering investing in a corporation’s 20-year bonds? (b) a bank contemplating a short-term loan? (c) an investor in common stock?  
12. 
(a) What are generally accepted accounting principles (GAAP)? (b) What body provides authoritative support for GAAP?  
13. 
(a) What is the primary objective of financial reporting? (b) Identify the characteristics of useful accounting information.  
14. 
Dan Fineman, the president of King Company, is pleased. King substantially increased its net income in 2012 while keeping its unit inventory relatively the same. Howard Gross, chief accountant, cautions Dan, however. Gross says that since King changed its method of inventory valuation, there is a consistency problem and it is difficult to determine whether King is better off. Is Gross correct? Why or why not?  
15. 
What is the distinction between comparability and consistency?  
16. 
Describe the two constraints inherent in the presentation of accounting information.  
17. 
Your roommate believes that international accounting standards are uniform throughout the world. Is your roommate correct? Explain.  
18. 
Laurie Belk is president of Better Books. She has no accounting background. Belk cannot understand why fair value is not used as the basis for all accounting measurement and reporting. Discuss.  
19. 
What is the economic entity assumption? Give an example of its violation.  
20. 
What was Tootsie Roll’s largest current asset, largest current liability, and largest item under “Other assets” at December 31, 2009?     

Brief Exercises

BE2--1 
The following are the major balance sheet classifications: Current assets (CA) Current liabilities (CL) Long-term investments (LTI) Long-term liabilities (LTL) Property, plant, and equipment (PPE) Common stock (CS) Intangible assets (IA) Retained earnings (RE) Match each of the following accounts to its proper balance sheet classification. _____ Accounts payable _____ Income taxes payable _____ Accounts receivable _____ Investment in long-term bonds _____ Accumulated depreciation _____ Land _____ Buildings _____ Inventory _____ Cash _____ Patent _____ Goodwill _____ Supplies 
BE2--2 
A list of financial statement items for Georges Company includes the following: accounts receivable $14,000; prepaid insurance $2,600; cash $10,400; supplies $3,800, and short-term investments $8,200. Prepare the current assets section of the balance sheet listing the items in the proper sequence. 
BE2--3 
The following information (in millions of dollars) is available for Limited Brands for 2008: Sales revenue $9,043; net income $220; preferred stock dividend $0; average shares outstanding 333 million. Compute the earnings per share for Limited Brands for 2008. 
BE2--4 
For each of the following events affecting the stockholders’ equity of Willis, indicate whether the event would: increase retained earnings (IRE), decrease retained earnings (DRE), increase common stock (ICS), or decrease common stock (DCS). _____ (a) Issued new shares of common stock. _____ (b) Paid a cash dividend. _____ (c) Reported net income of $75,000. _____ (d) Reported a net loss of $20,000. 
BE2--5 
These selected condensed data are taken from a recent balance sheet of Bob Evans Farms (in millions of dollars). Cash $ 29.3 Accounts receivable 20.5 Inventory 28.7 Other current assets 24.0 Total current assets $102.5 Total current liabilities $201.2 Compute working capital and the current ratio. 
BE2--6 
Kalb’s Books & Music Inc. reported the following selected information at March 31. 2012 Total current assets $262,787 Total assets 439,832 Total current liabilities 293,625 Total liabilities 376,002 Cash provided by operating activities 62,300 Calculate (a) the current ratio, (b) the debt to total assets ratio, and (c) free cash flow for March 31, 2012. The company paid dividends of $12,000 and spent $24,787 on capital expenditures. 
BE2--7 
Indicate whether each statement is true or false. (a) GAAP is a set of rules and practices established by accounting standard-setting bodies to serve as a general guide for financial reporting purposes. (b) Substantial authoritative support for GAAP usually comes from two standards-setting bodies: the FASB and the IRS. Classify accounts on balance sheet. (SO 1), Prepare the current assets section of a balance sheet. (SO 1), AP Compute earnings per share. (SO 2), AP Identify items affecting stockholders’ equity. (SO 3), Calculate liquidity ratios. (SO 4), AP Calculate liquidity and solvency ratios. (SO 4, 5), AP Recognize generally accepted accounting principles. (SO 6), K
BE2--8 
The accompanying chart shows the qualitative characteristics of useful accounting information. Fill in the blanks. Do it! Review 77 Identify characteristics of useful information. (SO 7), K Usefulness Enhancing Qualities Fundamental Qualities Relevance (a) (b) Consistency (e) (f ) (g) and Understandability Faithful Representation (c) Neutral (d) 
BE2--9 
Given the characteristics of useful accounting information, complete each of the following statements. (a) For information to be _____, it should have predictive and confirmatory value. (b) _____ is the quality of information that gives assurance that it is free from error and bias. (c) _____ means using the same accounting principles and methods from year to year within a company. 
BE2--10 
Here are some qualitative characteristics of useful accounting information: 1. Predictive value 3. Verifiable 2. Neutral 4. Timely Match each qualitative characteristic to one of the following statements. ——— (a) Accounting information should help provide accurate expectations about future events. ——— (b) Accounting information cannot be selected, prepared, or presented to favor one set of interested users over another. ——— (c) Accounting information must be proved to be free of error. ——— (d) Accounting information must be available to decision makers before it loses its capacity to influence their decisions. 
BE2--11 
The full disclosure principle dictates that: (a) financial statements should disclose all assets at their cost. (b) financial statements should disclose only those events that can be measured in dollars. (c) financial statements should disclose all events and circumstances that would matter to users of financial statements. (d) financial statements should not be relied on unless an auditor has expressed an unqualified opinion on them.    

Do it! 2-
Heather Corporation has collected the following information related to its December 31, 2012, balance sheet. Accounts receivable $22,000 Equipment $180,000 Accumulated depreciation—equipment 50,000 Inventory 58,000 Cash 13,000 Supplies 7,000 Prepare the assets section of Heather Corporation’s balance sheet. 

Do it! 2-
The following financial statement items were taken from the financial statements of Jing Corp. ____ Trademarks ____ Inventory ____ Current maturities of long-term debt ____ Accumulated depreciation ____ Interest revenue ____ Land improvements ____ Income taxes payable ____ Common stock ____ Long-term marketable debt securities ____ Advertising expense ____ Unearned consulting fees ____ Mortgage payable (due in 3 years) Match each of the financial statement items to its proper balance sheet classification. (See E2-1, on page 79, for a list of the balance sheet classifications.) If the item would not appear on a balance sheet, use “NA.”   
Do it! 2-

-3 
The following information is available for Gerard Corporation. 2012 2011 Current assets $ 54,000 $ 36,000 Total assets 240,000 205,000 Current liabilities 22,000 30,000 Total liabilities 72,000 100,000 Net income 80,000 40,000 Cash provided by operating activities 90,000 56,000 Preferred stock dividends 6,000 6,000 Common stock dividends 3,000 1,500 Expenditures on property, plant, and equipment 27,000 12,000 Shares outstanding at beginning of year 40,000 30,000 Shares outstanding at end of year 75,000 40,000 (a) Compute earnings per share for 2012 and 2011 for Gerard, and comment on the change. Gerard’s primary competitor, Thorpe Corporation, had earnings per share of $1 per share in 2012. Comment on the difference in the ratios of the two companies. (b) Compute the current ratio and debt to total assets ratio for each year, and comment on the changes. (c) Compute free cash flow for each year, and comment on the changes.   Do it!2-4 The following are characteristics, assumptions, principles, or constraints that guide the FASB when it creates accounting standards. Relevance Periodicity assumption Faithful representation Going concern assumption Comparability Cost principle Consistency Full disclosure principle Monetary unit assumption Materiality constraint Economic entity assumption Cost constraint Match each item above with a description below. 1. __________ Items not easily quantified in dollar terms are not reported in the financial statements. 2. __________ Accounting information must be complete, neutral, and free from error. 3. __________ Personal transactions are not mixed with the company’s transactions. 4. __________ The cost to provide information should be weighed against the benefit that users will gain from having the information available. 5. __________ A company’s use of the same accounting principles from year to year. 6. __________ Assets are recorded and reported at original purchase price. 7. __________ Accounting information should help users predict future events, and should confirm or correct prior expectations. 8. __________ The life of a business can be divided into artificial segments of time. 9. __________ The reporting of all information that would make a difference to financial statement users. 10. __________ The judgment concerning whether an item’s size makes it likely to influence a decision maker. 11. __________ Assumes a business will remain in operation for the foreseeable future. 12. __________ Different companies use the same accounting principles.    

Exercises

E2-1 
The following are the major balance sheet classifications. Current assets (CA) Current liabilities (CL) Long-term investments (LTI) Long-term liabilities (LTL) Property, plant, and equipment (PPE) Stockholders’ equity (SE) Intangible assets (IA)  Instructions Classify each of the following financial statement items taken from Inshore Corporation’s balance sheet. ____ Accounts payable ____ Income taxes payable ____ Accounts receivable ____ Inventory ____ Accumulated depreciation— ____ Investments equipment ____ Land ____ Buildings ____ Mortgage payable ____ Cash ____ Supplies ____ Interest payable ____ Equipment ____ Goodwill ____ Prepaid rent 
E2-2 
The major balance sheet classifications are listed in
E2-1 above.  Instructions Classify each of the following financial statement items based upon the major balance sheet classifications listed in
E2-1. ____ Prepaid advertising ____ Patents ____ Equipment ____ Bonds payable ____ Trademarks ____ Common stock ____ Salaries and wages payable ____ Accumulated depreciation— ____ Income taxes payable equipment ____ Retained earnings ____ Unearned sales revenue ____ Accounts receivable ____ Inventory ____ Land held for future use 
E2-3 
The following items were taken from the December 31, 2009, assets section of the Boeing Company balance sheet. (All dollars are in millions.) Inventories $16,933 Other current assets $ 966 Notes receivable—due after Property, plant, and December 31, 2010 5,466 equipment 21,579 Notes receivable—due before Cash and cash equivalents 9,215 December 31, 2010 368 Accounts receivable 5,785 Accumulated depreciation 12,795 Short-term investments 2,008 Intangible and other assets 12,528  Instructions Prepare the assets section of a classified balance sheet, listing the current assets in order of their liquidity. 
E2-4 
The following information (in thousands of dollars) is available for H.J. Heinz Company—famous for ketchup and other fine food products—for the year ended April 29, 2009. Prepaid expenses $ 125,765 Inventories $1,237,613 Land 76,193 Buildings and equipment 4,033,369 Other current assets 36,701 Cash and cash equivalents 373,145 Intangible assets 3,982,954 Accounts receivable 1,171,797 Other noncurrent assets 757,907 Accumulated depreciation 2,131,260  Instructions Prepare the assets section of a classified balance sheet, listing the items in proper sequence and including a statement heading. Exercises 79 Classify accounts on balance sheet. (SO 1), AP Classify financial statement items by balance sheet classification. (SO 1), AP Classify items as current or noncurrent, and prepare assets section of balance sheet. (SO 1), AP Prepare assets section of a classified balance sheet. (SO 1), AP 80 chapter 2 A Further Look at Financial Statements 
E2-5 
These items are taken from the financial statements of Victory Co. at December 31, 2012. Buildings $105,800 Accounts receivable 12,600 Prepaid insurance 3,200 Cash 11,840 Equipment 82,400 Land 61,200 Insurance expense 780 Depreciation expense 5,300 Interest expense 2,600 Common stock 60,000 Retained earnings (January 1, 2012) 40,000 Accumulated depreciation—buildings 45,600 Accounts payable 9,500 Notes payable 93,600 Accumulated depreciation—equipment 18,720 Interest payable 3,600 Service revenue 14,700  Instructions Prepare a classified balance sheet. Assume that $13,600 of the note payable will be paid in 2013. 
E2-6 
The following items were taken from the 2009 financial statements of Texas Instruments, Inc. (All dollars are in millions.) Common stock $2,826 Cash and cash equivalents $1,182 Prepaid expenses 164 Accumulated depreciation 3,547 Property, plant, and equipment 6,705 Accounts payable 1,344 Other current assets 546 Other noncurrent assets 2,210 Other current liabilities 115 Noncurrent liabilities 810 Long-term investments 637 Retained earnings 6,896 Short-term investments 1,743 Accounts receivable 1,277 Income taxes payable 128 Inventories 1,202  Instructions Prepare a classified balance sheet in good form as of December 31, 2009. 
E2-7 
The following information is available for Callaway Golf Company for the years 2008 and 2007. (Dollars are in thousands, except share information.) 2008 2007 Net sales $ 1,117,204 $ 1,124,591 Net income (loss) 66,176 54,587 Total assets 855,338 838,078 Share information Shares outstanding at year-end 64,507,000 66,282,000 Preferred dividends –0– –0– There were 73,139,000 shares outstanding at the end of 2006.  Instructions (a) What was the company’s earnings per share for each year? (b) Based on your findings above, how did the company’s profitability change from 2007 to 2008? (c) Suppose the company had paid dividends on preferred stock and on common stock during the year. How would this affect your calculation in part (a)? 
E2-8 
These financial statement items are for Whitnall Corporation at year-end, July 31, 2012. Salaries and wages payable $ 2,080 Salaries and wages expense 57,500 Supplies expense 15,600 Prepare a classified balance sheet. (SO 1), AP Prepare a classified balance sheet. (SO 1), AP Compute and interpret profitability ratio. (SO 2), AP Prepare financial statements. (SO 1, 3, 4), AP Equipment $18,500 Accounts payable 4,100 Service revenue 66,100 Rent revenue 8,500 Notes payable (due in 2015) 1,800 Common stock 16,000 Cash 29,200 Accounts receivable 9,780 Accumulated depreciation—equipment 6,000 Dividends 4,000 Depreciation expense 4,000 Retained earnings (beginning of the year) 34,000  Instructions (a) Prepare an income statement and a retained earnings statement for the year. Whitnall Corporation did not issue any new stock during the year. (b) Prepare a classified balance sheet at July 31. (c) Compute the current ratio and debt to total assets ratio. (d) Suppose that you are the president of Crescent Equipment. Your sales manager has approached you with a proposal to sell $20,000 of equipment to Whitnall. He would like to provide a loan to Whitnall in the form of a 10%, 5-year note payable. Evaluate how this loan would change Whitnall’s current ratio and debt to total assets ratio, and discuss whether you would make the sale. 
E2-9 
Nordstrom, Inc. operates department stores in numerous states. Selected financial statement data (in millions of dollars) for the year ended January 31, 2009, follow. End of Year Beginning of Year Cash and cash equivalents $ 72 $ 358 Receivables (net) 1,942 1,788 Merchandise inventory 900 956 Other current assets 303 259 Total current assets $3,217 $3,361 Total current liabilities $1,601 $1,635  Instructions (a) Compute working capital and the current ratio at the beginning of the year and at the end of the current year. (b) Did Nordstrom’s liquidity improve or worsen during the year? (c) Using the data in the chapter, compare Nordstrom’s liquidity with Best Buy’s. 
E2-10 
The chief financial officer (CFO) of Padilla Corporation requested that the accounting department prepare a preliminary balance sheet on December 30, 2012, so that the CFO could get an idea of how the company stood. He knows that certain debt agreements with its creditors require the company to maintain a current ratio of at least 2:1. The preliminary balance sheet is as follows. Instructions (a) Calculate the current ratio and working capital based on the preliminary balance sheet. (b) Based on the results in (a), the CFO requested that $20,000 of cash be used to pay off the balance of the accounts payable account on December 31, 2012. Calculate the new current ratio and working capital after the company takes these actions. (c) Discuss the pros and cons of the current ratio and working capital as measures of liquidity. (d) Was it unethical for the CFO to take these steps? 
E2-11 
The following data were taken from the 2009 and 2008 financial statements of American Eagle Outfitters. (All dollars are in thousands.) Instructions Perform each of the following. (a) Calculate the debt to total assets ratio for each year. (b) Calculate the free cash flow for each year. (c) Discuss American Eagle’s solvency in 2009 versus 2008. (d) Discuss American Eagle’s ability to finance its investment activities with cash provided by operating activities, and how any deficiency would be met. 
E2-12 
Presented below are the assumptions and principles discussed in this chapter. 1. Full disclosure principle. 4. Periodicity assumption. 2. Going concern assumption. 5. Cost principle. 3. Monetary unit assumption. 6. Economic entity assumption.  Instructions Identify by number the accounting assumption or principle that is described below. Do not use a number more than once. ——— (a) Is the rationale for why plant assets are not reported at liquidation value. (Note: Do not use the cost principle.) ——— (b) Indicates that personal and business record-keeping should be separately maintained. ——— (c) Assumes that the dollar is the “measuring stick” used to report on financial performance. ——— (d) Separates financial information into time periods for reporting purposes. ——— (e) Measurement basis used when a reliable estimate of fair value is not available. ——— (f ) Dictates that companies should disclose all circumstances and events that make a difference to financial statement users. 
E2-13 
Rosman Co. had three major business transactions during 2012. (a) Reported at its fair value of $260,000 merchandise inventory with a cost of $208,000. (b) The president of Rosman Co., Jay Rosman, purchased a truck for personal use and charged it to his expense account. (c) Rosman Co. wanted to make its 2012 income look better, so it added 2 more weeks to the year (a 54-week year). Previous years were 52 weeks.  Instructions In each situation, identify the assumption or principle that has been violated, if any, and discuss what the company should have done.   Problems: Set A

P2-1A 
The following items are taken from the 2008 balance sheet of Yahoo! Inc. (All dollars are in thousands.) Intangible assets $3,926,749 Common stock 6,282,504 Property and equipment, net 1,536,181 Accounts payable 151,897 Other assets 233,989 Long-term investments 3,247,431 Accounts receivable 1,060,450 Prepaid expenses and other current assets 233,061 Short-term investments 1,159,691 Retained earnings 4,968,438 Cash and cash equivalents 2,292,296 Long-term debt 733,891 Accrued expenses and other current liabilities 1,139,894 Unearned revenue—current 413,224 Instructions Prepare a classified balance sheet for Yahoo! Inc. as of December 31, 2008. 
P2-2A 
These items are taken from the financial statements of Xenox Corporation for 2012. Retained earnings (beginning of year) $31,000 Utilities expense 2,000 Equipment 66,000 Accounts payable 18,300 Cash 10,100 Salaries and wages payable 3,000 Common stock 12,000 Dividends 12,000 Service revenue 68,000 Prepaid insurance 3,500 Maintenance and repairs expense 1,800 Depreciation expense 3,600 Accounts receivable 11,700 Insurance expense 2,200 Salaries and wages expense 37,000 Accumulated depreciation—equipment 17,600 Instructions Prepare an income statement, a retained earnings statement, and a classified balance sheet as of December 31, 2012. 
P2-3A 
You are provided with the following information for Merrell Enterprises, effective as of its April 30, 2012, year-end. Accounts payable $ 834 Accounts receivable 810 Accumulated depreciation—equipment 670 Cash 1,270 Common stock 900 Cost of goods sold 1,060 Problems: Set A 83 Exercises: Set B and Challenge Exercises Visit the book’s companion website, at www.wiley.com/college/kimmel, and choose the Student Companion site to access Exercise Set B and Challenge Exercises. Prepare a classified balance sheet. (SO 1), AP Tot. current assets $4,745,498 Tot. assets $13,689,848 Prepare financial statements. (SO 1, 3), AP Net income $21,400 Tot. assets $73,700 Prepare financial statements. (SO 1, 3), AP 84 chapter 2 A Further Look at Financial Statements Depreciation expense $ 335 Dividends 325 Equipment 2,420 Income tax expense 165 Income taxes payable 135 Insurance expense 210 Interest expense 400 Inventory 967 Land 3,100 Mortgage payable 3,500 Notes payable 61 Prepaid insurance 60 Retained earnings (beginning) 1,600 Sales revenue 5,100 Short-term investments 1,200 Salaries and wages expense 700 Salaries and wages payable 222 Instructions (a) Prepare an income statement and a retained earnings statement for Merrell Enterprises for the year ended April 30, 2012. (b) Prepare a classified balance sheet for Merrell Enterprises as of April 30, 2012. 
P2-4A 
Comparative financial statement data for Duran Corporation and Kiepert Corporation, two competitors, appear below. All balance sheet data are as of December 31, 2012. Duran Corporation Kiepert Corporation 2012 2012 Net sales $1,800,000 $620,000 Cost of goods sold 1,175,000 340,000 Operating expenses 283,000 98,000 Interest expense 9,000 3,800 Income tax expense 85,000 36,000 Current assets 407,200 190,336 Plant assets (net) 532,000 139,728 Current liabilities 66,325 33,716 Long-term liabilities 108,500 40,684 Cash from operating activities 138,000 36,000 Capital expenditures 90,000 20,000 Dividends paid on common stock 36,000 15,000 Average number of shares outstanding 80,000 50,000 Instructions (a) Comment on the relative profitability of the companies by computing the net income and earnings per share for each company for 2012. (b) Comment on the relative liquidity of the companies by computing working capital and the current ratios for each company for 2012. (c) Comment on the relative solvency of the companies by computing the debt to total assets ratio and the free cash flow for each company for 2012. 
P2-5A 
Here and on page 85 are financial statements of Batcha Company. BATCHA COMPANY Income Statement For the Year Ended December 31, 2012 Net sales $2,218,500 Cost of goods sold 1,012,400 Selling and administrative expenses 906,000 Interest expense 78,000 Income tax expense 69,000 Net income $ 153,100 Net income $2,230 Tot. current assets $4,307 Tot. assets $9,157 Compute ratios; comment on relative profitability, liquidity, and solvency. (SO 2, 4, 5), AN Compute and interpret liquidity, solvency, and profitability ratios. (SO 2, 4, 5), AP BATCHA COMPANY Balance Sheet December 31, 2012 Assets Current assets Cash $ 60,100 Short-term investments 84,000 Accounts receivable (net) 169,800 Inventory 145,000 Total current assets 458,900 Plant assets (net) 575,300 Total assets $1,034,200 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 160,000 Income taxes payable 35,500 Total current liabilities 195,500 Bonds payable 200,000 Total liabilities 395,500 Stockholders’ equity Common stock 350,000 Retained earnings 288,700 Total stockholders’ equity 638,700 Total liabilities and stockholders’ equity $1,034,200 Additional information: The cash provided by operating activities for 2012 was $190,800. The cash used for capital expenditures was $92,000. The cash used for dividends was $31,000. The average number of shares outstanding during the year was 50,000. Instructions (a) Compute the following values and ratios for 2012. (We provide the results from 2011 for comparative purposes.) (i) Working capital. (2011: $160,500) (ii) Current ratio. (2011: 1.65:1) (iii) Free cash flow. (2011: $48,700) (iv) Debt to total assets ratio. (2011: 31%) (v) Earnings per share. (2011: $3.15) (b) Using your calculations from part (a), discuss changes from 2011 in liquidity, solvency, and profitability. 
P2-6A 
Condensed balance sheet and income statement data for Sievert Corporation are presented here and on the next page. SIEVERT CORPORATION Balance Sheets December 31 Assets 2012 2011 Cash $ 28,000 $ 20,000 Receivables (net) 70,000 62,000 Other current assets 90,000 73,000 Long-term investments 62,000 60,000 Plant and equipment (net) 510,000 470,000 Total assets $760,000 $685,000 Liabilities and Stockholders’ Equity Current liabilities $ 75,000 $ 70,000 Long-term debt 80,000 90,000 Common stock 330,000 300,000 Retained earnings 275,000 225,000 Total liabilities and stockholders’ equity $760,000 $685,000 Problems: Set A 85 Compute and interpret liquidity, solvency, and profitability ratios. (SO 2, 4, 5), AP 86 chapter 2 A Further Look at Financial Statements SIEVERT CORPORATION Income Statements For the Years Ended December 31 2012 2011 Sales $750,000 $680,000 Cost of goods sold 440,000 400,000 Operating expenses (including income taxes) 240,000 220,000 Net income $ 70,000 $ 60,000 Additional information: Cash from operating activities $82,000 $56,000 Cash used for capital expenditures $45,000 $38,000 Dividends paid $20,000 $15,000 Average number of shares outstanding 33,000 30,000 Instructions Compute these values and ratios for 2011 and 2012. (a) Earnings per share. (b) Working capital. (c) Current ratio. (d) Debt to total assets ratio. (e) Free cash flow. (f ) Based on the ratios calculated, discuss briefly the improvement or lack thereof in financial position and operating results from 2011 to 2012 of Sievert Corporation. 
P2-7A 
Selected financial data of two competitors, Target and Wal-Mart, are presented here. (All dollars are in millions.) Target Wal-Mart (1/31/09) (1/31/09) Income Statement Data for Year Net sales $64,948 $401,244 Cost of goods sold 44,157 306,158 Selling and administrative expenses 16,389 76,651 Interest expense 894 2,103 Other income 28 4,213 Income taxes 1,322 7,145 Net income $ 2,214 $ 13,400 Target Wal-Mart Balance Sheet Data (End of Year) Current assets $17,488 $ 48,949 Noncurrent assets 26,618 114,480 Total assets $44,106 $163,429 Current liabilities $10,512 $ 55,390 Long-term debt 19,882 42,754 Total stockholders’ equity 13,712 65,285 Total liabilities and stockholders’ equity $44,106 $163,429 Cash from operating activities $4,430 $23,147 Cash paid for capital expenditures 3,547 11,499 Dividends declared and paid on common stock 465 3,746 Average shares outstanding (millions) 774 3,951 Instructions For each company, compute these values and ratios. (a) Working capital. (b) Current ratio. Compute ratios and compare liquidity, solvency, and profitability for two companies. (SO 2, 4, 5), AP (c) Debt to total assets ratio. (d) Free cash flow. (e) Earnings per share. (f ) Compare the liquidity and solvency of the two companies. 
P2-8A 
A friend of yours, Ana Gehrig, recently completed an undergraduate degree in science and has just started working with a biotechnology company. Ana tells you that the owners of the business are trying to secure new sources of financing which are needed in order for the company to proceed with development of a new health care product. Ana said that her boss told her that the company must put together a report to present to potential investors. Ana thought that the company should include in this package the detailed scientific findings related to the Phase I clinical trials for this product. She said, “I know that the biotech industry sometimes has only a 10% success rate with new products, but if we report all the scientific findings, everyone will see what a sure success this is going to be! The president was talking about the importance of following some set of accounting principles. Why do we need to look at some accounting rules? What they need to realize is that we have scientific results that are quite encouraging, some of the most talented employees around, and the start of some really great customer relationships. We haven’t made any sales yet, but we will. We just need the funds to get through all the clinical testing and get government approval for our product. Then these investors will be quite happy that they bought in to our company early!” Instructions (a) What is accounting information? Explain to Ana what is meant by generally accepted accounting principles. (b) Comment on how Ana’s suggestions for what should be reported to prospective investors conforms to the qualitative characteristics of accounting information. Do you think that the things that Ana wants to include in the information for investors will conform to financial reporting guidelines? Problems: Set B 87 Comment on the objectives and qualitative characteristics of financial reporting. (SO 6, 7), E Problems: Set B
P2-1B 
The following items are from the 2009 balance sheet of Kellogg Company. (All dollars are in millions.) Common stock $ 577 Other assets 5,632 Notes payable—current 44 Other current assets 221 Cash and cash equivalents 334 Other long-term liabilities 1,802 Retained earnings 1,698 Accounts payable 1,077 Other current liabilities 1,167 Accounts receivable, net 1,093 Property, net 3,010 Inventories 910 Long-term debt 4,835 Instructions Prepare a classified balance sheet for Kellogg Company as of December 31, 2009. 
P2-2B 
These items are taken from the financial statements of Tilley, Inc. Prepaid insurance $ 1,400 Equipment 31,000 Salaries and wages expense 36,000 Utilities expense 2,100 Accumulated depreciation—equipment 8,600 Accounts payable 8,200 Cash 5,100 Prepare a classified balance sheet. (SO 1), AP Tot. current assets $2,558 Tot. assets $11,200 Prepare financial statements. (SO 1, 3), AP 88 chapter 2 A Further Look at Financial Statements Accounts receivable $ 4,900 Salaries and wages payable 2,000 Common stock 6,000 Depreciation expense 4,300 Retained earnings (beginning) 14,000 Dividends 2,600 Service revenue 53,000 Maintenance and repairs expense 2,600 Insurance expense 1,800 Instructions Prepare an income statement, a retained earnings statement, and a classified balance sheet as of December 31, 2012. 
P2-3B 
You are provided with the following information for Rapp Corporation, effective as of its April 30, 2012, year-end. Accounts payable $ 2,100 Accounts receivable 9,150 Accumulated depreciation—equipment 6,600 Depreciation expense 2,200 Cash 21,955 Common stock 20,000 Dividends 2,800 Equipment 24,250 Sales revenue 21,450 Income tax expense 1,600 Income taxes payable 300 Interest expense 350 Interest payable 175 Notes payable (due in 2016) 5,700 Prepaid rent 380 Rent expense 760 Retained earnings, beginning 13,960 Salaries and wages expense 6,840 Instructions (a) Prepare an income statement and a retained earnings statement for Rapp Corporation for the year ended April 30, 2012. (b) Prepare a classified balance sheet for Rapp as of April 30, 2012. (c) Explain how each financial statement interrelates with the others. 
P2-4B 
Comparative statement data for Al Sharif Company and Weber Company, two competitors, are presented below. All balance sheet data are as of December 31, 2012. Al Sharif Company Weber Company 2012 2012 Net sales $450,000 $890,000 Cost of goods sold 260,000 620,000 Operating expenses 130,000 59,000 Interest expense 6,000 10,000 Income tax expense 10,000 65,000 Current assets 180,000 700,000 Plant assets (net) 600,000 800,000 Current liabilities 75,000 300,000 Long-term liabilities 190,000 200,000 Cash from operating activities 46,000 180,000 Capital expenditures 20,000 50,000 Dividends paid 4,000 15,000 Average number of shares outstanding 200,000 400,000 Instructions (a) Compute the net income and earnings per share for each company for 2012. Net income $6,200 Tot. assets $33,800 Prepare financial statements. (SO 1, 3), AP Net income $9,700 Tot. current assets $31,485 Tot. assets $49,135 Compute ratios; comment on relative profitability, liquidity, and solvency. (SO 2, 4, 5), AN (b) Comment on the relative liquidity of the companies by computing working capital and the current ratio for each company for 2012. (c) Comment on the relative solvency of the companies by computing the debt to total assets ratio and the free cash flow for each company for 2012. 
P2-5B 
The financial statements of DeVoe Company are presented here. Problems: Set B 89 DEVOE COMPANY Income Statement For the Year Ended December 31, 2012 Net sales $700,000 Cost of goods sold 400,000 Selling and administrative expenses 150,000 Interest expense 7,800 Income tax expense 43,000 Net income $ 99,200 DEVOE COMPANY Balance Sheet December 31, 2012 Assets Current assets Cash $ 18,100 Short-term investments 34,800 Accounts receivable (net) 90,700 Inventory 155,000 Total current assets 298,600 Plant assets (net) 465,300 Total assets $763,900 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $119,700 Income taxes payable 29,000 Total current liabilities 148,700 Bonds payable 110,000 Total liabilities 258,700 Stockholders’ equity Common stock 170,000 Retained earnings 335,200 Total stockholders’ equity 505,200 Total liabilities and stockholders’ equity $763,900 Cash from operating activities $ 71,300 Capital expenditures $ 42,000 Dividends paid $ 10,000 Average number of shares outstanding 65,000 Instructions (a) Compute the following values and ratios for 2012. (We provide the results from 2011 for comparative purposes.) (i) Current ratio. (2011: 2.4:1) (ii) Working capital. (2011: $178,000) (iii) Debt to total assets ratio. (2011: 31%) (iv) Free cash flow. (2011: $13,000) (v) Earnings per share. (2011: $1.35) (b) Using your calculations from part (a), discuss changes from 2011 in liquidity, solvency, and profitability. Compute and interpret liquidity, solvency, and profitability ratios. (SO 2, 4, 5), AP 90 chapter 2 A Further Look at Financial Statements 
P2-6B 
Condensed balance sheet and income statement data for Fellenz Corporation are presented below. FELLENZ CORPORATION Balance Sheets December 31 Assets 2012 2011 Cash $ 40,000 $ 24,000 Receivables (net) 90,000 55,000 Other current assets 74,000 73,000 Long-term investments 78,000 60,000 Plant and equipment (net) 520,000 407,000 Total assets $802,000 $619,000 Liabilities and Stockholders’ Equity 2012 2011 Current liabilities $ 88,000 $ 65,000 Long-term debt 90,000 70,000 Common stock 370,000 320,000 Retained earnings 254,000 164,000 Total liabilities and stockholders’ equity $802,000 $619,000 FELLENZ CORPORATION Income Statements For the Years Ended December 31 2012 2011 Sales $770,000 $800,000 Cost of goods sold 420,000 400,000 Operating expenses (including income taxes) 200,000 237,000 Net income $150,000 $163,000 Cash from operating activities $165,000 $178,000 Cash used for capital expenditures 85,000 45,000 Dividends paid 50,000 43,000 Average number of shares outstanding 370,000 320,000 Instructions Compute the following values and ratios for 2011 and 2012. (a) Earnings per share. (b) Working capital. (c) Current ratio. (d) Debt to total assets ratio. (e) Free cash flow. (f ) Based on the ratios calculated, discuss briefly the improvement or lack thereof in the financial position and operating results of Fellenz from 2011 to 2012. 
P2-7B 
Selected financial data of two competitors, Blockbuster Inc. and Movie Gallery, Inc., in a recent year are presented below and on page 91. (All dollars are in millions.) Blockbuster Inc. Movie Gallery, Inc. Income Statement Data for Year Net sales $ 5,524 $2,542 Cost of goods sold 2,476 1,012 Selling and administrative expenses 2,755 1,431 Interest expense 102 120 Other expense 212 3 Income tax expense (refund) (76) 2 Net income (loss) $ 55 $ (26) Compute and interpret liquidity, solvency, and profitability ratios. (SO 2, 4, 5), AP Compute ratios and compare liquidity, solvency, and profitability for two companies. (SO 2, 4, 5), AP Instructions For each company, compute these values and ratios. (a) Working capital. (b) Current ratio. (Round to two decimal places.) (c) Debt to total assets ratio. (d) Free cash flow. (e) Earnings per share. (f ) Compare the liquidity, profitability, and solvency of the two companies. 
P2-8B 
Net Nanny Software International Inc., headquartered in Vancouver, specializes in Internet safety and computer security products for both the home and commercial markets. In a recent balance sheet, it reported a deficit (negative retained earnings) of US $5,678,288. It has reported only net losses since its inception. In spite of these losses, Net Nanny’s common shares have traded anywhere from a high of $3.70 to a low of $0.32 on the Canadian Venture Exchange. Net Nanny’s financial statements have historically been prepared in Canadian dollars. Recently, the company adopted the U.S. dollar as its reporting currency. Instructions (a) What is the objective of financial reporting? How does this objective meet or not meet Net Nanny’s investors’ needs? (b) Why would investors want to buy Net Nanny’s shares if the company has consistently reported losses over the last few years? Include in your answer an assessment of the relevance of the information reported on Net Nanny’s financial statements. (c) Comment on how the change in reporting information from Canadian dollars to U.S. dollars likely affected the readers of Net Nanny’s financial statements. Include in your answer an assessment of the comparability of the information. Continuing Cookie Chronicle 91 Blockbuster Inc. Movie Gallery, Inc. Balance Sheet Data (End of Year) Current assets $ 1,566 $ 239 Property, plant, and equipment (net) 580 243 Intangible assets 835 297 Other assets 156 374 Total assets $ 3,137 $1,153 Current liabilities $ 1,395 $ 268 Long-term debt 851 1,122 Total stockholders’ equity 891 (237) Total liabilities and stockholders’ equity $ 3,137 $1,153 Cash from operating activities $329 $(10) Cash used for capital expenditures 79 20 Dividends paid 11 –0– Average shares outstanding 189.0 31.8 Comment on the objectives and qualitative characteristics of accounting information. (SO 6, 7), E Problems: Set C Visit the book’s companion website, at www.wiley.com/college/kimmel, and choose the Student Companion site to access Problem Set C. Continuing Cookie Chronicle (Note: This is a continuation of the Cookie Chronicle from Chapter 1.) CCC2 After investigating the different forms of business organization, Natalie Koebel decides to operate her business as a corporation, Cookie Creations Inc., and she begins the process of getting her business running. 92 chapter 2 A Further Look at Financial Statements While at a trade show, Natalie is introduced to Gerry Richards, operations manager of “Biscuits,” a national food retailer. After much discussion, Gerry asks Natalie to consider being Biscuits’ major supplier of oatmeal chocolate chip cookies. He provides Natalie with the most recent copy of the financial statements of Biscuits. He expects that Natalie will need to supply Biscuits’ Watertown warehouse with approximately 1,500 dozen cookies a week. Natalie is to send Biscuits a monthly invoice, and she will be paid approximately 30 days from the date the invoice is received in Biscuits’ Chicago office. Natalie is thrilled with the offer. However, she has recently read in the newspaper that Biscuits has a reputation for selling cookies and donuts with high amounts of sugar and fat, and as a result, consumer demand for the company’s products has decreased. Instructions Natalie has several questions. Answer the following questions for Natalie. (a) What type of information does each financial statement provide? (b) What financial statements would Natalie need in order to evaluate whether Biscuits will have enough cash to meet its current liabilities? Explain what to look for. (c) What financial statements would Natalie need in order to evaluate whether Biscuits will be able to survive over a long period of time? Explain what to look for. (d) What financial statement would Natalie need in order to evaluate Biscuits’ profitability? Explain what to look for. (e) Where can Natalie find out whether Biscuits has outstanding debt? How can Natalie determine whether Biscuits would be able to meet its interest and debt payments on any debts it has? (f ) How could Natalie determine whether Biscuits pays a dividend? (g) In deciding whether to go ahead with this opportunity, are there other areas of concern that Natalie should be aware of? Financial Reporting and Analysis FINANCIAL REPORTING PROBLEM: Tootsie Roll Industries Inc. BY
P2-1 
The financial statements of Tootsie Roll Industries, Inc., appear in Appendix A at the end of this book. Instructions Answer the following questions using the financial statements and the notes to the financial statements. (a) What were Tootsie Roll’s total current assets at December 31, 2009, and December 31, 2008? (b) Are the assets included in current assets listed in the proper order? Explain. (c) How are Tootsie Roll’s assets classified? (d) What were Tootsie Roll’s current liabilities at December 31, 2009, and December 31, 2008? COMPARATIVE ANALYSIS PROBLEM: Tootsie Roll vs. Hershey BY
P2-2 
The financial statements of The Hershey Company appear in Appendix B, following the financial statements for Tootsie Roll in Appendix A. Assume Hershey’s average number of shares outstanding was 227,517,000, and Tootsie Roll’s was 56,072,000. Instructions (a) For each company calculate the following values for 2009. (1) Working capital. (4) Free cash flow. (2) Current ratio. (5) Earnings per share. (3) Debt to total assets ratio (Hint: When calculating free cash flow, do not consider business acquisitions to be part of capital expenditures.) (b) Based on your findings above, discuss the relative liquidity and solvency of the two companies. broadening your perspective RESEARCH CASE BY
P2-3 
The April 27, 2009, edition of the Wall Street Journal Online includes an article by Cari Tuna entitled “Corporate Blogs and ‘Tweets’ Must Keep SEC in Mind.” Instructions Read the article and answer the following questions. (a) At the time of the article, how many of the Fortune 500 companies sponsored public blogs? Of these blogs, how many had links to corporate Twitter accounts? (b) What potential advantages might Twitter provide to companies in their efforts to communicate with investors? (c) Why are some companies, such as Intel, wary of using Twitter and blogs to communicate to investors? (d) What recommendations does Lisa Wood, of Foley Hoag LLP, make to companies if they use blogs or Twitter to communicate to investors? INTERPRETING FINANCIAL STATEMENTS BY
P2-4 
The following information was reported by Gap, Inc. in its 2009 annual report. 2009 2008 2007 2006 2005 Total assets (millions) $7,985 $7,564 $7,838 $ 8,544 $ 8,821 Working capital 2,533 1,847 1,653 $ 2,757 $ 3,297 Current ratio 2.19:1 1.86:1 1.68:1 2.21:1 2.70:1 Debt to total assets ratio .39:1 .42:1 .45:1 .39:1 .38:1 Earnings per share $1.59 $1.35 $1.05 $0.94 $1.26 (a) Determine the overall percentage decrease in Gap’s total assets from 2005 to 2009. What was the average decrease per year? (b) Comment on the change in Gap’s liquidity. Does working capital or the current ratio appear to provide a better indication of Gap’s liquidity? What might explain the change in Gap’s liquidity during this period? (c) Comment on the change in Gap’s solvency during this period. (d) Comment on the change in Gap’s profitability during this period. How might this affect your prediction about Gap’s future profitability? FINANCIAL ANALYSIS ON THE WEB BY
P2-5 Purpose: 
Identify summary liquidity, solvency, and profitability information about companies, and compare this information across companies in the same industry. Address: http://biz.yahoo.com/i, or go to www.wiley.com/college/kimmel Steps 1. Type in a company name, or use the index to find a company name. Choose Profile. Choose Key Statistics. Perform instruction (a) below. 2. Go back to Profile. Click on the company’s particular industry behind the heading “Industry.” Perform instructions (b), (c), and (d). Instructions Answer the following questions. (a) What is the company’s name? What was the company’s current ratio and debt to equity ratio (a variation of the debt to total assets ratio)? (b) What is the company’s industry? (c) What is the name of a competitor? What is the competitor’s current ratio and its debt to equity ratio? (d) Based on these measures: Which company is more liquid? Which company is more solvent? BY
P2-6 
The opening story described the dramatic effect that investment bulletin boards are having on the investment world. This exercise will allow you to evaluate a bulletin board discussing a company of your choice. Address: http://biz.yahoo.com/i, or go to www.wiley.com/college/kimmel Broadening Your Perspective 93 94 chapter 2 A Further Look at Financial Statements Steps 1. Type in a company name, or use the index to find a company name. 2. Choose Msgs or Message Board. (for messages). 3. Read the ten most recent messages. Instructions Answer the following questions. (a) State the nature of each of these messages (e.g., offering advice, criticizing company, predicting future results, ridiculing other people who have posted messages). (b) For those messages that expressed an opinion about the company, was evidence provided to support the opinion? (c) What effect do you think it would have on bulletin board discussions if the participants provided their actual names? Do you think this would be a good policy? Critical Thinking DECISION MAKING ACROSS THE ORGANIZATION BY
P2-7 
As a financial analyst in the planning department for Lindemann Industries, Inc., you have been requested to develop some key ratios from the comparative financial statements. This information is to be used to convince creditors that Lindemann Industries, Inc. is liquid, solvent, and profitable, and that it deserves their continued support. Lenders are particularly concerned about the company’s ability to continue as a going concern. Here are the data requested and the computations developed from the financial statements: 2012 2011 Current ratio 3.1 2.1 Working capital Up 22% Down 7% Free cash flow Up 25% Up 18% Debt to total assets ratio 0.60 0.70 Net income Up 32% Down 8% Earnings per share $2.40 $1.15 Instructions Lindemann Industries, Inc. asks you to prepare brief comments stating how each of these items supports the argument that its financial health is improving. The company wishes to use these comments to support presentation of data to its creditors. With the class divided into groups, prepare the comments as requested, giving the implications and the limitations of each item regarding Lindemann’s financial well-being. COMMUNICATION ACTIVITY BY
P2-8 
T. J. Cerrillo is the chief executive officer of Tomorrow’s Products. T. J. is an expert engineer but a novice in accounting. Instructions Write a letter to T. J. Cerrillo that explains (a) the three main types of ratios; (b) examples of each, how they are calculated, and what they measure; and (c) the bases for comparison in analyzing Tomorrow’s Products’ financial statements. ETHICS CASE BY
P2-9 
At one time, Boeing closed a giant deal to acquire another manufacturer, McDonnell Douglas. Boeing paid for the acquisition by issuing shares of its own stock to the stockholders of McDonnell Douglas. In order for the deal not to be revoked, the value of Boeing’s stock could not decline below a certain level for a number of months after the deal. During the first half of the year, Boeing suffered significant cost overruns because of inefficiencies in its production methods. Had these problems been disclosed in the quarterly financial statements during the first and second quarter of the year, the company’s stock most likely would have plummeted, and the deal would have been revoked. Company managers spent considerable time debating when the bad news should be disclosed. One public relations manager suggested that the company’s problems be revealed on the date of either Princess Diana’s or Mother Teresa’s funeral, in the hope that it would be lost among those big stories that day. Instead, the company waited until October 22 of that year to announce a $2.6 billion write-off due to cost overruns. Within one week, the company’s stock price had fallen 20%, but by this time the McDonnell Douglas deal could not be reversed. Instructions Answer the following questions. (a) Who are the stakeholders in this situation? (b) What are the ethical issues? (c) What assumptions or principles of accounting are relevant to this case? (d) Do you think it is ethical to try to “time” the release of a story so as to diminish its effect? (e) What would you have done if you were the chief executive officer of Boeing? (f ) Boeing’s top management maintains that it did not have an obligation to reveal its problems during the first half of the year. What implications does this have for investors and analysts who follow Boeing’s stock? “ALL ABOUT YOU” ACTIVITY BY
P2-10 
Every company needs to plan in order to move forward. Its top management must consider where it wants the company to be in three to five years. Like a company, you need to think about where you want to be three to five years from now, and you need to start taking steps now in order to get there. Instructions Provide responses to each of the following items. (a) Where would you like to be working in three to five years? Describe your plan for getting there by identifying between five and 10 specific steps that you need to take in order to get there. (b) In order to get the job you want, you will need a résumé. Your résumé is the equivalent of a company’s annual report. It needs to provide relevant and reliable information about your past accomplishments so that employers can decide whether to “invest” in you. Do a search on the Internet to find a good résumé format. What are the basic elements of a résumé? (c) A company’s annual report provides information about a company’s accomplishments. In order for investors to use the annual report, the information must be reliable; that is, users must have faith that the information is accurate and believable. How can you provide assurance that the information on your résumé is reliable? (d) Prepare a résumé assuming that you have accomplished the five to 10 specific steps you identified in part (a). Also, provide evidence that would give assurance that the information is reliable. FASB CODIFICATION ACTIVITY BY
P2-11 
If your school has a subscription to the FASB Codification, go to http://aaahq.org/ ascLogin.cfm to log in and prepare responses to the following. Instructions (a) Access the glossary (“Master Glossary”) at the FASB Codification website to answer the following. (1) What is the definition of current assets? (2) What is the definition of current liabilities? (b) A company wants to offset its accounts payable against its cash account and show a cash amount net of accounts payable on its balance sheet. Identify the criteria (found in the FASB Codification) under which a company has the right of set off. Does the company have the right to offset accounts payable against the cash account? Broadening Your Perspective 95 96 chapter 2 A Further Look at Financial Statements Answers to Insight and Accounting Across the Organization Questions p. 60 Can a Company Be Too Liquid? Q: What can various company managers do to ensure that working capital is managed efficiently to maximize net income? A: Marketing and sales managers must understand that by extending generous repayment terms, they are expanding the company’s receivables balance and slowing the company’s cash flow. Production managers must strive to minimize the amount of excess inventory on hand. Managers must coordinate efforts to speed up the collection of receivables, while also ensuring that the company pays its payables on time but never too early. p. 61 When Debt Is Good Q: Discuss the difference in the debt to total assets ratio of Microsoft and General Motors. A: Microsoft has a very low debt to total assets ratio. The company is in a rapidly changing industry and thus should try to minimize the risk associated with increased debt. Also, because Microsoft generates significant amounts of cash and has minimal needs for large investments in plant assets, it does not need to borrow a lot of cash. General Motors needs to make huge investments in plant assets, and it has a very large credit operation. Thus, it has large borrowing needs. p. 64 The Korean Discount Q: What is meant by the phrase “make the country’s businesses more transparent”? Why would increasing transparency spur economic growth? A: Transparency refers to the extent to which outsiders have knowledge regarding a company’s financial performance and financial position. If a company lacks transparency, its financial reports do not adequately inform investors of critical information that is needed to make investment decisions. If corporate transparency is increased, investors will be more willing to supply the financial capital that businesses need in order to grow, which would spur the country’s economic growth. p. 65 What Do These Companies Have in Common? Q: What problems might Best Buy’s year-end create for analysts? A: First, if Best Buy’s competitors use a different year-end, then when you compare their financial results, you are not comparing performance over the same period of time or financial position at the same point in time. Also, by not picking a particular date, the number of weeks in Best Buy’s fiscal year will change. For example, fiscal years 2008 and 2009 had 52 weeks, but fiscal year 2007 had 53 weeks. Answers to Self-Test Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 
IFRS A Look at
IFRS 
The classified balance sheet, although generally required internationally, contains certain variations in format when reporting under
IFRS. KEY POINTS 
IFRS recommends but does not require the use of the title “statement of financial position” rather than balance sheet. • The format of statement of financial position information is often presented differently under
IFRS. Although no specific format is required, most companies that follow
IFRS present statement of financial position information in this order: • Noncurrent assets • Current assets • Equity • Noncurrent liabilities • Current liabilities •
IFRS requires a classified statement of financial position except in very limited situations.
IFRS follows the same guidelines as this textbook for distinguishing between current and noncurrent assets and liabilities. • Under
IFRS, current assets are usually listed in the reverse order of liquidity. For example, under GAAP cash is listed first, but under
IFRS it is listed last. • Some companies report the subtotal net assets, which equals total assets minus total liabilities. See, for example, the statement of financial position of Zetar plc in Appendix C. •
IFRS has many differences in terminology that you will notice in this textbook. For example, in the sample statement of financial position illustrated below, notice in the investment category that stock is called shares, and in the equity section common stock is called share capital–ordinary. A Look at
IFRS 97 FRANKLIN CORPORATION Statement of Financial Position October 31, 2012 Assets Intangible assets Patents $ 3,100 Property, plant, and equipment Land $10,000 Office equipment $24,000 Less: Accumulated depreciation 5,000 19,000 29,000 Long-term investments Investment in shares of Walters Corp. 5,200 Investment in real estate 2,000 7,200 Current assets Prepaid insurance 400 Supplies 2,100 Inventories 3,000 Notes receivable 1,000 Accounts receivable 7,000 Short-term investments 2,000 Cash 6,600 22,100 Total assets $61,400 Equity and Liabilities Equity Share capital—ordinary $20,000 Retained earnings 14,050 $34,050 Non-current liabilities Mortgage note payable 10,000 Notes payable 1,300 11,300 Current liabilities Notes payable 11,000 Accounts payable 2,100 Salaries payable 1,600 Unearned revenue 900 Interest payable 450 16,050 Total equity and liabilities $61,400 • Both
IFRS and GAAP require disclosures about (1) accounting policies followed, (2) judgments that management has made in the process of applying the entity’s accounting policies, and (3) the key assumptions and estimation uncertainty that could result in a material adjustment to the carrying amounts of assets and liabilities within the next financial year. • Comparative prior-period information must be presented and financial statements must be prepared annually. • Both GAAP and
IFRS are increasing the use of fair value to report assets. However, at this point
IFRS has adopted it more broadly. As examples, under
IFRS companies can apply fair value to property, plant, and equipment; natural resources; and in some cases intangible assets. • Recently, the IASB and FASB completed the first phase of a jointly created conceptual framework. In this first phase, they agreed on the objective of financial reporting and a common set of desired qualitative characteristics. These were presented in the Chapter 2 discussion. 98 chapter 2 A Further Look at Financial Statements • The monetary unit assumption is part of each framework. However, the unit of measure will vary depending on the currency used in the country in which the company is incorporated (e.g., Chinese yuan, Japanese yen, and British pound). • The economic entity assumption is also part of each framework although some cultural differences result in differences in its application. For example, in Japan many companies have formed alliances that are so strong that they act similar to related corporate divisions although they are not actually part of the same company. LOOKING TO THE FUTURE The IASB and the FASB are working on a project to converge their standards related to financial statement presentation. A key feature of the proposed framework is that each of the statements will be organized in the same format, to separate an entity’s financing activities from its operating and investing activities and, further, to separate financing activities into transactions with owners and creditors. Thus, the same classifications used in the statement of financial position would also be used in the income statement and the statement of cash flows. The project has three phases. You can follow the joint financial presentation project at the following link: http://www.fasb.org/project/financial_statement_presentation.shtml. The IASB and the FASB face a difficult task in attempting to update, modify, and complete a converged conceptual framework. For example, how do companies choose between information that is highly relevant but difficult to verify versus information that is less relevant but easy to verify? How do companies define control when developing a definition of an asset? Is a liability the future sacrifice itself or the obligation to make the sacrifice? Should a single measurement method, such as historical cost or fair value, be used, or does it depend on whether it is an asset or liability that is being measured? It appears that the new document will be a significant improvement over its predecessors and will lead to principle-based standards, which will help financial statement users make better decisions. 
IFRS Self-Test Questions 1. 
Which of the following statements is false? (a) The monetary unit assumption is used under
IFRS. (b) Under
IFRS, companies sometimes net liabilities against assets to report “net assets.” (c) The FASB and IASB are working on a joint conceptual framework project. (d) Under
IFRS, the statement of financial position is usually referred to as the statement of assets and equity. 2. A company has purchased a tract of land and expects to build a production plant on the land in approximately 5 years. During the 5 years before construction, the land will be idle. Under
IFRS, the land should be reported as: (a) land expense. (b) property, plant, and equipment. (c) an intangible asset. (d) a long-term investment. 3. Current assets under
IFRS are listed generally: (a) by importance. (b) in the reverse order of their expected conversion to cash. (c) by longevity. (d) alphabetically. 4. Companies that use
IFRS: (a) may report all their assets on the statement of financial position at fair value. (b) may offset assets against liabilities and show net assets and net liabilities on their statement of financial positions, rather than the underlying detailed line items. (c) may report noncurrent assets before current assets on the statement of financial position. (d) do not have any guidelines as to what should be reported on the statement of financial position. 5. Companies that follow
IFRS to prepare a statement of financial position generally use the following order of classification: (a) current assets, current liabilities, noncurrent assets, noncurrent liabilities, equity. (b) noncurrent assets, noncurrent liabilities, current assets, current liabilities, equity. (c) noncurrent assets, current assets, equity, noncurrent liabilities, current liabilities. (d) equity, noncurrent assets, current assets, noncurrent liabilities, current liabilities. 
IFRS Concepts and Application
IFRS2–1 
In what ways does the format of a statement of financial of position under
IFRS often differ from a balance sheet presented under GAAP? 
IFRS2–2 
Do the
IFRS and GAAP conceptual frameworks differ in terms of the objective of financial reporting? Explain. 
IFRS2–3 
What terms commonly used under
IFRS are synonymous with common stock and balance sheet? 
IFRS2–4 
The statement of financial position for Diaz Company includes the following accounts: Accounts Receivable £12,500; Prepaid Insurance £3,600; Cash £15,400; Supplies £5,200; and Short-Term Investments £6,700. Prepare the current assets section of the statement of financial position, listing the accounts in proper sequence. 
IFRS2–5 
Zurich Company recently received the following information related to the company’s December 31, 2012, statement of financial position. Inventories CHF 2,900 Short-term investments CHF 120 Cash 13,400 Accumulated depreciation 5,700 Equipment 21,700 Accounts receivable 4,300 Investments in ordinary shares (long-term) 6,500 Prepare the assets section of the company’s classified statement of financial position. 
IFRS2–6 
The following information is available for Karr Bowling Alley at December 31, 2012. Buildings $128,800 Share Capital—Ordinary $100,000 Accounts Receivable 14,520 Retained Earnings 15,000 Prepaid Insurance 4,680 Accumulated Depreciation—Buildings 42,600 Cash 18,040 Accounts Payable 12,300 Equipment 62,400 Notes Payable 97,780 Land 64,000 Accumulated Depreciation—Equipment 18,720 Insurance Expense 780 Interest Payable 2,600 Depreciation Expense 7,360 Bowling Revenues 14,180 Interest Expense 2,600 Prepare a classified statement of financial position; assume that $13,900 of the notes payable will be paid in 2013. 
IFRS2–7 
Brian Hopkins is interested in comparing the liquidity and solvency of a U.S. software company with a Chinese competitor. Is this possible if the two companies report using different currencies? INTERNATIONAL COMPARATIVE ANALYSIS PROBLEM: Tootsie Roll vs. Zetar plc 
IFRS2–8 
The financial statements of Zetar plc are presented in Appendix C. The company’s complete annual report, including the notes to its financial statements, is available at www.zetarplc.comInstructions Identify five differences in the format of the statement of financial position used by Zetar plc compared to a company, such as Tootsie Roll, that follows GAAP. (Tootsie Roll’s financial statements are available in Appendix A.) Answers to
IFRS Self-Test Questions 1. 
2. 3. 4. 5.