Solutions Manual and Test Bank Intermediate Accounting Kieso Weygandt Warfield 14th edition
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Chapter 5 Balance Sheet and Statement of Cash Flows
1. How does information from the balance sheet help users of the financial statements?
2. What is meant by solvency? What information in the balance sheet can be used to assess a company’s solvency?
3. A recent financial magazine indicated that the airline industry has poor financial flexibility. What is meant by financial flexibility, and why is it important?
4. Discuss at least two situations in which estimates could affect the usefulness of information in the balance sheet.
5. Perez Company reported an increase in inventories in the past year. Discuss the effect of this change on the current ratio (current assets 4 current liabilities). What does this tell a statement user about Perez Company’s liquidity?
6. What is meant by liquidity? Rank the following assets from one to five in order of liquidity. (a) Goodwill. (b) Inventory. (c) Buildings. (d) Short-term investments. (e) Accounts receivable.
7. What are the major limitations of the balance sheet as a source of information?
8. Discuss at least two items that are important to the value of companies like Intel or IBM but that are not recorded in their balance sheets. What are some reasons why these items are not recorded in the balance sheet?
9. How does separating current assets from property, plant, and equipment in the balance sheet help analysts?
10. In its December 31, 2012, balance sheet Oakley Corporation reported as an asset, “Net notes and accounts receivable, $7,100,000.” What other disclosures are necessary?
11. Should available-for-sale securities always be reported as a current asset? Explain.
12. What is the relationship between current assets and current liabilities?
13. The New York Knicks, Inc. sold 10,000 season tickets at $2,000 each. By December 31, 2012, 16 of the 40 home games had been played. What amount should be reported as a current liability at December 31, 2012?
14. What is working capital? How does working capital relate to the operating cycle?
15. In what section of the balance sheet should the following items appear, and what balance sheet terminology would you use? (a) Treasury stock (recorded at cost). (b) Checking account at bank. (c) Land (held as an investment). (d) Sinking fund. (e) Unamortized premium on bonds payable. (f) Copyrights. (g) Pension fund assets. (h) Premium on capital stock. (i) Long-term investments (pledged against bank loans payable).
16. Where should the following items be shown on the balance sheet, if shown at all? (a) Allowance for doubtful accounts receivable. (b) Merchandise held on consignment. (c) Advances received on sales contract. (d) Cash surrender value of life insurance. (e) Land. (f) Merchandise out on consignment. (g) Franchises. (h) Accumulated depreciation of plant and equipment. (i) Materials in transit—purchased f.o.b. destination.
17. State the generally accepted accounting principle applicable to the balance sheet valuation of each of the following assets. (a) Trade accounts receivable. (b) Land. (c) Inventories. (d) Trading securities (common stock of other companies). (e) Prepaid expenses.
18. Refer to the definition of assets on page 216. Discuss how a leased building might qualify as an asset of the lessee (tenant) under this definition.
19. Kathleen Battle says, “Retained earnings should be reported as an asset, since it is earnings which are reinvested in the business.” How would you respond to Battle?
20. The creditors of Chester Company agree to accept promissory notes for the amount of its indebtedness with a proviso that two-thirds of the annual profits must be applied to their liquidation. How should these notes be reported on the balance sheet of the issuing company? Give a reason for your answer.
21. What is the purpose of a statement of cash flows? How does it differ from a balance sheet and an income statement?
22. The net income for the year for Genesis, Inc. is $750,000, but the statement of cash flows reports that the cash provided by operating activities is $640,000. What might account for the difference?
23. Net income for the year for Carrie, Inc. was $750,000, but the statement of cash flows reports that cash provided by operating activities was $860,000. What might account for the difference?
24. Differentiate between operating activities, investing activities, and financing activities.
25. Each of the following items must be considered in preparing a statement of cash flows. Indicate where each item is to be reported in the statement, if at all. Assume that net income is reported as $90,000. (a) Accounts receivable increased from $34,000 to $39,000 from the beginning to the end of the year. (b) During the year, 10,000 shares of preferred stock with a par value of $100 a share were issued at $115 per share. (c) Depreciation expense amounted to $14,000, and bond premium amortization amounted to $5,000. (d) Land increased from $10,000 to $30,000.
26. Sergey Co. has net cash provided by operating activities of $1,200,000. Its average current liabilities for the period are $1,000,000, and its average total liabilities are $1,500,000. Comment on the company’s liquidity and financial flexibility, given this information.
27. Net income for the year for Tanizaki, Inc. was $750,000, but the statement of cash flows reports that cash provided by operating activities was $860,000. Tanizaki also reported capital expenditures of $75,000 and paid dividends in the amount of $30,000. Compute Tanizaki’s free cash flow.
28. What is the purpose of a free cash flow analysis?
29. What are some of the techniques of disclosure for the balance sheet?
30. What is a “Summary of Significant Accounting Policies”?
31. What types of contractual obligations must be disclosed in great detail in the notes to the balance sheet? Why do you think these detailed provisions should be disclosed?
32. What is the profession’s recommendation in regard to the use of the term “surplus”? Explain. BRI E F EXERCI S E S 3
BE5-1 Harding Corporation has the following accounts included in its December 31, 2012, trial balance: Accounts Receivable $110,000; Inventory $290,000; Allowance for Doubtful Accounts $8,000; Patents $72,000; Prepaid Insurance $9,500; Accounts Payable $77,000; Cash $30,000. Prepare the current assets section of the balance sheet, listing the accounts in proper sequence.
BE5-2 Koch Corporation’s adjusted trial balance contained the following asset accounts at December 31, 2012: Cash $7,000; Land $40,000; Patents $12,500; Accounts Receivable $90,000; Prepaid Insurance $5,200; Inventory $30,000; Allowance for Doubtful Accounts $4,000; Equity Investments (trading) $11,000. Prepare the current assets section of the balance sheet, listing the accounts in proper sequence.
BE5-3 Included in Outkast Company’s December 31, 2012, trial balance are the following accounts: Prepaid Rent $5,200; Debt Investments $56,000; Unearned Fees $17,000; Land (held for investment) $39,000; Notes Receivable (long-term) $42,000. Prepare the long-term investments section of the balance sheet.
BE5-4 Lowell Company’s December 31, 2012, trial balance includes the following accounts: Inventory $120,000; Buildings $207,000; Accumulated Depreciation—Equipment $19,000; Equipment $190,000; Land (held for investment) $46,000; Accumulated Depreciation—Buildings $45,000; Land $71,000; Timberland $70,000. Prepare the property, plant, and equipment section of the balance sheet.
BE5-5 Crane Corporation has the following accounts included in its December 31, 2012, trial balance: Equity Investments (trading) $21,000; Goodwill $150,000; Prepaid Insurance $12,000; Patents $220,000; Franchises $130,000. Prepare the intangible assets section of the balance sheet.
BE5-6 Patrick Corporation’s adjusted trial balance contained the following asset accounts at December 31, 2012: Prepaid Rent $12,000; Goodwill $50,000; Franchise Fees Receivable $2,000; Franchises $47,000; Patents $33,000; Trademarks $10,000. Prepare the intangible assets section of the balance sheet.
BE5-7 Thomas Corporation’s adjusted trial balance contained the following liability accounts at December 31, 2012: Bonds Payable (due in 3 years) $100,000; Accounts Payable $72,000; Notes Payable (due in 90 days) $22,500; Salaries and Wages Payable $4,000; Income Taxes Payable $7,000. Prepare the current liabilities section of the balance sheet.
BE5-8 Included in Adams Company’s December 31, 2012, trial balance are the following accounts: Accounts Payable $220,000; Pension Asset/Liability $375,000; Discount on Bonds Payable $29,000; Unearned Revenue $41,000; Bonds Payable $400,000; Salaries and Wages Payable $27,000; Interest Payable $12,000; Income Taxes Payable $29,000. Prepare the current liabilities section of the balance sheet.
BE5-9 Use the information presented in
BE5-8 for Adams Company to prepare the long-term liabilities section of the balance sheet. 3 3 3 3 3 3 3 3
BE5-10 Hawthorn Corporation’s adjusted trial balance contained the following accounts at December 31, 2012: Retained Earnings $120,000; Common Stock $750,000; Bonds Payable $100,000; Paid-in Capital in Excess of Par—Common Stock $200,000; Goodwill $55,000; Accumulated Other Comprehensive Loss $150,000. Prepare the stockholders’ equity section of the balance sheet.
BE5-11 Stowe Company’s December 31, 2012, trial balance includes the following accounts: Investment in Common Stock $70,000; Retained Earnings $114,000; Trademarks $31,000; Preferred Stock $152,000; Common Stock $55,000; Deferred Income Taxes $88,000; Paid-in Capital in Excess of Par—Common Stock $174,000. Prepare the stockholders’ equity section of the balance sheet.
BE5-12 Keyser Beverage Company reported the following items in the most recent year. Net income $40,000 Dividends paid 5,000 Increase in accounts receivable 10,000 Increase in accounts payable 7,000 Purchase of equipment (capital expenditure) 8,000 Depreciation expense 4,000 Issue of notes payable 20,000 Compute net cash provided by operating activities, the net change in cash during the year, and free cash flow.
BE5-13 Ames Company reported 2012 net income of $151,000. During 2012, accounts receivable increased by $13,000 and accounts payable increased by $9,500. Depreciation expense was $44,000. Prepare the cash flows from operating activities section of the statement of cash flows.
BE5-14 Martinez Corporation engaged in the following cash transactions during 2012. Sale of land and building $191,000 Purchase of treasury stock 40,000 Purchase of land 37,000 Payment of cash dividend 95,000 Purchase of equipment 53,000 Issuance of common stock 147,000 Retirement of bonds 100,000 Compute the net cash provided (used) by investing activities.
BE5-15 Use the information presented in
BE5-14 for Martinez Corporation to compute the net cash used (provided) by financing activities.
BE5-16 Using the information in
BE5-14, determine Martinez’s free cash flow, assuming that it reported net cash provided by operating activities of $400,000. 3 3 6 6 6 6 7 EXERCI S E S
E5-1 (Balance Sheet Classifications) Presented below are a number of balance sheet accounts of Cunningham, Inc. (a) Investment in Preferred Stock. (h) Interest Payable. (b) Treasury Stock. (i) Deficit. (c) Common Stock. (j) Equity Investments (trading). (d) Dividends Payable. (k) Income Tax Payable. (e) Accumulated Depreciation—Equipment. (l) Unearned Subscription Revenue. (f) Construction in Process. (m) Work in Process. (g) Petty Cash. (n) Vacation Wages Payable.
Instructions For each of the accounts above, indicate the proper balance sheet classification. In the case of borderline items, indicate the additional information that would be required to determine the proper classification.
E5-2 (Classification of Balance Sheet Accounts) Presented below are the captions of Nikos Company’s balance sheet. (a) Current assets. (f) Current liabilities. (b) Investments. (g) Non-current liabilities. (c) Property, plant, and equipment. (h) Capital stock. (d) Intangible assets. (i) Additional paid-in capital. (e) Other assets. (j) Retained earnings.
Balance Sheet and Statement of Cash Flows
Instructions Indicate by letter where each of the following items would be classified. 1. Preferred stock. 11. Cash surrender value of life insurance. 2. Goodwill. 12. Notes payable (due next year). 3. Salaries and wages payable. 13. Supplies. 4. Accounts payable. 14. Common stock. 5. Buildings. 15. Land. 6. Equity investments (trading). 16. Bond sinking fund. 7. Current portion of long-term debt. 17. Inventory. 8. Premium on bonds payable. 18. Prepaid insurance. 9. Allowance for doubtful accounts. 19. Bonds payable. 10. Accounts receivable. 20. Income tax payable.
E5-3 (Classification of Balance Sheet Accounts) Assume that Masters Enterprises uses the following headings on its balance sheet. (a) Current assets. (f) Current liabilities. (b) Investments. (g) Long-term liabilities. (c) Property, plant, and equipment. (h) Capital stock. (d) Intangible assets. (i) Paid-in capital in excess of par. (e) Other assets. (j) Retained earnings.
Instructions Indicate by letter how each of the following usually should be classified. If an item should appear in a note to the financial statements, use the letter “N” to indicate this fact. If an item need not be reported at all on the balance sheet, use the letter “X.” 1. Prepaid insurance. 2. Stock owned in affiliated companies. 3. Unearned subscriptions revenue. 4. Advances to suppliers. 5. Unearned rent revenue. 6. Preferred stock. 7. Additional paid-in capital on preferred stock. 8. Copyrights. 9. Petty cash fund. 10. Sales tax payable. 11. Accrued interest on notes receivable. 12. Twenty-year issue of bonds payable that will mature within the next year. (No sinking fund exists, and refunding is not planned.) 13. Machinery retired from use and held for sale. 14. Fully depreciated machine still in use. 15. Accrued interest on bonds payable. 16. Salaries that company budget shows will be paid to employees within the next year. 17. Discount on bonds payable. (Assume related to bonds payable in No. 12.) 18. Accumulated depreciation—buildings.
E5-4 (Preparation of a Classified Balance Sheet) Assume that Gulistan Inc. has the following accounts at the end of the current year. 1. Common Stock. 2. Discount on Bonds Payable. 3. Treasury Stock (at cost). 4. Notes Payable (short-term). 5. Raw Materials. 6. Preferred Stock Investments (long-term). 7. Unearned Rent Revenue. 8. Work in Process. 9. Copyrights. 10. Buildings. 11. Notes Receivable (short-term). 12. Cash. 13. Salaries and Wages Payable. 14. Accumulated Depreciation—Buildings. 15. Cash Restricted for Plant Expansion. 16. Land Held for Future Plant Site. 17. Allowance for Doubtful Accounts—Accounts Receivable. 18. Retained Earnings. 19. Paid-in Capital in Excess of Par—Common Stock. 20. Unearned Subscriptions Revenue. 21. Receivables—Officers (due in one year). 22. Finished Goods. 23. Accounts Receivable. 24. Bonds Payable (due in 4 years).
Instructions Prepare a classified balance sheet in good form. (No monetary amounts are necessary.)
E5-5 (Preparation of a Corrected Balance Sheet) Bruno Company has decided to expand its operations. The bookkeeper recently completed the balance sheet presented on the next page in order to obtain additional funds for expansion. 2 3 2 3 3
Instructions Prepare a revised balance sheet given the available information. Assume that the accumulated depreciation balance for the buildings is $160,000 and for the office equipment, $105,000. The allowance for doubtful accounts has a balance of $17,000. The pension obligation is considered a long-term liability.
E5-6 (Corrections of a Balance Sheet) The bookkeeper for Garfield Company has prepared the following balance sheet as of July 31, 2012. BRUNO COMPANY BALANCE SHEET DECEMBER 31, 2012 Current assets Cash $260,000 Accounts receivable (net) 340,000 Inventories (lower-of-average-cost-or-market) 401,000 Equity investments (trading)—at cost (fair value $120,000) 140,000 Property, plant, and equipment Buildings (net) 570,000 Offi ce equipment (net) 160,000 Land held for future use 175,000 Intangible assets Goodwill 80,000 Cash surrender value of life insurance 90,000 Prepaid expenses 12,000 Current liabilities Accounts payable 135,000 Notes payable (due next year) 125,000 Pension obligation 82,000 Rent payable 49,000 Premium on bonds payable 53,000 Long-term liabilities Bonds payable 500,000 Stockholders’ equity Common stock, $1.00 par, authorized 400,000 shares, issued 290,000 290,000 Additional paid-in capital 180,000 Retained earnings ? GARFIELD COMPANY BALANCE SHEET AS OF JULY 31, 2012 Cash $ 69,000 Notes and accounts payable $ 44,000 Accounts receivable (net) 40,500 Long-term liabilities 75,000 Inventory 60,000 Stockholders’ equity 155,500 Equipment (net) 84,000 $274,500 Patents 21,000 $274,500 The following additional information is provided. 1. Cash includes $1,200 in a petty cash fund and $12,000 in a bond sinking fund. 2. The net accounts receivable balance is comprised of the following three items: (a) accounts receivable—debit balances $52,000; (b) accounts receivable—credit balances $8,000; (c) allowance for doubtful accounts $3,500. 3. Merchandise inventory costing $5,300 was shipped out on consignment on July 31, 2012. The ending inventory balance does not include the consigned goods. Receivables in the amount of $5,300 were recognized on these consigned goods. 4. Equipment had a cost of $112,000 and an accumulated depreciation balance of $28,000. 5. Taxes payable of $9,000 were accrued on July 31. Garfield Company, however, had set up a cash fund to meet this obligation. This cash fund was not included in the cash balance, but was offset against the taxes payable amount. 3 Exercises 283 284 Chapter 5 Balance Sheet and Statement of Cash Flows
Instructions Prepare a corrected classified balance sheet as of July 31, 2012, from the available information, adjusting the account balances using the additional information.
E5-7 (Current Assets Section of the Balance Sheet) Presented below are selected accounts of Aramis Company at December 31, 2012. Finished Goods $ 52,000 Cost of Goods Sold $2,100,000 Unearned Revenue 90,000 Notes Receivable 40,000 Equipment 253,000 Accounts Receivable 161,000 Work in Process 34,000 Raw Materials 187,000 Cash 42,000 Supplies Expense 60,000 Equity Investments (short-term) 31,000 Allowance for Doubtful Accounts 12,000 Customer Advances 36,000 Licenses 18,000 Cash Restricted for Plant Expansion 50,000 Additional Paid-in Capital 88,000 Treasury Stock 22,000 The following additional information is available. 1. Inventories are valued at lower-of-cost-or-market using LIFO. 2. Equipment is recorded at cost. Accumulated depreciation, computed on a straight-line basis, is $50,600. 3. The short-term investments have a fair value of $29,000. (Assume they are trading securities.) 4. The notes receivable are due April 30, 2014, with interest receivable every April 30. The notes bear interest at 6%. (Hint: Accrue interest due on December 31, 2012.) 5. The allowance for doubtful accounts applies to the accounts receivable. Accounts receivable of $50,000 are pledged as collateral on a bank loan. 6. Licenses are recorded net of accumulated amortization of $14,000. 7. Treasury stock is recorded at cost.
Instructions Prepare the current assets section of Aramis Company’s December 31, 2012, balance sheet, with appropriate disclosures.
E5-8 (Current vs. Long-term Liabilities) Pascal Corporation is preparing its December 31, 2012, balance sheet. The following items may be reported as either a current or long-term liability. 1. On December 15, 2012, Pascal declared a cash dividend of $2.00 per share to stockholders of record on December 31. The dividend is payable on January 15, 2013. Pascal has issued 1,000,000 shares of common stock, of which 50,000 shares are held in treasury. 2. At December 31, bonds payable of $100,000,000 are outstanding. The bonds pay 10% interest every September 30 and mature in installments of $25,000,000 every September 30, beginning September 30, 2013. 3. At December 31, 2011, customer advances were $12,000,000. During 2012, Pascal collected $30,000,000 of customer advances, and advances of $25,000,000 were earned.
Instructions For each item above, indicate the dollar amounts to be reported as a current liability and as a long-term liability, if any.
E5-9 (Current Assets and Current Liabilities) The current assets and current liabilities sections of the balance sheet of Agincourt Company appear as follows. 3 2 2 3 AGINCOURT COMPANY BALANCE SHEET (PARTIAL) DECEMBER 31, 2012 Cash $ 40,000 Accounts payable $ 61,000 Accounts receivable $89,000 Notes payable 67,000 Less: Allowance for $128,000 doubtful accounts 7,000 82,000 Inventory 171,000 Prepaid expenses 9,000 $302,000 The following errors in the corporation’s accounting have been discovered: 1. January 2013 cash disbursements entered as of December 2012 included payments of accounts payable in the amount of $35,000, on which a cash discount of 2% was taken. 2. The inventory included $27,000 of merchandise that had been received at December 31 but for which no purchase invoices had been received or entered. Of this amount, $10,000 had been received on consignment; the remainder was purchased f.o.b. destination, terms 2/10, n/30. 3. Sales for the first four days in January 2013 in the amount of $30,000 were entered in the sales book as of December 31, 2012. Of these, $21,500 were sales on account and the remainder were cash sales. 4. Cash, not including cash sales, collected in January 2013 and entered as of December 31, 2012, totaled $35,324. Of this amount, $23,324 was received on account after cash discounts of 2% had been deducted; the remainder represented the proceeds of a bank loan.
Instructions (a) Restate the current assets and current liabilities sections of the balance sheet in accordance with good accounting practice. (Assume that both accounts receivable and accounts payable are recorded gross.) (b) State the net effect of your adjustments on Agincourt Company’s retained earnings balance.
E5-10 (Current Liabilities) Mary Pierce is the controller of Arnold Corporation and is responsible for the preparation of the year-end financial statements. The following transactions occurred during the year. (a) On December 20, 2012, an employee filed a legal action against Arnold for $100,000 for wrongful dismissal. Management believes the action to be frivolous and without merit. The likelihood of payment to the employee is remote. (b) Bonuses to key employees based on net income for 2012 are estimated to be $150,000. (c) On December 1, 2012, the company borrowed $900,000 at 8% per year. Interest is paid quarterly. (d) Credit sales for the year amounted to $10,000,000. Arnold’s expense provision for doubtful accounts is estimated to be 2% of credit sales. (e) On December 15, 2012, the company declared a $2.00 per share dividend on the 40,000 shares of common stock outstanding, to be paid on January 5, 2013. (f) During the year, customer advances of $160,000 were received; $50,000 of this amount was earned by December 31, 2012.
Instructions For each item above, indicate the dollar amount to be reported as a current liability. If a liability is not reported, explain why.
E5-11 (Balance Sheet Preparation) Presented below is the adjusted trial balance of Abbey Corporation at December 31, 2012. Exercises 285 Debits Credits Cash $ ? Supplies 1,200 Prepaid Insurance 1,000 Equipment 48,000 Accumulated Depreciation—Equipment $ 9,000 Trademarks 950 Accounts Payable 10,000 Salaries and Wages Payable 500 Unearned Service Revenue 2,000 Bonds Payable (due 2017) 9,000 Common Stock 10,000 Retained Earnings 20,000 Service Revenue 10,000 Salaries and Wages Expense 9,000 Insurance Expense 1,400 Rent Expense 1,200 Interest Expense 900 Total $ ? $ ? 2 3 3 Additional information: 1. Net loss for the year was $2,500. 2. No dividends were declared during 2012. 286 Chapter 5 Balance Sheet and Statement of Cash Flows
Instructions Prepare a classified balance sheet as of December 31, 2012. Debits Credits Cash $ 197,000 Sales $ 7,900,000 Debt Investments (trading) (cost, $145,000) 153,000 Cost of Goods Sold 4,800,000 Debt Investments (long-term) 299,000 Equity Investments (long-term) 277,000 Notes Payable (short-term) 90,000 Accounts Payable 455,000 Selling Expenses 2,000,000 Investment Revenue 63,000 Land 260,000 Buildings 1,040,000 Dividends Payable 136,000 Accrued Liabilities 96,000 Accounts Receivable 435,000 Accumulated Depreciation—Buildings 352,000 Allowance for Doubtful Accounts 25,000 Administrative Expenses 900,000 Interest Expense 211,000 Inventory 597,000 Extraordinary Gain 80,000 Notes Payable (long-term) 900,000 Equipment 600,000 Bonds Payable 1,000,000 Accumulated Depreciation—Equipment 60,000 Franchises 160,000 Common Stock ($5 par) 1,000,000 Treasury Stock 191,000 Patents 195,000 Retained Earnings 78,000 Paid-in Capital in Excess of Par 80,000 Totals $12,315,000 $12,315,000
Instructions Prepare a balance sheet at December 31, 2012, for Vivaldi Corporation. Ignore income taxes.
E5-13 (Statement of Cash Flows—Classifications) The major classifications of activities reported in the statement of cash flows are operating, investing, and financing. Classify each of the transactions listed below as: 1. Operating activity—add to net income. 2. Operating activity—deduct from net income. 3. Investing activity. 4. Financing activity. 5. Reported as significant noncash activity. The transactions are as follows. (a) Issuance of capital stock. (h) Payment of cash dividends. (b) Purchase of land and building. (i) Exchange of furniture for office equipment. (c) Redemption of bonds. (j) Purchase of treasury stock. (d) Sale of equipment. (k) Loss on sale of equipment. (e) Depreciation of machinery. (l) Increase in accounts receivable during the year. (f) Amortization of patent. (m) Decrease in accounts payable during the year. (g) Issuance of bonds for plant assets.
E5-14 (Preparation of a Statement of Cash Flows) The comparative balance sheets of Connecticut Inc. at the beginning and the end of the year 2012 appear on the next page. 3 5 6
E5-12 (Preparation of a Balance Sheet) Presented below is the trial balance of Vivaldi Corporation at December 31, 2012. Net income of $34,000 was reported, and dividends of $13,000 were paid in 2012. New equipment was purchased and none was sold.
Instructions Prepare a statement of cash flows for the year 2012.
E5-15 (Preparation of a Statement of Cash Flows) Presented below is a condensed version of the comparative balance sheets for Sondergaard Corporation for the last two years at December 31. Exercises 287 CONNECTICUT INC. BALANCE SHEETS Assets Dec. 31, 2012 Jan. 1, 2012 Inc./Dec. Cash $ 45,000 $ 13,000 $32,000 Inc. Accounts receivable 91,000 88,000 3,000 Inc. Equipment 39,000 22,000 17,000 Inc. Less: Accumulated depreciation—equipment (17,000) (11,000) 6,000 Inc. Total $158,000 $112,000 Liabilities and Stockholders’ Equity Accounts payable $ 20,000 $ 15,000 5,000 Inc. Common stock 100,000 80,000 20,000 Inc. Retained earnings 38,000 17,000 21,000 Inc. Total $158,000 $112,000 2012 2011 Cash $157,000 $ 78,000 Accounts receivable 180,000 185,000 Investments 52,000 74,000 Equipment 298,000 240,000 Less: Accumulated depreciation—equipment (106,000) (89,000) Current liabilities 134,000 151,000 Capital stock 160,000 160,000 Retained earnings 287,000 177,000 Additional information: Investments were sold at a loss (not extraordinary) of $7,000; no equipment was sold; cash dividends paid were $50,000; and net income was $160,000.
Instructions (a) Prepare a statement of cash flows for 2012 for Sondergaard Corporation. (b) Determine Sondergaard Corporation’s free cash flow.
E5-16 (Preparation of a Statement of Cash Flows) A comparative balance sheet for Orozco Corporation is presented below. December 31 Assets 2012 2011 Cash $ 63,000 $ 22,000 Accounts receivable 82,000 66,000 Inventory 180,000 189,000 Land 71,000 110,000 Equipment 270,000 200,000 Accumulated depreciation—equipment (69,000) (42,000) Total $597,000 $545,000 Liabilities and Stockholders’ Equity Accounts payable $ 34,000 $ 47,000 Bonds payable 150,000 200,000 Common stock ($1 par) 214,000 164,000 Retained earnings 199,000 134,000 Total $597,000 $545,000 6 7 6 7 288 Chapter 5 Balance Sheet and Statement of Cash Flows Additional information: 1. Net income for 2012 was $105,000. 2. Cash dividends of $40,000 were declared and paid. 3. Bonds payable amounting to $50,000 were retired through issuance of common stock.
Instructions (a) Prepare a statement of cash flows for 2012 for Orozco Corporation. (b) Determine Orozco Corporation’s current cash debt coverage ratio, cash debt coverage ratio, and free cash flow. Comment on its liquidity and financial flexibility.
E5-17 (Preparation of a Statement of Cash Flows and a Balance Sheet) Chekov Corporation’s balance sheet at the end of 2011 included the following items. Current assets $235,000 Current liabilities $150,000 Land 30,000 Bonds payable 100,000 Buildings 120,000 Common stock 180,000 Equipment 90,000 Retained earnings 44,000 Accum. depr.—buildings (30,000) Total $474,000 Accum. depr.—equipment (11,000) Patents 40,000 Total $474,000 The following information is available for 2012. 1. Net income was $55,000. 2. Equipment (cost $20,000 and accumulated depreciation $8,000) was sold for $9,000. 3. Depreciation expense was $4,000 on the building and $9,000 on equipment. 4. Patent amortization was $2,500. 5. Current assets other than cash increased by $25,000. Current liabilities increased by $13,000. 6. An addition to the building was completed at a cost of $27,000. 7. A long-term investment in stock was purchased for $16,000. 8. Bonds payable of $50,000 were issued. 9. Cash dividends of $25,000 were declared and paid. 10. Treasury stock was purchased at a cost of $11,000.
Instructions (Show only totals for current assets and current liabilities.) (a) Prepare a statement of cash flows for 2012. (b) Prepare a balance sheet at December 31, 2012.
E5-18 (Preparation of a Statement of Cash Flows, Analysis) The comparative balance sheets of Menachem Corporation at the beginning and end of the year 2012 appear below. MENACHEM CORPORATION BALANCE SHEETS Assets Dec. 31, 2012 Jan. 1, 2012 Inc./Dec. Cash $ 22,000 $ 13,000 $ 9,000 Inc. Accounts receivable 106,000 88,000 18,000 Inc. Equipment 37,000 22,000 15,000 Inc. Less: Accumulated depreciation—equipment (17,000) (11,000) 6,000 Inc. Total $148,000 $112,000 Liabilities and Stockholders’ Equity Accounts payable $ 20,000 $ 15,000 5,000 Inc. Common stock 100,000 80,000 20,000 Inc. Retained earnings 28,000 17,000 11,000 Inc. Total $148,000 $112,000 Net income of $34,000 was reported, and dividends of $23,000 were paid in 2012. New equipment was purchased and none was sold. 3 6 6 7
Instructions (a) Prepare a statement of cash flows for the year 2012. (b) Compute the current ratio (current assets 4 current liabilities) as of January 1, 2012, and December 31, 2012, and compute free cash flow for the year 2012. (c) In light of the analysis in (b), comment on Menachem’s liquidity and financial flexibility.
P5-1 (Preparation of a Classified Balance Sheet, Periodic Inventory) Presented below is a list of accounts in alphabetical order. Accounts Receivable Land Accumulated Depreciation—Buildings Land for Future Plant Site Accumulated Depreciation—Equipment Loss from Flood Advances to Employees Notes Payable (due next year) Advertising Expense Patents Allowance for Doubtful Accounts Payroll Taxes Payable Bond Sinking Fund Pension Obligations Bonds Payable Petty Cash Buildings Preferred Stock Cash in Bank Premium on Bonds Payable Cash on Hand Paid-in Capital in Excess of Par—Preferred Stock Cash Surrender Value of Life Insurance Prepaid Rent Commission Expense Purchases Common Stock Purchase Returns and Allowances Copyrights Retained Earnings Debt Investments (trading) Sales Dividends Payable Sales Discounts Equipment Salaries and Wages Expense (sales) Gain on Sale of Equipment Salaries and Wages Payable Interest Receivable Transportation-in Inventory—Beginning Treasury Stock (at cost) Inventory—Ending Unearned Subscriptions Revenue 3 3 3
Instructions Prepare a classified balance sheet in good form. (No monetary amounts are to be shown.)
P5-2 (Balance Sheet Preparation) Presented below are a number of balance sheet items for Montoya, Inc., for the current year, 2012. Goodwill $ 125,000 Accumulated depreciation—equipment $ 292,000 Payroll taxes payable 177,591 Inventory 239,800 Bonds payable 300,000 Rent payable (short-term) 45,000 Discount on bonds payable 15,000 Income tax payable 98,362 Cash 360,000 Rent payable (long-term) 480,000 Land 480,000 Common stock, $1 par value 200,000 Notes receivable 445,700 Preferred stock, $10 par value 150,000 Notes payable (to banks) 265,000 Prepaid expenses 87,920 Accounts payable 490,000 Equipment 1,470,000 Retained earnings ? Equity investments (trading) 121,000 Income taxes receivable 97,630 Accumulated depreciation—buildings 270,200 Unsecured notes payable (long-term) 1,600,000 Buildings 1,640,000
Instructions Prepare a classified balance sheet in good form. Common stock authorized was 400,000 shares, and preferred stock authorized was 20,000 shares. Assume that notes receivable and notes payable are short-term, unless stated otherwise. Cost and fair value of equity investments (trading) are the same.
P5-3 (Balance Sheet Adjustment and Preparation) The adjusted trial balance of Eastwood Company and other related information for the year 2012 are presented on the next page. 290 Chapter 5 Balance Sheet and Statement of Cash Flows EASTWOOD COMPANY ADJUSTED TRIAL BALANCE DECEMBER 31, 2012 Debits Credits Cash $ 41,000 Accounts Receivable 163,500 Allowance for Doubtful Accounts $ 8,700 Prepaid Insurance 5,900 Inventory 208,500 Equity Investments (long-term) 339,000 Land 85,000 Construction in Process (building) 124,000 Patents 36,000 Equipment 400,000 Accumulated Depreciation—Equipment 240,000 Discount on Bonds Payable 20,000 Accounts Payable 148,000 Accrued Expenses 49,200 Notes Payable 94,000 Bonds Payable 200,000 Common Stock 500,000 Paid-in Capital in Excess of Par—Common Stock 45,000 Retained Earnings 138,000 $1,422,900 $1,422,900 Additional information: 1. The LIFO method of inventory value is used. 2. The cost and fair value of the long-term investments that consist of stocks and bonds is the same. 3. The amount of the Construction in Progress account represents the costs expended to date on a building in the process of construction. (The company rents factory space at the present time.) The land on which the building is being constructed cost $85,000, as shown in the trial balance. 4. The patents were purchased by the company at a cost of $40,000 and are being amortized on a straight-line basis. 5. Of the discount on bonds payable, $2,000 will be amortized in 2013. 6. The notes payable represent bank loans that are secured by long-term investments carried at $120,000. These bank loans are due in 2013. 7. The bonds payable bear interest at 8% payable every December 31, and are due January 1, 2023. 8. 600,000 shares of common stock of a par value of $1 were authorized, of which 500,000 shares were issued and outstanding.
Instructions Prepare a balance sheet as of December 31, 2012, so that all important information is fully disclosed.
P5-4 (Preparation of a Corrected Balance Sheet) Presented below and on the next page is the balance sheet of Kishwaukee Corporation as of December 31, 2012. KISHWAUKEE CORPORATION BALANCE SHEET DECEMBER 31, 2012 Assets Goodwill (Note 2) $ 120,000 Buildings (Note 1) 1,640,000 Inventory 312,100 Land 950,000 Accounts receivable 170,000 Treasury stock (50,000 shares) 87,000 Cash on hand 175,900 Assets allocated to trustee for plant expansion Cash in bank 70,000 Debt investments (held-to-maturity) 138,000 $3,663,000 3 Equities Notes payable (Note 3) $ 600,000 Common stock, authorized and issued, 1,000,000 shares, no par 1,150,000 Retained earnings 858,000 Appreciation capital (Note 1) 570,000 Income tax payable 75,000 Reserve for depreciation recorded to date on the building 410,000 $3,663,000 Note 1: Buildings are stated at cost, except for one building that was recorded at appraised value. The excess of appraisal value over cost was $570,000. Depreciation has been recorded based on cost. Note 2: Goodwill in the amount of $120,000 was recognized because the company believed that book value was not an accurate representation of the fair value of the company. The gain of $120,000 was credited to Retained Earnings. Note 3: Notes payable are long-term except for the current installment due of $100,000.
Instructions Prepare a corrected classified balance sheet in good form. The notes above are for information only.
P5-5 (Balance Sheet Adjustment and Preparation) Presented below is the balance sheet of Sargent Corporation for the current year, 2012. SARGENT CORPORATION BALANCE SHEET DECEMBER 31, 2012 Current assets $ 485,000 Current liabilities $ 380,000 Investments 640,000 Long-term liabilities 1,000,000 Property, plant, and equipment 1,720,000 Stockholders’ equity 1,770,000 Intangible assets 305,000 $3,150,000 $3,150,000 The following information is presented. 1. The current assets section includes: cash $150,000, accounts receivable $170,000 less $10,000 for allowance for doubtful accounts, inventories $180,000, and unearned revenue $5,000. Inventories are stated on the lower-of-FIFO-cost-or-market. 2. The investments section includes: the cash surrender value of a life insurance contract $40,000; investments in common stock, short-term (trading) $80,000 and long-term (available-for-sale) $270,000; and bond sinking fund $250,000. The cost and fair value of investments in common stock are the same. 3. Property, plant, and equipment includes: buildings $1,040,000 less accumulated depreciation $360,000; equipment $450,000 less accumulated depreciation $180,000; land $500,000; and land held for future use $270,000. 4. Intangible assets include: a franchise $165,000; goodwill $100,000; and discount on bonds payable $40,000. 5. Current liabilities include: accounts payable $140,000; notes payable—short-term $80,000 and longterm $120,000; and taxes payable $40,000. 6. Long-term liabilities are composed solely of 7% bonds payable due 2020. 7. Stockholders’ equity has: preferred stock, no par value, authorized 200,000 shares, issued 70,000 shares for $450,000; and common stock, $1.00 par value, authorized 400,000 shares, issued 100,000 shares at an average price of $10. In addition, the corporation has retained earnings of $320,000.
Instructions Prepare a balance sheet in good form, adjusting the amounts in each balance sheet classification as affected by the information given above.
P5-6 (Preparation of a Statement of Cash Flows and a Balance Sheet) Lansbury Inc. had the balance sheet shown on the next page at December 31, 2011. 3 3 6 7 Problems 291 292 Chapter 5 Balance Sheet and Statement of Cash Flows During 2012, the following occurred. 1. Lansbury Inc. sold part of its investment portfolio for $15,000. This transaction resulted in a gain of $3,400 for the firm. The company classifies its investments as available-for-sale. 2. A tract of land was purchased for $18,000 cash. 3. Long-term notes payable in the amount of $16,000 were retired before maturity by paying $16,000 cash. 4. An additional $20,000 in common stock was issued at par. 5. Dividends of $8,200 were declared and paid to stockholders. 6. Net income for 2012 was $32,000 after allowing for depreciation of $11,000. 7. Land was purchased through the issuance of $30,000 in bonds. 8. At December 31, 2012, Cash was $32,000, Accounts Receivable was $41,600, and Accounts Payable remained at $30,000.
Instructions (a) Prepare a statement of cash flows for 2012. (b) Prepare an unclassified balance sheet as it would appear at December 31, 2012. (c) How might the statement of cash flows help the user of the financial statements? Compute two cash flow ratios.
P5-7 (Preparation of a Statement of Cash Flows and Balance Sheet) Aero Inc. had the following balance sheet at December 31, 2011. LANSBURY INC. BALANCE SHEET DECEMBER 31, 2011 Cash $ 20,000 Accounts payable $ 30,000 Accounts receivable 21,200 Notes payable (long-term) 41,000 Investments 32,000 Common stock 100,000 Plant assets (net) 81,000 Retained earnings 23,200 Land 40,000 $194,200 $194,200 AERO INC. BALANCE SHEET DECEMBER 31, 2011 Cash $ 20,000 Accounts payable $ 30,000 Accounts receivable 21,200 Bonds payable 41,000 Investments 32,000 Common stock 100,000 Plant assets (net) 81,000 Retained earnings 23,200 Land 40,000 $194,200 $194,200 During 2012, the following occurred. 1. Aero liquidated its available-for-sale investment portfolio at a loss of $5,000. 2. A tract of land was purchased for $38,000. 3. An additional $30,000 in common stock was issued at par. 4. Dividends totaling $10,000 were declared and paid to stockholders. 5. Net income for 2012 was $35,000, including $12,000 in depreciation expense. 6. Land was purchased through the issuance of $30,000 in additional bonds. 7. At December 31, 2012, Cash was $70,200, Accounts Receivable was $42,000, and Accounts Payable was $40,000.
Instructions (a) Prepare a statement of cash flows for the year 2012 for Aero. (b) Prepare the balance sheet as it would appear at December 31, 2012. (c) Compute Aero’s free cash flow and the current cash debt coverage ratio for 2012. (d) Use the analysis of Aero to illustrate how information in the balance sheet and statement of cash flows helps the user of the financial statements. 1 3 6 7 CONCEPTS FOR ANALYS I S
CA5-1 (Reporting the Financial Effects of Varied Transactions) In an examination of Arenes Corporation as of December 31, 2012, you have learned that the following situations exist. No entries have been made in the accounting records for these items. 1. The corporation erected its present factory building in 1997. Depreciation was calculated by the straight-line method, using an estimated life of 35 years. Early in 2012, the board of directors conducted a careful survey and estimated that the factory building had a remaining useful life of 25 years as of January 1, 2012. 2. An additional assessment of 2011 income taxes was levied and paid in 2012. 3. When calculating the accrual for officers’ salaries at December 31, 2012, it was discovered that the accrual for officers’ salaries for December 31, 2011, had been overstated. 4. On December 15, 2012, Arenes Corporation declared a cash dividend on its common stock outstanding, payable February 1, 2013, to the common stockholders of record December 31, 2012.
Instructions Describe fully how each of the items above should be reported in the financial statements of Arenes Corporation for the year 2012.
CA5-2 (Current Asset and Liability Classification) Below are the titles of a number of debit and credit accounts as they might appear on the balance sheet of Hayduke Corporation as of October 31, 2012. Debits Credits Interest Receivable on U.S. Government Preferred Stock Securities 11% First Mortgage Bonds, due in 2017 Notes Receivable Preferred Cash Dividend, payable Nov. 1, 2012 Petty Cash Fund Allowance for Doubtful Accounts Receivable Debt Investments (trading) Federal Income Taxes Payable Treasury Stock Customers’ Advances (on contracts to be Unamortized Bond Discount completed next year) Cash in Bank Premium on Bonds Redeemable in 2012 Land Offi cers’ 2012 Bonus Accrued Inventory of Operating Parts and Supplies Accrued Payroll Inventory of Raw Materials Notes Payable Patents Interest Expense Cash and U.S. Government Bonds Set Aside Accumulated Depreciation for Property Additions Accounts Payable Investment in Subsidiary Paid-in Capital in Excess of Par Accounts Receivable: Accrued Interest on Notes Payable U.S. Government Contracts 8% First Mortgage Bonds, to be redeemed in 2012 Regular out of current assets Installments—Due Next Year Installments—Due After Next year Goodwill Inventory of Finished Goods Inventory of Work in Process Defi cit
Instructions Select the current asset and current liability items from among these debits and credits. If there appear to be certain borderline cases that you are unable to classify without further information, mention them and explain your difficulty, or give your reasons for making questionable classifications, if any. (AICPA adapted)
CA5-3 (Identifying Balance Sheet Deficiencies) The assets of Fonzarelli Corporation are presented on the next page (000s omitted). 294 Chapter 5 Balance Sheet and Statement of Cash Flows
Instructions Indicate the deficiencies, if any, in the foregoing presentation of Fonzarelli Corporation’s assets.
CA5-4 (Critique of Balance Sheet Format and Content) Presented below and on the next page is the balance sheet of Rasheed Brothers Corporation (000s omitted). FONZARELLI CORPORATION BALANCE SHEET (PARTIAL) DECEMBER 31, 2012 Assets Current assets Cash $ 100,000 Unclaimed payroll checks 27,500 Debt investments (trading) (fair value $30,000) at cost 37,000 Accounts receivable (less bad debt reserve) 75,000 Inventory—at lower-of-cost- (determined by the next-in, fi rst-out method) or-market 240,000 Total current assets 479,500 Tangible assets Land (less accumulated depreciation) 80,000 Buildings and equipment $800,000 Less: Accumulated depreciation 250,000 550,000 Net tangible assets 630,000 Long-term investments Stocks and bonds 100,000 Treasury stock 70,000 Total long-term investments 170,000 Other assets Discount on bonds payable 19,400 Sinking fund 975,000 Total other assets 994,400 Total assets $2,273,900 RASHEED BROTHERS CORPORATION BALANCE SHEET DECEMBER 31, 2012 Assets Current assets Cash $26,000 Marketable securities 18,000 Accounts receivable 25,000 Inventory 20,000 Supplies 4,000 Stock investment in subsidiary company 20,000 $113,000 Investments Treasury stock 25,000 Property, plant, and equipment Buildings and land 91,000 Less: Reserve for depreciation 31,000 60,000 Other assets Cash surrender value of life insurance 19,000 Total assets $217,000 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $22,000 Reserve for income taxes 15,000 Customers’ accounts with credit balances 1 $ 37,001 Deferred credits Unamortized premium on bonds payable 2,000 Long-term liabilities Bonds payable 60,000 Total liabilities 99,001 Common stock Common stock, par $5 85,000 Earned surplus 24,999 Cash dividends declared 8,000 117,999 Total liabilities and stockholders’ equity $217,000
Instructions Evaluate the balance sheet presented. State briefly the proper treatment of any item criticized.
CA5-5 (Presentation of Property, Plant, and Equipment) Carol Keene, corporate comptroller for Dumaine Industries, is trying to decide how to present “Property, plant, and equipment” in the balance sheet. She realizes that the statement of cash flows will show that the company made a significant investment in purchasing new equipment this year, but overall she knows the company’s plant assets are rather old. She feels that she can disclose one figure titled “Property, plant, and equipment, net of depreciation,” and the result will be a low figure. However, it will not disclose the age of the assets. If she chooses to show the cost less accumulated depreciation, the age of the assets will be apparent. She proposes the following. Property, plant, and equipment, net of depreciation $10,000,000 rather than Property, plant, and equipment $50,000,000 Less: Accumulated depreciation (40,000,000) Net book value $10,000,000
Instructions Answer the following questions. (a) What are the ethical issues involved? (b) What should Keene do?
CA5-6 (Cash Flow Analysis) The partner in charge of the Kappeler Corporation audit comes by your desk and leaves a letter he has started to the CEO and a copy of the cash flow statement for the year ended December 31, 2012. Because he must leave on an emergency, he asks you to finish the letter by explaining: (1) the disparity between net income and cash flow; (2) the importance of operating cash flow; (3) the renewable source(s) of cash flow; and (4) possible suggestions to improve the cash position. KAPPELER CORPORATION STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2012 Cash fl ows from operating activities Net income $100,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 10,000 Amortization expense 1,000 Loss on sale of fi xed assets 5,000 Increase in accounts receivable (net) (40,000) Increase in inventory (35,000) Decrease in accounts payable (41,000) (100,000) Net cash provided by operating activities –0– Cash fl ows from investing activities Sale of plant assets 25,000 Purchase of equipment (100,000) Purchase of land (200,000) Net cash used by investing activities (275,000) Cash fl ows from fi nancing activities Payment of dividends (10,000) Redemption of bonds (100,000) Net cash used by fi nancing activities (110,000) Net decrease in cash (385,000) Cash balance, January 1, 2012 400,000 Cash balance, December 31, 2012 $ 15,000 Concepts for Analysis 295 296 Chapter 5 Balance Sheet and Statement of Cash Flows Date President Kappeler, CEO Kappeler Corporation 125 Wall Street Middleton, Kansas 67458 Dear Mr. Kappeler: I have good news and bad news about the financial statements for the year ended December 31, 2012. The good news is that net income of $100,000 is close to what we predicted in the strategic plan last year, indicating strong performance this year. The bad news is that the cash balance is seriously low. Enclosed is the Statement of Cash Flows, which best illustrates how both of these situations occurred simultaneously . . .
Instructions Complete the letter to the CEO, including the four components requested by your boss. FINANCIAL REPORTING Financial Reporting Problem The Procter & Gamble Company (P&G) The financial statements of P&G are presented in Appendix 5B or can be accessed at the book’s companion website, www.wiley.com/college/kieso.
Instructions Refer to P&G’s financial statements and the accompanying notes to answer the following questions. (a) What alternative formats could P&G have adopted for its balance sheet? Which format did it adopt? (b) Identify the various techniques of disclosure P&G might have used to disclose additional pertinent financial information. Which technique does it use in its financials? (c) In what classifications are P&G’s investments reported? What valuation basis does P&G use to report its investments? How much working capital did P&G have on June 30, 2009? On June 30, 2008? (d) What were P&G’s cash flows from its operating, investing, and financing activities for 2009? What were its trends in net cash provided by operating activities over the period 2007 to 2009? Explain why the change in accounts payable and in accrued and other liabilities is added to net income to arrive at net cash provided by operating activities. (e) Compute P&G’s (1) current cash debt coverage ratio, (2) cash debt coverage ratio, and (3) free cash flow for 2009. What do these ratios indicate about P&G’s financial condition? Comparative Analysis Case The Coca-Cola Company and PepsiCo, Inc.
Instructions Go to the book’s companion website and use information found there to answer the following questions related to The Coca-Cola Company and PepsiCo, Inc. (a) What format(s) did these companies use to present their balance sheets? (b) How much working capital did each of these companies have at the end of 2009? Speculate as to their rationale for the amount of working capital they maintain. (c) What is the most significant difference in the asset structure of the two companies? What causes this difference? USING YOUR JUDGMENT Using Your Judgment 297 (d) What are the companies’ annual and 5-year (2005–2009) growth rates in total assets and long-term debt? (e) What were these two companies’ trends in net cash provided by operating activities over the period 2007 to 2009? (f) Compute both companies’ (1) current cash debt coverage ratio, (2) cash debt coverage ratio, and (3) free cash flow. What do these ratios indicate about the financial condition of the two companies?
Financial Statement Analysis Cases
Case 1 Uniroyal Technology Corporation Uniroyal Technology Corporation (UTC), with corporate offices in Sarasota, Florida, is organized into three operating segments. The high-performance plastics segment is responsible for research, development, and manufacture of a wide variety of products, including orthopedic braces, graffiti-resistant seats for buses and airplanes, and a static-resistant plastic used in the central processing units of microcomputers. The coated fabrics segment manufactures products such as automobile seating, door and instrument panels, and specialty items such as waterproof seats for personal watercraft and stain-resistant, easy-cleaning upholstery fabrics. The foams and adhesives segment develops and manufactures products used in commercial roofing applications. The following items relate to operations in a recent year. 1. Serious pressure was placed on profi tability by sharply increasing raw material prices. Some raw materials increased in price 50% during the past year. Cost containment programs were instituted and product prices were increased whenever possible, which resulted in profi t margins actually improving over the course of the year. 2. The company entered into a revolving credit agreement, under which UTC may borrow the lesser of $15,000,000 or 80% of eligible accounts receivable. At the end of the year, approximately $4,000,000 was outstanding under this agreement. The company plans to use this line of credit in the upcoming year to fi nance operations and expansion.
Instructions (a) Should investors be informed of raw materials price increases, such as described in item 1? Does the fact that the company successfully met the challenge of higher prices affect the answer? Explain. (b) How should the information in item 2 be presented in the financial statements of UTC?
Case 2 Sherwin-Williams Company Sherwin-Williams, based in Cleveland, Ohio, manufactures a wide variety of paint and other coatings, which are marketed through its specialty stores and in other retail outlets. The company also manufactures paint for automobiles. The Automotive Division has had financial difficulty. During a recent year, five branch locations of the Automotive Division were closed, and new management was put in place for the branches remaining. The following titles were shown on Sherwin-Williams’s balance sheet for that year. Accounts payable Machinery and equipment Accounts receivable, less allowance Other accruals Accrued taxes Other capital Buildings Other current assets Cash and cash equivalents Other long-term liabilities Common stock Postretirement obligations other than pensions Employee compensation payable Retained earnings Finished goods inventories Short-term investments Intangibles and other assets Taxes payable Land Work in process and raw materials inventories Long-term debt
Instructions (a) Organize the accounts in the general order in which they would have been presented in a classified balance sheet. (b) When several of the branch locations of the Automotive Division were closed, what balance sheet accounts were most likely affected? Did the balance in those accounts decrease or increase?
Case 3 Deere & Company Presented below is the SEC-mandated disclosure of contractual obligations provided by Deere & Company in a recent annual report. Deere & Company reported current assets of $27,208 and total current liabilities of $15,922 at year-end. All dollars are in millions. The payment schedule for the company’s contractual obligations at year-end in millions of dollars is as follows: Less More than 2&3 4&5 than Total 1 year years years 5 years Debt Equipment operations $ 2,061 $ 130 $ 321 $1,610 Financial Services 19,598 8,515 7,025 $3,003 1,055 Total 21,659 8,645 7,346 3,003 2,665 Interest on debt 3,857 941 1,102 557 1,257 Purchase obligations 3,212 3,172 26 9 5 Operating leases 358 100 120 58 80 Capital leases 29 3 6 4 16 Total $29,115 $12,861 $8,600 $3,631 $4,023
Instructions (a) Compute Deere & Company’s working capital and current ratio (current assets 4 current liabilities) with and without the contractual obligations reported in the schedule. (b) Briefly discuss how the information provided in the contractual obligation disclosure would be useful in evaluating Deere & Company for loans: (1) due in one year, (2) due in five years.
Case 4 Amazon.com The incredible growth of Amazon.com has put fear into the hearts of traditional retailers. Amazon’s stock price has soared to amazing levels. However, it is often pointed out in the financial press that it took the company several years to report its first profit. The following financial information is taken from Amazon’s recent annual report. ($ in millions) Current Year Prior Year Current assets $ 3,373 $2,929 Total assets 4,363 3,696 Current liabilities 2,532 1,899 Total liabilities 3,932 3,450 Cash provided by operations 702 733 Capital expenditures 216 204 Dividends paid 0 0 Net income(loss) 190 359 Sales 10,711 8,490
Instructions (a) Calculate free cash flow for Amazon for the current and prior years, and discuss its ability to finance expansion from internally generated cash. Thus far Amazon has avoided purchasing large warehouses. Instead, it has used those of others. It is possible, however, that in order to increase customer satisfaction the company may have to build its own warehouses. If this happens, how might your impression of its ability to finance expansion change? Using Your Judgment 299 (b) Discuss any potential implications of the change in Amazon’s cash provided by operations from the prior year to the current year.
Accounting, Analysis, and Principles Early in January 2013, Hopkins Company is preparing for a meeting with its bankers to discuss a loan request. Its bookkeeper provided the following accounts and balances at December 31, 2012. Except for the following items, Hopkins has recorded all adjustments in its accounts. 1. Cash includes $500 petty cash and $15,000 in a bond sinking fund. 2. Net accounts receivable is comprised of $52,000 in accounts receivable and $13,500 in allowance for doubtful accounts. 3. Equipment had a cost of $112,000 and accumulated depreciation of $28,000. 4. On January 8, 2013, one of Hopkins’ customers declared bankruptcy. At December 31, 2012, this customer owed Hopkins $9,000.
Accounting Prepare a corrected December 31, 2012, balance sheet for Hopkins Company.
Analysis Hopkins’ bank is considering granting an additional loan in the amount of $45,000, which will be due December 31, 2013. How can the information in the balance sheet provide useful information to the bank about Hopkins’ ability to repay the loan?
Principles In the upcoming meeting with the bank, Hopkins plans to provide additional information about the fair value of its equipment and some internally generated intangible assets related to its customer lists. This information indicates that Hopkins has significant unrealized gains on these assets, which are not reflected on the balance sheet. What objections is the bank likely to raise about the usefulness of this information in evaluating Hopkins for the loan renewal? BRIDGE TO THE PROFESSION
Professional Research: FASB Codifi cation In light of the full disclosure principle, investors and creditors need to know the balances for assets, liabilities, and equity as well as the accounting policies adopted by management to measure the items reported in the balance sheet.
Instructions 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. Provide Codification references for your responses. (a) Identify the literature that addresses the disclosure of accounting policies. (b) How are accounting policies defined in the literature? Debit Credit Cash $ 75,000 Accounts Receivable (net) 38,500 Inventory 65,300 Equipment (net) 84,000 Patents 15,000 Notes and Accounts Payable $ 52,000 Notes Payable (due 2014) 75,000 Common Stock 100,000 Retained Earnings 50,800 $277,800 $277,800 (c) What are the three scenarios that would result in detailed disclosure of the accounting methods used? (d) What are some examples of common disclosures that are required under this statement?
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