Brown Company earned 5.5% on sales in 2011. What further information would be needed to evaluate this result?
> Rachit Company has cash that has been frozen in a bank in Cuba. Should this cash be classified as a current asset? Discuss.
> List the major categories of items usually found in current assets.
> Define current assets.
> Define the operating cycle.
> Why does LIFO result in a very unrealistic ending inventory figure in a period of rising prices?
> Indicate the objective of the sales to working capital ratio.
> List three situations in which the liquidity position of the firm may be better than that indicated by the liquidity ratios.
> Name the type of opinion indicated by each of the following situations: a. There is a material uncertainty. b. There was a change in accounting principle. c. There is no material scope limitation or material departure from GAAP. d. The financial stat
> Indicate the single most important factor that motivates a company to select LIFO.
> Which inventory costing method results in the highest balance sheet amount for inventory? (Assume inflationary conditions.)
> Before computing the acid-test ratio, compute the accounts receivable turnover. Comment.
> Why could a current asset such as Net Assets of Business Held for Sale distort a firm’s liquidity, in terms of working capital or the current ratio?
> When a firm faces an inflationary condition and the LIFO inventory method is based on a periodic basis, purchases late in the year can have a substantial influence on profits. Comment.
> Does the allowance method for bad debts or the direct write-off method result in the fairest presentation of receivables on the balance sheet and the fairest matching of expenses against revenue?
> Is the profitability of the entity considered to be of major importance in determining the short-term debtpaying ability? Discuss.
> Define current liabilities.
> Define working capital.
> One of the computations used to determine the liquidity of inventory determines the inventory turnover. In this computation, usually the average inventory is determined by using the beginning-of-the-year and the end-of-theyear inventory figures, but this
> Answer the following multiple-choice questions: a. The following relate to Owens data in 2012. What is the ending inventory? Purchases …………………………..$580,000 Beginning inventory……………. 80,000 Purchase returns ………………….8,000 Sales …………………………………..900,000 Cost
> During times of inflation, which of the inventory costing methods listed below would give the most realistic valuation of inventory? Which method would give the least realistic valuation of inventory? Explain. a. LIFO b. Average c. FIFO
> The days’ sales in inventory is an estimate of the number of days that it will take to sell the current inventory. a. What is the ideal number of days’ sales in inventory? b. In general, does a company want many days’ sales in inventory? c. Can days’
> The number of days’ sales in inventory relates the amount of the ending inventory to the average daily cost of goods sold. Explain why this computation may be misleading under the following conditions: a. The company uses a natural business year for its
> Describe the difference in inventories between a firm that is a retail company and a firm that is a manufacturing concern.
> If a company has substantial cash sales and credit sales, is there any meaning to the receivable liquidity computations that are based on gross sales?
> Melcher Company uses the calendar year. Sales are at a peak during the holiday season, and T. Melcher Company extends 30-day credit terms to customers. Comment on the expected liquidity of its receivables, based on the days’ sales in receivables and the
> Would a company that uses a natural business year tend to overstate or understate the liquidity of its receivables? Explain
> A. B. Smith Company has guaranteed a $1 million bank note for Alender Company. How would this influence the liquidity ratios of A. B. Smith Company? How should this situation be considered?
> What is the reason for separating current assets from the rest of the assets found on the balance sheet?
> Jones Wholesale Company has been one of the fastest growing wholesale firms in the United States for the last five years in terms of sales and profits. The firm has maintained a current ratio above the average for the wholesale industry. Mr. Jones has as
> Answer the following multiple-choice questions: a. Which of the following items would be classified as operating revenue or expense on an income statement of a manufacturing firm? 1. Interest expense 2. Advertising expense 3. Equity income 4. Divide
> It is proposed at a stockholders’ meeting that the firm slow its rate of payments on accounts payable in order to make more funds available for operations. It is contended that this procedure will enable the firm to expand inventory, which will in turn e
> The cost of inventory at the close of the calendar year of the first year of operation is $40,000, using LIFO inventory, resulting in a profit before tax of $100,000. If the FIFO inventory would have been $50,000, what would the reported profit before ta
> List three situations in which the liquidity position of the firm may not be as good as that indicated by the liquidity ratios.
> A relatively low sale to working capital ratio is a tentative indication of an efficient use of working capital. Comment. A relatively high sale to working capital ratio is a tentative indication that the firm is undercapitalized. Comment.
> Before computing the current ratio, the accounts receivable turnover and the inventory turnover should be computed. Why?
> Would a firm with a relatively long operating cycle tend to charge a higher markup on its inventory cost than a firm with a short operating cycle? Discuss.
> Discuss why some firms have longer natural operating cycles than other firms.
> Discuss some benefits that may accrue to a firm from reducing its operating cycle. Suggest some ways that may be used to reduce a company’s operating cycle.
> In determining the short-term liquidity of a firm, the current ratio is usually considered to be a better guide than the acid-test ratio, and the acid-test ratio is considered to be a better guide than the cash ratio. Discuss when the acid-test ratio wou
> Both current assets and current liabilities are used in the computation of working capital and the current ratio, yet the current ratio is considered to be more indicative of the short-term debt-paying ability. Explain.
> The following information for Gaffney Corporation covers the year ended December 31, 2012: Required a. Will net income or comprehensive income tend to be more volatile? Comment. b. Which income figure will be used to compute earnings per share? c. Wha
> Discuss how to use working capital in analysis.
> Several comparisons can be made to determine the short-term debt-paying ability of an entity. Some of these are: a. Working capital b. Current ratio c. Acid-test ratio d. Cash ratio 1. Define each of these terms. 2. If the book figures are based on
> Explain the influence of the use of LIFO inventory on the inventory turnover.
> Some firms do not report the cost of goods sold separately on their income statements. In such a case, how should you proceed to compute days’ sales in inventory? Will this procedure produce a realistic days’ sales in inventory?
> Are managers the only users of financial reports? Discuss.
> Suppose you are comparing two firms within an industry. One is large and the other is small. Will relative or absolute numbers be of more value in each case? What kinds of statistics can help evaluate relative size?
> What is trend analysis? Can it be used for ratios? For absolute figures?
> Differentiate between absolute and percentage changes. Which is generally a better measure of change? Why?
> What does each of the following categories of ratios attempt to measure? (a) liquidity; (b) long-term borrowing capacity; (c) profitability. Name a group of users who might be interested in each category.
> Each of the following statements represents a decision made by the accountant of Growth Industries: a. A tornado destroyed $200,000 in uninsured inventory. This loss is included in the cost of goods sold. b. Land was purchased 10 years ago for $50,000.
> What is a ratio? How do ratios help to alleviate the problem of size differences among firms?
> What source contains a comprehensive reference for products and services, company profiles, and a catalog file?
> Indicate some sources that contain an appraisal of the outlook for particular industries.
> You would like to determine the principal business affiliations of the president of a company you are analyzing. Which reference service may have this information?
> What source includes comprehensive statistics on many industries?
> Indicate some sources that contain a dividend record of payments.
> You want to know the trading activity (volume of its stock sold) for a company. Which service provides this information?
> You are considering buying the stock of a large publicly traded company. You need an opinion of timeliness of the industry and the company. Which publication could you use?
> You want to compare the progress of a given company with a composite of that company’s industry group for selected income statement and balance sheet items. Which library source will aid you?
> You want to know if there have been any reported deaths of officers of a company you are researching. What library source will aid you in your search?
> Uranium Mining Company, founded in 1982 to mine and market uranium, purchased a mine in 1983 for $900 million. It estimated that the uranium had a market value of $150 per ounce. By 2012, the market value had increased to $300 per ounce. Records for 2012
> On July 1, 2010, an initial registration statement on Form 10 was filed with the U.S. Securities and Exchange Commission (“SEC”) in connection with the Company’s separation into two independent, publi
> a. What is the SIC number? How can it aid in the search of a company, industry, or product? b. What is the NAICS number? How can it aid in the search of a company, industry, or product?
> Using The Department of Commerce Financial Report discussion in the text, answer the following: a. Could we determine the percentage of total sales income after income taxes that a particular firm had in relation to the total industry sales? Explain. b.
> Answer the following concerning the Almanac of Business and Industrial Financial Ratios: a. This service presents statistics for how many size categories of firms? b. Indicate some of the industries covered by this service.
> You want profile information on the president of a company. Which reference book should be consulted?
> Using these results for a given ratio, compute the median, upper quartile, and lower quartile. 14%, 13.5%, 13%, 11.8%, 10.5%, 9.5%, 9.3%, 9%, 7%
> Differentiate between the types of inventory typically held by a retailing firm and a manufacturing firm.
> Briefly describe how each of these groups might use financial reports: managers, investors, and creditors.
> Differentiate between horizontal and vertical analysis. Using sales as a component for each type, give an example that explains the difference.
> Sometimes manufacturing firms have only raw materials and finished goods listed on their balance sheets. This is true of Avon Products, a manufacturer of cosmetics, and it might be true of food canners also. Explain the absence of work in process.
> Refer to Exhibits 5-3, 5-4, and 5-5 to answer the following questions: a. For each of the firms illustrated, what is the single largest asset category? Does this seem typical of this type of firm? b. Which of the three firms has the largest amount in c
> The income statement of Jones Company for the year ended December 31, 2012, follows. Required a. Compute the net earnings remaining after removing nonrecurring items. b. Determine the earnings (loss) from the nonconsolidated subsidiary. c. Determine th
> In the future, we should expect few presentations of a “cumulative effect of change in accounting principle.” Comment.
> Why are unusual or infrequent items disclosed before tax?
> A health food distributor selling wholesale dairy products and vitamins decides to discontinue the division that sells vitamins. How should this discontinuance be classified on the income statement?
> Which of the following would be classified as extraordinary? a. Selling expense b. Interest expense c. Gain on the sale of marketable securities d. Loss from flood e. Income tax expense f. Loss from prohibition of red dye g. Loss from the write-do
> What are extraordinary items? How are they shown on the income statement? Why are they shown in that manner?
> Review the consolidated income statement, expenses analyzed by function (Exhibit 4-12). Comment on similarities and differences to the U.S. GAAP income statement. Source International GAAP Holding Limited LAS L.10(b), Consolidred stasement of compre
> Management does not usually like to tie comprehensive income closely with the income statement. Comment.
> Comment on your ability to determine a firm’s capacity to make distributions to stockholders, using published financial statements.
> Melcher Company reported earnings per share in 2011 and 2010 of $2.00 and $1.60, respectively. In 2012, there was a 2-for-1 stock split, and the earnings per share for 2012 were reported to be $1.40. Give a three-year presentation of earnings per share (
> An income statement is a summary of revenues and expenses and gains and losses, ending with net income for a specific period of time. Indicate the two traditional formats for presenting the income statement. Which of these formats is preferable for analy
> The income statement of Tawls Company for the year ended December 31, 2012, shows the following: Required a. Compute the net earnings remaining after removing nonrecurring items. b. Determine the earnings from the nonconsolidated subsidiary. c. For th
> Describe the following items: a. Net income–noncontrolling interest b. Equity in earnings of nonconsolidated subsidiaries
> A balance sheet represents a specific date, such as “December 31,” while an income statement covers a period of time, such as “For the Year Ended December 31, 2011.” Why does this difference exist?
> List the three types of appropriated retained earnings accounts. Which of these types is most likely not a detriment to the payment of a dividend? Explain
> Explain the relationship between the income statement and the reconciliation of retained earnings.
> How does the declaration of a cash dividend affect the financial statements? How does the payment of a cash dividend affect the financial statements?
> Why is the equity in earnings of nonconsolidated subsidiaries sometimes a problem in profitability analysis? Discuss with respect to income versus cash flow.
> Give three examples of unusual or infrequent items that are disclosed separately. Why are they shown separately? Are they presented before or after tax? Why or why not?
> Review the consolidated income statement, expenses analyzed by nature (Exhibit 4-13). Comment on similarities and differences to the U.S. GAAP income statement. Answer: This represents a finer line item disclosure than under U.S. GAAP. Many of the item
> Why is net income–noncontrolling interest deducted before arriving at net income?
> What is the difference in the impact on financial statements of a stock dividend versus a stock split?
> List where each of the following items may appear. Choose from (A) income statement, (B) balance sheet, or (C) reconciliation of retained earnings. a. Dividends paid b. Notes payable c. Income from noncontrolling interest d. Accrued payrolls e. Loss
> What is depreciation? Which tangible assets are depreciated, and which are not? Why?
> What types of inventory will a retailing firm have? A manufacturing firm?
> Differentiate between accounts receivable and accounts payable.
> Differentiate between marketable securities and long-term investments. What is the purpose of owning each?
