Question: Describe horizontal analysis. Describe vertical

> On October 1, X Company acquired for cash all of Y Company’s outstanding common stock. Both companies have a December 31 year-end and have been in business for many years. Consolidated net income for the year ended December 31 should include net income o

> Aaron Inc. owns 80 percent of the outstanding stock of Belle Inc. Compare the total consolidated net earnings of Aaron and Belle (X) and Aaron’s operating earnings before considering the income from Belle (Y). Assume that neither company incurs a net los

> Select the correct answer for each of the following questions. 1. Consolidated financial statements are typically prepared when one company has a. Accounted for its investment in another company by the equity method. b. Accounted for its investment in an

> Ownership of 51 percent of the outstanding voting stock of a company would usually result in a. The use of the cost method. b. The use of the lower-of-cost-or-market method. c. The use of the equity method. d. A consolidation.

> Select the correct answer for each of the following questions. Items 1 and 2 are based on the following: On January 2, 20X8, Pare Company acquired 75 percent of Kidd Company’s outstanding common stock at an amount equal to its underlyin

> Goodwill represents the excess of the sum of the fair value of the (1) consideration given, (2) shares already owned, and (3) the noncontrolling interest over the a. Sum of the fair values assigned to identifiable assets acquired less liabilities assume

> Consolidated statements are proper for Neely Inc., Randle Inc., and Walker Inc., if a. Neely owns 80 percent of the outstanding common stock of Randle and 40 percent of Walker; Randle owns 30 percent of Walker. b. Neely owns 100 percent of the outstandin

> Select the correct answer for each of the following questions. Items 1 and 2 are based on the following: On January 2, 20X8, Pare Company acquired 75 percent of Kidd Company’s outstanding common stock at an amount equal to its underlyin

> Variable interest entities may be established as a. Corporations. b. Trusts. c. Partnerships. d. All of the above.

> Select the correct answer for each of the following questions. 1. Special-purpose entities generally a. Have a much larger portion of assets financed by equity shareholders than do companies such as General Motors. b. Have relatively large amounts of pre

> In determining whether or not a variable interest entity is to be consolidated, the FASB focused on a. Legal control. b. Share of profits and obligation to absorb losses. c. Frequency of intercompany transfers. d. Proportionate size of the two entities.

> An enterprise that will absorb a majority of a variable interest entity’s expected losses is called the a. Primary beneficiary. b. Qualified owner. c. Major facilitator. d. Critical management director.

> Consolidated financial statements are typically prepared when one company has a controlling interest in another unless a. The subsidiary is a finance company. b. The fiscal year-ends of the two companies are more than three months apart. c. Circumstances

> Select the correct answer for each of the following questions. 1. When a parent–subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of a. Reliability. b. Materiality. c. Legal entity. d.

> Which of the following is the best theoretical justification for consolidated financial statements? a. In form, the companies are one entity; in substance, they are separate. b. In form, the companies are separate; in substance, they are one entity. c. I

> Penn Inc., a manufacturing company, owns 75 percent of the common stock of Sell Inc., an investment company. Sell owns 60 percent of the common stock of Vane Inc., an insurance company. In Penn’s consolidated financial statements, should Sell and Vane be

> A and B Companies have been operating separately for five years. Each company has a minimal amount of liabilities and a simple capital structure consisting solely of voting common stock. In exchange for 40 percent of its voting stock A Company, acquires

> Many well-known products and names come from companies that may be less well known or may be known for other reasons. In some cases, an obscure parent company may have well-known subsidiaries, and often familiar but diverse products may be produced under

> Dell Computer Corp. and CIT Group Inc. established Dell Financial Services LP (DFS) as a joint venture to provide financing services for Dell customers. Dell originally purchased 70 percent of the equity of DFS and CIT purchased 30 percent. In the initia

> The concept of the accounting entity often is considered to be the most fundamental of accounting concepts, one that pervades all of accounting. For each of the following, indicate whether the entity concept is applicable; discuss and give illustrations.

> A reader of Gigantic Company’s consolidated financial statements received from another source copies of the financial statements of the individual companies included in the consolidation. The person is confused by the fact that the total assets in the co

> A variety of organizational structures are used by major companies, and different approaches to consolidation are sometimes found. Two large and familiar U.S. corporations are Union Pacific and ExxonMobil. a. Many large companies have tens or even hundre

> A variable interest entity (VIE) is a structure frequently used for off-balance sheet financing. VIEs have become quite numerous in recent years and have been the subject of some controversy. a. Briefly explain what is meant by off-balance sheet financ

> The International Accounting Standards Board (IASB) is charged with developing a set of high quality standards and encouraging their adoption globally. Standards promulgated by the IASB are called International Financial Reporting Standards (IFRS). The E

> During previous merger booms, a number of companies acquired many subsidiaries that often were in businesses unrelated to the acquiring company’s central operations. In many cases, the acquiring company’s management was unable to manage effectively the m

> How does the consolidation process change when consolidated statements are prepared after— rather than at—the date of acquisition?

> How are extraordinary items of the investee disclosed by the investor under equity-method reporting?

> In a business combination in which an acquiring company purchases 100 percent of the outstanding common stock of another company, if the fair value of the net identifiable assets acquired exceeds the fair value of the consideration given. The excess shou

> Troy Company notified Kline Company’s shareholders that it was interested in purchasing controlling ownership of Kline and offered to exchange one share of Troy’s common stock for each share of Kline Company submitted by July 31, 20X7. At the time of the

> How do service, merchandising, and manufacturing companies differ from each other? How are service, merchandising, and manufacturing companies similar to each other? List as many similarities and differences as you can identify.

> Explain why “differential cost” and “variable cost” do not have the same meaning. Give an example of a situation in which there is a cost that is a differential cost but not a variable cost.

> What makes a cost relevant or irrelevant when making a decision? Suppose a company is evaluating whether to use its warehouse for storage of its own inventory or whether to rent it out to a local theater group for housing props. Describe what informatio

> How are the cost of goods manufactured, the cost of goods sold, the income statement, and the balance sheet related for a manufacturing company? What specific items flow from one statement or schedule to the next? Describe the flow of costs between the c

> Describe how the income statement of a merchandising company differs from the income statement of a manufacturing company. Also comment on how the income statement from a merchandising company is similar to the income statement of a manufacturing company

> Stakeholders are frequently the reason that companies adopt sustainable practices. Think of an organization with which you are familiar. List as many stakeholders as you can think of for this organization. For each stakeholder listed, describe why that s

> Oftentimes, an investment in sustainable technology is more costly than a comparable investment in traditional technology. What arguments can you make for the investment in sustainable technology? What arguments can you make for the investment in traditi

> Compare product costs to period costs. Using a product of your choice, give examples of product costs and period costs. Explain why you categorized your costs as you did.

> The effect of sustainability on the environment is probably the most visible component of the triple bottom line. For a company with which you are familiar, list two examples of its sustainability efforts related to the planet.

> Information from an environmental management accounting (EMA) system can be used to support managers and their primary responsibilities of planning, directing, and control-ling. Think of an organization you’re familiar with. Give an example of informatio

> Compare and contrast a master budget and a flexible budget.

> Perform an online search on the terms “carbon offset” and “carbon footprint.” What is a carbon footprint? What is a carbon offset? Why would carbon offsets be of interest to a company? What are some companies that offer (sell) carbon offsets?

> What types of EMA information might be reported internally by this company? Make reasonable “guesses”; the annual report will not give this information directly. Use your imagination.

> What environmental goals does this company have for the upcoming five to ten years?

> What environmental accounting information does this company report?

> Perform an online search for sustainability issues in the industry in which this organization operates. Does the company appear to be addressing the sustainability issues of the industry?

> Judging from the information in the report(s) from the company, does the company appear to emphasize profits, environment, or society? Or does the company appear to give equal emphasis to each component of the triple bottom line? Justify your answer.

> Suppose a company has a relatively high inventory turnover. What does the high inventory turnover indicate about the company’s short-term liquidity?

> What does the accounts receivable turnover measure? What does a relatively high ac-counts receivable turnover indicate about a company?

> What is meant by the term product costs? What is meant by the term period costs? Why does it matter whether a cost is a product cost or a period cost?

> Define residual income. How is it calculated? Describe the major weakness of residual income.

> Describe at least four financial conditions that may signal financial trouble.

> Compare and contrast the current ratio and the quick ratio.

> Describe at least two reasons that a company’s ratios might not be comparable over time.

> Describe the set of circumstances that could result in net income increasing while return on investment (ROI) decreases.

> Assume a company has a current ratio of 2.0. List two examples of transactions that could cause the current ratio to increase. Also list two examples of transactions that could cause the current ratio to decrease.

> How is the current ratio calculated? What is it used to measure? How is it interpreted?

> Describe why book value per share of common stock may not be useful for investment analysis.

> Calculate at least two ratios that help to analyze the stock as an investment.

> Calculate at least two ratios that measure profitability.

> Compare direct costs to indirect costs. Give an example of a cost at a company that could be a direct cost at one level of the organization but would be considered an indirect cost at a different level of that organization. Explain why this same cost co

> Contrast lag indicators with lead indicators. Provide an example of each type of indicator.

> Calculate at least two ratios that measure the ability to pay long-term debt.

> Calculate at least two ratios that measure the ability to sell inventory and collect receivables.

> Calculate two ratios that measure the ability to pay current liabilities.

> Now that you have crunched the numbers, interpret the ratios. What can you tell about each company and its financial position? Is one company clearly better than the others in terms of its financial position, or are all three companies similar to each ot

> Provide an example of an operating cash inflow that could result from sustainability activities. Also provide an example of an operating cash outflow that would support sustainability.

> Summarize the process for preparing the operating section of the statement of cash flows when using the direct method.

> Describe the process for reconciling net income to the cash basis. What items are added to net income? What items are subtracted from net income?

> Describe the difference between the direct and the indirect methods of preparing the operating section of the statement of cash flows.

> Define a “noncash investing or financing” activity. Describe an activity that would need to be disclosed as a noncash investing or financing activity.

> Define a “financing activity.” List two examples of a financing activity on the statement of cash flows that would increase cash. List two examples of a financing activity that would decrease cash.

> Locate the company’s annual report as outlined previously. Find the company’s segment information; it should be in the “Notes to Consolidated Financial Statements” or another, similarly named section. Look for the word “Segment” in a heading; that is usu

> What is the value chain? What are the six types of business activities found in the value chain? Which type(s) of business activities in the value chain generate costs that go directly to the income statement once incurred? What type(s) of business activ

> What is the Sarbanes-Oxley Act of 2002 (SOX)? How does SOX affect financial accounting? How does SOX impact managerial accounting? Is there any overlap between financial and managerial accounting in terms of the SOX impact? If so, what are the areas of

> Define an “investing activity.” List two examples of an investing activity on the statement of cash flows that would increase cash. List two examples of an investing activity that would decrease cash.

> Define an “operating activity.” List two examples of an operating activity on the statement of cash flows that would increase cash. List two examples of an operating activity that would decrease cash.

> Think of a company with which you are familiar. Describe an investing activity related to a company’s sustainability efforts that would be classified as a use of cash on a company’s statement of cash flows. Describe a financing activity related to a comp

> When preparing a statement of cash flows using the indirect method, what information is needed? What documents or statements would be used?

> Describe at least four needs for cash within a business.

> How do managers use the statement of cash flows?

> Did financing activities in total increase cash or decrease cash during the year? What were the major uses or sources of cash related to financing?

> Did investing activities in total increase cash or decrease cash during the year? What were the major uses or sources of cash related to investing?

> Can you calculate RI using the data presented? Why or why not?

> Overall, was cash increased or decreased by operating activities?

> What items decreased cash provided by operations?

> Briefly describe a service company, a merchandising company, and a manufacturing company. Give an example of each type of company, but do not use the same examples as given in the chapter.

> What items increased cash provided by operations?

> Which method is used to calculate the cash provided or used by operations?

> What items (if any) are disclosed as significant noncash financing or investing activities? Now that you have looked at each company’s cash flow statements individually, compare the two companies. What can you tell about each company from its statement o

> The net present value method assumes that future cash inflows are immediately rein-vested at the required rate of return, while the internal rate of return method assumes that future cash inflows are immediately invested at the internal rate of return ra

> Suppose you are a manager and you have three potential capital investment projects from which to choose. Funds are limited, so you can only choose one of the three projects. Describe at least three methods you can use to select the one project in which t

> Summarize the net present value method for evaluating a capital investment opportunity. Describe the circumstances that create a positive net present value. Describe the circum-stances that may cause the net present value of a project to be negative. Des

> “As the required rate of return increases, the net present value of a project also increases.” Explain why you agree or disagree with this statement.

> Use the data you collected in Requirement 2 to calculate each segment’s ROI. Interpret your results.

> List and describe the advantages and disadvantages of the internal rate of return method.

> List and describe the advantages and disadvantages of the payback method.

> The decision rule for NPV analysis states that the project with the highest NPV should be selected. Describe at least two situations when the project with the highest NPV may not necessarily be the best project to select.

> A cost object can be anything for which managers want a separate measurement of cost. List three different potential cost objects other than the product itself for the company you have selected.

> Net cash inflows and net cash outflows are used in the net present value method and in the internal rate of return method. Explain why accounting net income is not used instead of cash flows.

> Define capital investment. List at least three examples of capital investments other than the examples provided in the chapter.