Question: How does operating income differ from net

> Operating cash flow per share is a better indicator of profitability than is earnings per share. Do you agree? Explain

> Describe the following terms, which indicate the period of time included in the financial statements: a. Natural business year b. Calendar year c. Fiscal year

> Aerco Company acquired equipment in exchange for $50,000 in common stock. Should this transaction be on the statement of cash flows?

> Pickerton started the year with $50,000 in accounts receivable. The firm ended the year with $20,000 in accounts receivable. How did this decrease influence cash from operations?

> Depreciation is often considered a major source of funds. Do you agree? Explain.

> A member of the board of directors is puzzled by the fact that the firm has had a very profitable year but does not have enough cash to pay its bills on time. Explain to the director how a firm can be profitable, yet not have enough cash to pay its bills

> A firm owed accounts payable of $150,000 at the beginning of the year and $250,000 at the end of the year. What influence will the $100,000 increase have on cash from operations?

> For the current year, a firm reported net income from operations of $20,000 on its income statement and an increase of $30,000 in cash from operations on the statement of cash flows. Explain some likely reasons for the greater increase in cash from opera

> Fully depreciated equipment costing $60,000 was discarded, with no salvage value. What effect would this have on the statement of cash flows?

> Would a write-off of uncollectible accounts against allowance for doubtful accounts be disclosed on a cash flow statement? Explain.

> Why is it important to disclose certain noncash investing and financing transactions, such as exchanging common stock for land?

> If a firm presents an income statement and a balance sheet, why is it necessary that a statement of cash flows also be presented?

> The Mason Company, a retail business had $100,000 in cash sales and $450,000 in credit sales for 2012. The accounts receivable balances were $50,000 and $60,000 on December 31, 2011 and 2012, respectively. What was the cash receipts from sales in 2012?

> There are two principal methods of presenting cash flow from operating activities—the direct method and the indirect method. Describe these two methods.

> Using the descriptions of assets, liabilities, and stockholders’ equity, summarize the changes to these accounts for cash inflows and changes for cash outflows.

> Dividends on preferred stock total $5,000 for the current year. How would these dividends influence earnings per share?

> Keller & Fink, a partnership, engages in the wholesale fish market. How would this company disclose earnings per share?

> Assume that a corporation is a nonpublic company. Comment on the requirement for this firm to disclose earnings per share.

> Give a simple definition of earnings per share.

> Explain how outstanding stock appreciation rights could increase reported income in a particular year.

> Why can a relatively small number of stock appreciation rights prove to be a material drain on future earnings and cash of a company?

> Why should an investor read the note concerning stock options? How might stock options affect profitability?

> Because of assumptions and estimates that go into the preparation of financial statements, the statements are inaccurate and are, therefore, not a very meaningful tool to determine the profits or losses of an entity or the financial position of an entity

> Why is book value often meaningless? What improvements to financial statements would make it more meaningful?

> Why would an investor ever buy stock in a firm with a low dividend yield?

> Why is the price/earnings ratio considered a gauge of future earning power?

> Why do many firms try to maintain a stable percentage of earnings retained?

> Retroactive recognition is given to stock dividends and stock splits on common stock when computing earnings per share. Why?

> Preferred dividends decreased this year because some preferred stock was retired. How would this influence the earnings per share computation this year?

> The denominator of the earnings per share computation includes the weighted average number of common shares outstanding. Why use the weighted average instead of the year-end common shares outstanding.

> Why does a relatively new firm often have a low dividend payout ratio? Why does a firm with a substantial growth record and/or substantial growth prospects often have a low dividend payout ratio?

> Given a set level of earnings before interest and tax, how will a rise in interest rates affect the degree of financial leverage?

> Define financial leverage. What is its effect on earnings? When is the use of financial leverage advantageous and disadvantageous?

> Zebra Company has incurred substantial financial losses in recent years. Because of its financial condition, the ability of the company to keep operating is in question. Management prepares a set of financial statements that conform to generally accepted

> Would you expect the profit margin in a quality jewelry store to differ from that of a grocery store? Comment.

> If profits as a percent of sales decline, what can be said about expenses?

> What is the advantage of segregating extraordinary items in the income statement?

> Profits might be compared with sales, assets, or stockholders’ equity. Why might all three bases be used? Will trends in these ratios always move in the same direction?

> Why can pro-forma financial information be misleading?

> Why may comprehensive income fluctuate substantially more than net income?

> Speculate on why accounting standards do not mandate full financial statements in interim reports.

> Since interim reports are not audited, they are not meaningful. Comment.

> G. Herrich Company and Thomas, Inc., are department stores. For the current year, they reported ante income after tax of $400,000 and $600,000, respectively. Is Thomas, Inc., a more profitable company than G. Herrich Company? Discuss.

> Explain how return on assets could decline, given an increase in net profit margin.

> A corporation like General Electric has many owners (stockholders). Which concept enables the accountant to account for transactions of General Electric separate and distinct from the personal transactions of the owners of General Electric?

> The following is a summary of the Perry Ellis international Inc Company’s significant accounting policies: The consolidated financial statements include the accounts of Perry Ellis International, Inc. and its wholly-owned and controlled

> Why are equity earnings usually greater than cash flow generated from the investment? How can these equity earnings distort profitability analysis?

> What is the DuPont analysis, and how does it aid in financial analysis?

> The ratio return on assets has net income in the numerator and total assets in the denominator. Explain how each part of the ratio could cause return on assets to fall.

> What is return on investment? What are some of the types of measures for return on investment? Why is the following ratio preferred? Why is the interest multiplied by (1 − Tax Rate)? Net Income Before Noncontrolling Interest and Non

> How is return on investment different from return on total equity? How does return on total equity differ from return on common equity?

> Capital leases that have not been capitalized will decrease the times interest earned ratio. Comment.

> For a given firm, would you expect the debt ratio to be as high as the debt/equity ratio? Explain.

> Is it feasible to get a precise measurement of the funds that could be available from long-term assets to pay long-term debts? Discuss.

> Why is it difficult to determine the value of assets?

> Identify the accounting principle(s) applicable to each of the following situations: a. Tim Roberts owns a bar and a rental apartment and operates a consulting service. He has separate financial statements for each. b. An advance collection for magazin

> Why should capitalized interest be added to interest expense when computing times interest earned?

> Would you expect an auto manufacturer to finance a relatively high proportion of its long-term funds from debt? Discuss.

> What type of times interest earned ratio would be desirable? What type would not be desirable?

> Comment on the significance of disclosing the fair value of financial instruments.

> Comment on the significance of disclosing the off-balance-sheet risk of accounting loss.

> Speculate on why the disclosure of the concentrations of credit risk is potentially important to the users of financial reports.

> Indicate why comparing firms for postretirement benefits other than pensions can be difficult.

> There is a chance that a company may be in a position to have large sums transferred from the pension fund to the company. Comment.

> Comment on the implications of relying on a greater proportion of short-term debt in relation to long-term debt.

> A firm has a high current debt/net worth ratio in relation to prior years, competitors, and the industry. Comment on what this tentatively indicates

> The president of your firm, Lesky and Lesky, has little background in accounting. Today, he walked into your office and said, “A year ago we bought a piece of land for $100,000. This year, inflation has driven prices up by 6%, and an appraiser just told

> What portion of net worth can the federal government require a company to use to pay for pension obligations?

> Indicate the risk to a company if it withdraws from a multiemployer pension plan or if the multiemployer pension plan is terminated.

> Why is the vesting provision an important provision of a pension plan? How has the Employee Retirement Income Security Act influenced vesting periods?

> Indicate the status of pension liabilities under the Employee Retirement Income Security Act.

> One of the ratios used to indicate long-term debt-paying ability compares total liabilities to total assets. What is the intent of this ratio? How precise is this ratio in achieving its intent?

> Discuss how noncash charges for depreciation, depletion, and amortization can be used to obtain a short run view of times interest earned.

> Would you expect a telephone company to have a high debt ratio? Discuss.

> List the two approaches to examining a firm’s long-term debt-paying ability. Discuss why each of these approaches gives an important view of a firm’s ability to carry debt.

> Is profitability important to a firm’s long-term debt paying ability? Discuss.

> When examining financial statements, a note that describes contingencies should be reviewed closely for possible significant liabilities that are not disclosed on the face of the balance sheet. Comment.

> How does the concept of consistency aid in the analysis of financial statements? What type of accounting disclosure is required if this concept is not applied?

> When a firm guarantees a bank loan for a joint venture in which it participates and the joint venture is handled as an investment, then the overall potential debt position will not be obvious from the face of the balance sheet. Comment.

> Explain why deferred taxes that are disclosed as long-term liabilities may not result in actual cash outlays in the future

> Consider the accounts of bonds payable and reserve for rebuilding furnaces. Explain how one of these accounts could be considered a firm liability and the other could be considered a soft liability.

> Consider the debt ratio. Explain a position for including short-term liabilities in the debt ratio. Explain a position for excluding short-term liabilities from the debt ratio. Which of these approaches would be more conservative?

> Operating leases are not reflected on the balance sheet, but they are reflected on the income statement in the rent expense. Comment on why an interest expense figure that relates to long-term operating leases should be considered when determining a fixe

> A firm with substantial leased assets that have not been capitalized may be overstating its long-term debt paying ability. Explain.

> How should lessees account for operating leases? Capital leases? Include both income statement and balance sheet accounts.

> Why is it important to compare long-term debt ratios of a given firm with industry averages?

> Explain how the debt/equity ratio indicates the same relative long-term debt-paying ability as does the debt ratio, only in a different form.

> A company that uses a natural business year, or ends its year when business is at a peak, will tend to distort the liquidity of its receivables when end-of-year and beginning-of-year receivables are used in the computation. Explain how a company that use

> Discuss the role of each of the following in the formulation of accounting principles: a. American Institute of Certified Public Accountants b. Financial Accounting Standards Board c. Securities and Exchange Commission

> List the two computations that are used to determine the liquidity of inventory.

> List the two computations that are used to determine the liquidity of receivables.

> Arrow Company has invested funds in a supplier to help ensure a steady supply of needed materials. Would this investment be classified as a marketable security (current asset)?

> 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