Worthington Company and Millward Company both reported pro forma earnings numbers in conjunction with their release of results for the most recent quarter. Both announcements included a reconciliation to GAAP earnings. These reconciliations are reproduced here. Worthington Company Pro Forma Earnings (in thousands) GAAP earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,000 Add back amount expensed for an R&D project that resulted in a valuable new product … 35,000 Subtract a one-time gain from the sale of a building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,000) Pro forma earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,000 Millward Company Pro Forma Earnings (in thousands) GAAP earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,000 Add back expenses associated with a strategic realignment initiative . . . . . . . . . . . . . . . . . 10,000 Add back employee training expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 Pro forma earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,000 Which of the two pro forma earnings disclosures do you find to be the more informative? Explain.
> What has academic research shown with respect to earnings-based bonus thresholds?
> Is greater accuracy achieved in financial statements prepared from double-entry accrual data as compared with cash data? Explain.
> How does the fact that there are limited resources in the world relate to accounting information?
> Explain the relationship between financial accounting rules and tax accounting rules.
> Distinguish between accrual and cash-basis accounting.
> What is the best long-run business practice?
> According to the AICPA Code of Professional Conduct, what precept should guide members of the AICPA as they encounter conflicting pressures among their clients, investors, the business community, the government, and so forth?
> How do accounting standards impact the cost of capital?
> The text of the chapter includes discussion of seven stages in an earnings management meltdown. At what stage does the earnings management meltdown become public knowledge?
> What economic incentives do financial analysts sometimes have for overlooking a company’s glaring deficiencies and continuing to recommend it to investors as a “buy”?
> What costs and risks is an auditor balancing when signing an audit opinion?
> As indicated in the case at the beginning of this chapter, Xerox was manipulating income between the years 1997 through 1999. Below are revenue, gross profit, net income, and operating cash flow data for Xerox for the years 1997 through 2000. The secur
> A manager being pressured to meet expectations in the face of a downturn in operating performance can be tempted to turn to an accounting solution and use accrual estimates and judgments to manage reported earnings. How else might the manager respond to
> What are the seven elements of an earnings management meltdown?
> What is the AICPA? The AAA?
> What user careers require a knowledge of intermediate accounting issues?
> In what sense is financial reporting part of a company’s general public relations effort?
> Identify the criteria that an item must meet to qualify for recognition.
> With respect to pro forma earnings numbers, what recommendation made by the Financial Executives International (FEI) and the National Investor Relations Institute did the SEC endorse?
> What is conservatism in accounting? What is an example of conservatism in accounting practice?
> Describe the process one should use in forecasting depreciation expense.
> Refer to Practice 3-9. Net income for the year totaled $3,600. Compute return on assets. In Practice 3-9 Current Assets: Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> Diageo is a United Kingdom (UK) consumer products firm, best known in the United States for the following brand names: Smirnoff, Johnnie Walker, J&B, Gordon’s, Seagram’s, and Guinness. Diageo’s 20
> What is the starting point for the preparation of forecasted financial statements?
> Refer to Practice 3-9. Sales for the year totaled $50,000. Compute asset turnover. In Practice 3-9 Current Assets: Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> In 1998, then-SEC Chairman Arthur Levitt gave a speech in which he identified five techniques of accounting hocus-pocus. List those five techniques.
> Identify the major sections (components of income) that are included in a multiple-step income statement.
> Refer to Practice 3-9. As of the end of the year, the total market value of shares outstanding was $10,000. Compute the book-to-market ratio. In Practice 3-9 Current Assets: Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> What are two potential causes of non-GAAP accounting?
> Use the information in Practice 3-9 to compute the proportion of total assets in each of the following asset categories. (a) Inventory (b) Property, Plant, and Equipment In Practice 3-9 Current Assets: Cash. . . . . . . . . . . . . . . . . . . . . . . .
> What is the meaning of “intraperiod” income tax allocation?
> What are some examples of supplementary information included in the notes to financial statements?
> What are some possible disadvantages of a multiple-step income statement?
> In the press release announcing Disney’s results for the first fiscal quarter of 2008 ending December 29, 2007, the company stated the following: The Walt Disney Company today reported earnings for its first fiscal quarter ended December 29, 2007. Dilute
> Refer to Practice 3-9. Net income for the year totaled $2,000. Compute return on equity. In Practice 3-9 Current Assets: Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> What does the term income smoothing mean?
> What constitutes authoritative GAAP in the United States?
> Under double-entry accounting, what are the debit/credit relationships of accounts?
> How does the SEC influence the setting of accounting standards?
> What one financial ratio summarizes everything about the performance of a company? How is it computed?
> What are the four factors that might motivate a manager to attempt to manage earnings?
> Explain how the asset turnover ratio provides a measure of a company’s overall efficiency.
> What types of reports are generated from the accounting system?
> What are financial ratios?
> Safeway operates 1,775 supermarkets in the United States and Canada. In the United States, Safeway is located principally in the Western, Southwestern, Rocky Mountain, Midwestern, and Mid-Atlantic regions. Kroger operates 2,468 stores in Northeastern, We
> You are the chief financial officer (CFO) of Clarke Company, which is publicly traded. At the annual shareholders’ meeting you discussed the company’s recent reported results. As part of your presentation, you illustrated the minimum and maximum values f
> In what order are assets usually listed in the balance sheet?
> Jacob Marley is the controller for Dickens Company. Marley has been with Dickens for more than 30 years. Marley is a dedicated employee and prides himself on the efficiency of his accounting department staff. Over the years, Marley has received many inqu
> How do the Equity sections of proprietorships, partnerships, and corporations differ from one another?
> What effect, if any, does the use of a work sheet have on the sequence of the reporting phase of the accounting process?
> What five items make up the general-purpose financial statements?
> The H.K. Clark Health Club sells lifetime memberships for $5,000 each. These memberships entitle a person to unlimited access to the club’s weight room, exercise equipment, swimming pool, and sauna. Once a lifetime membership fee is paid, it is not refun
> “Liabilities are obligations denominated in precise monetary terms.” Do you agree or disagree? Explain.
> Lily Company has historically reported a bad debt expense amount of between 1% and 4% of sales. The percentage for any given year is a function of both the business conditions for the year and whether recent experience suggests that the estimates in past
> Joseph Han has $10 million that he wishes to invest. He has identified two candidate companies: Company A and Company B. Both companies are privately held and have never yet released external financial statements. Joseph Han has some familiarity with the
> What is the importance of the term probable in the definition of an asset?
> Refer back to the section of the chapter entitled “Preparing Adjusting Entries.” Who determines how long buildings and furniture and equipment are to last? Who determines the dollar amount of accounts receivable that are doubtful? Suppose we were to chan
> The financial position of St. Charles Ranch is summarized in the following letter to the corporation’s accountant. Dear Dallas: The following information should be of value to you in preparing the balance sheet for St. Charles Ranch as of December 31, 20
> Some accounting students feel that the mechanics of accounting (journal entries and T-accounts) are for bookkeepers. Because these students are training to be accountants, they see no need to spend a great deal of time studying these mechanics. In one pa
> The following balance sheet was prepared by the accountant for Midway Company. Instructions: Prepare a corrected classified balance sheet using appropriate account titles. Midway Company Balance Sheet June 30, 2013 Assets Cash 2$ 44,500 Investment
> Locate the 2009 financial statements for Lockheed Martin Corporation on the Internet. Reconstruct the company’s adjusted trial balance as of December 31, 2009.
> (a) What role does the EITF play in establishing accounting standards? (b) Why can it meet this role more efficiently than the FASB?
> The accountant for Sierra Corp. prepared the following schedule of liabilities as of December 31, 2013. Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85,000 Notes
> Julie is successful in her position as a consultant for Worldwide Enterprises. She has selectively invested her money in stocks of several companies. She receives the annual reports and faithfully analyzes them as she was taught in her university account
> Adjusted account balances and supplemental information for Brockbank Research Corp. as of December 31, 2013, are as follows: Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> The Boston Celtics are the most successful team in professional basketball history. Teams led by Bill Russell, Larry Bird, and Kevin Garnett have won a total of 17 NBA championships. The Celtics are also an unusual professional sports team because owners
> Computers have drastically altered the way accounting records are maintained. Almost all businesses now keep the bulk of their accounting records on computers. However, the financial statements are still prepared methodically on only a quarterly and annu
> Following is a list of account titles and balances for Pennington Investment Corporation as of January 31, 2013. Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,
> Alice Guth operates a low-impact aerobics studio. Alice has been in business for three years and has always had her financial statements prepared on a cash basis. This year, Alice’s accountant has suggested that accrual-based financial statements would g
> Denton Equipment Inc. furnishes you with the following list of accounts. Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66,000 Accounts Receivable . . . .
> Jim Price and Elaine Bijard are taking an accounting systems course at their local university. They are intrigued with the rapid advances in technology and communication that are occurring in the computer world. Today’s lecture was especially thought pro
> The following information relates to two companies, designated Company A and Company B. One of the companies is a traditional steel manufacturer. The other is a successful Internet retailer. Using the following information, identify which is which, and e
> Explain why each of the following hypothetical events would not be recorded in a journal entry. 1. A famous and much-beloved movie star is secretly filmed by an investigative news team using your company’s product when she in fact has an endorsement cont
> Describe the nature and purpose of a work sheet.
> The following information was used to prepare the financial statements for Delta Chemical Company. Prepare the necessary notes to accompany the statements. Delta uses the LIFO inventory method on its financial statements. If the FIFO method were used, th
> Consider the following account of a veterinarian attempting to hire his first bookkeeper: Miss Harbottle, the prospective bookkeeper, paused at the desk, heaped high with incoming and outgoing bills and circulars from drug firms with here and there stray
> Research has discovered a phenomenon common to both capitalist managers in the West and socialist managers in China. What is this phenomenon?
> For each of the following items, indicate whether the item should be reflected in the 2013 financial statements for Tindall Company. If the item should be reflected, indicate whether it should be reported in the financial statements themselves or by note
> The following account balances are taken from the general ledger of Whitni Corporation on December 31, 2013, the end of its fiscal year. The corporation was organized January, 2005. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> The following events occurred after the end of the company’s fiscal year but before the annual audit was completed. Classify each event as to its impact on the financial statements, that is, (1) Reported by changing the amounts in the financial statement
> Frank Elsholz is the new chief executive officer (CEO) of Kearl Street Company. You are the controller for Kearl Street; you have been with the company for 15 years. In connection with the preparation of this year’s financial statements (the first prepar
> Schlofman Company has the following assets. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,000 Accounts receivable . . . . . . . . . . . . . . . . . . .
> Data for adjustments at December 31, 2013, are as follows: (a) Taipei International uses a perpetual inventory system. (b) An analysis of Accounts Receivable reveals that the appropriate year-end balance in Allowance for Bad Debts is $750. (c) Equipment
> The following data are from the financial statements of Riverton Company. Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55,000 Total assets . . . . . . . . . .
> Account balances taken from the ledger of Builders’ Supply Corporation on December 31, 2013, before adjustment, follow information relating to adjustments on December 31, 2013: (a) Allowance for Bad Debts is to be increased to a balance of $3,000. (b) Bu
> What characteristics of the standard-setting process are designed to increase the acceptability of standards established by the FASB?
> In its annual report to stockholders, Hakobe Inc. presents a condensed balance sheet with detailed data provided in supplementary schedules. 1. From the adjusted trial balance of Hakobe, prepare the following sections of the balance sheet, properly class
> Locate the 2009 financial statements for The Walt Disney Company on the Internet. 1. Compute a current ratio for Disney as of October 3, 2009. How does this current ratio compare with the prior year’s current ratio? 2. Compute Disney’s asset turnover for
> Gee Enterprises records all transactions on the cash basis. Greg Gee, company accountant, prepared the following income statement at the end of the company’s first year of operations: You have been asked to prepare an income statement
> Use the information in Practice 3-3 to compute the debt ratio. Assume that the list includes all liability and equity items. In Practice 3-3 Accrued Income Taxes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,000 Notes Payable (
> The bookkeeper for Joe’s Hardware Co. records all revenue and expense items in nominal accounts during the period. The following balances, among others, are listed on the trial balance at the end of the fiscal period, December 31, 2013, before accounts h
> The following balance sheet was prepared for Jared Corporation as of December 31, 2013. The following additional information relates to the December 31, 2013, balance sheet. (a) Cash includes $4,000 that has been restricted to the purchase of manufactu
> The accountant for Save More Company made the following adjusting entries on December 31, 2013. Further information is provided as follows: (a) Annual rent is paid in advance every October 1. (b) Advertising materials are purchased at one time (June 1)
> From the following data, compute the working capital for Hales Shipping Co. at December 31, 2013. Cash in general checking account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,000 Cash in fund to be used
> On December 31, Trinkets Supply Company noted the following transactions that occurred during 2013, some or all of which might require adjustment to the books. (a) Payment of $4,300 to suppliers was made for purchases on account during the year and was n
> Accounting standards place limits on the set of allowable alternative accounting treatments, but the accountant must still exercise judgment to choose among the remaining alternatives. In making those choices, which of the following should the accountant
> Using the format provided, identify for each account, including an asterisk for contra accounts: 1. Whether the account will appear on a balance sheet (B/S), income statement (I/S), or neither (N) 2. Whether the account is an asset (A), liability (L), ow
> Payment of insurance in advance may be recorded in either (a) An expense account or (b) An asset account. Which method would you recommend? What periodic entries are required under each method?
> General Electric has long been known as a company that smoothes its reported earnings. What is it about General Electric that makes it possible for the company to smooth earnings?
> FASB Concepts Statement No. 1 states, “The primary focus of financial reporting is information about an enterprise’s performance provided by measures of earnings and its components.” Why is it unwise for users of financial statements to focus too much at
