Intermediate Accounting 题库Chap003

Chapter 03 - The Balance Sheet and Financial Disclosures

Chapter 3 The Balance Sheet and Financial Disclosures

QUESTIONS FOR REVIEW OF KEY TOPICS

Question 3-1

The purpose of the balance sheet, also known as the statement of financial position, is to present the financial position of the company on a particular date. Unlike the income statement, which is a change statement that reports events occurring during a period of time, the balance sheet is a statement that presents an organized array of assets, liabilities, and shareholders’ equity at a point in time. It is a freeze frame or snapshot picture of financial position at the end of a particular day marking the end of an accounting period.

Question 3-2

The balance sheet does not portray the market value of the entity (number of common stock shares outstanding multiplied by price per share) for a number of reasons. Most assets are not reported at fair value, but instead are measured according to historical cost. Also, there are certain resources, such as trained employees, an experienced management team, and a good reputation, that are not recorded as assets at all. Therefore, the assets of a company minus its liabilities, as shown in the balance sheet, will not be representative of the company’s market value.

Question 3-3

Current assets include cash and other assets that are reasonably expected to be converted to cash or consumed during one year, or within the normal operating cycle of the business if the operating cycle is longer than one year. The typical asset categories classified as current assets include: — Cash and cash equivalents — Short-term investments — Accounts receivable — Inventories

— Prepaid expenses

Question 3-4

Current liabilities are those obligations that are expected to be satisfied through the use of current assets or the creation of other current liabilities. So, this classification will include all liabilities that are scheduled to be liquidated within one year or the operating cycle, whichever is longer, except those that management intends to refinance on a long-term basis. The typical liability categories classified as current liabilities include: — Accounts payable — Short-term notes payable — Accrued liabilities

— Current maturities of long-term debt

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Chapter 03 - The Balance Sheet and Financial Disclosures

Answers to Questions (continued)

Question 3-5

The operating cycle for a typical manufacturing company refers to the period of time required to convert cash to raw materials, raw materials to a finished product, finished product to receivables, and then finally receivables back to cash.

Question 3-6

Investments in equity securities are classified as current if the company’s management (1) intends to liquidate the investment in the next year or operating cycle, whichever is longer, and (2) has the ability to do so, i.e., the investment is marketable. If either of these criteria does not hold, the investment is classified as noncurrent.

Question 3-7

The common characteristics that these assets have in common are that they are tangible, long-lived assets used in the operations of the business. They usually are the primary revenue-generating assets of the business. These assets include land, buildings, equipment, machinery, furniture and other assets used in the operations of the business, as well as natural resources, such as mineral mines, timber tracts and oil wells.

Question 3-8

Property, plant, and equipment and intangible assets each represent assets that are long-lived and are used in the operations of the business. The difference is that property, plant, and equipment represent physical assets, while intangible assets lack physical substance. Generally, intangible assets represent the ownership of an exclusive right, such as a patent, copyright or franchise.

Question 3-9

A note payable of $100,000 due in five years would be classified as a long-term liability. A $100,000 note due in five annual installments of $20,000 each would be classified as a $20,000 current liability — current maturities of long-term debt — and an $80,000 long-term liability.

Question 3-10

Paid-in-capital consists of amounts invested by shareholders in the corporation. Retained earnings equals net income less dividends paid to shareholders from the inception of the corporation.

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Chapter 03 - The Balance Sheet and Financial Disclosures

Answers to Questions (continued) Question 3-11

Disclosure notes provide additional detail concerning specific financial statement items. Included are such data as the fair values of financial instruments and off-balance-sheet risk associated with financial instruments and details of pension plans, leases, debt, and assets. Common to all companies’ disclosures are certain specific notes such as a summary of significant accounting policies, descriptions of subsequent events, and related third-party transactions. However, many notes are designed to fit the disclosure needs of the particular reporting company. In fact, any explanation that helps investors and creditors make decisions should be included.

Question 3-12

The disclosure of the company’s significant accounting policies is extremely important to external users in terms of their ability to compare financial information across companies. It is critical to a financial analyst involved in assessing future cash flows of two construction companies to know that one company uses the percentage-of-completion method in recognizing gross profit, while the other company uses the completed contract method.

Question 3-13

A subsequent event is an event that occurs after the date of the financial statements but prior to the date on which the statements are actually issued or ―available to be issued.‖ It may help to clarify a previously existing situation or it may represent a new event not directly affecting financial position at the end of the reporting period.

Question 3-14

The discussion provides management’s views on significant events, trends and uncertainties pertaining to the company’s (a) operations, (b) liquidity, and (c) capital resources. Certainly the Management Discussion and Analysis section may be slanted to management’s biased perspective and therefore can lack objectivity. However, management can offer an informed insight that might not be available elsewhere, so if the reader maintains awareness of the information’s source, it can offer a unique view of the situation.

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Chapter 03 - The Balance Sheet and Financial Disclosures

Answers to Questions (continued)

Question 3-15

Depending on the circumstances, the auditor will issue a (an):

1. Unqualified opinion – The auditors are satisfied that the financial statements ―present fairly‖ the financial position, results of operations, and cash flows and are ―prepared in accordance with generally accepted accounting principles.‖

2. Qualified opinion – This contains an exception to the standard unqualified opinion, but not of sufficient seriousness to invalidate the financial statements as a whole. Examples of exceptions are (a) unconformity with generally accepted accounting principles, (b) inadequate disclosures, and (c) a limitation or restriction of the scope of the examination.

3. Adverse opinion – This is necessary when the exceptions (a) and (b) above are so serious that a qualified opinion is not justified. Adverse opinions are rare because auditors usually are able to persuade management to rectify problems to avoid this undesirable report.

4. Disclaimer – An auditor will disclaim an opinion if item (c) above applies and therefore insufficient information has been gathered to express an opinion.

Question 3-16

A proxy statement must be sent each year to all shareholders. It usually is in the same mailing with the annual report. The statement invites shareholders to the shareholders’ meeting to elect board members and to vote on issues before the shareholders. It also permits shareholders to vote using an enclosed proxy card. The proxy statement also provides for more disclosures on compensation to directors and executives, and in particular, stock options granted to executives.

Question 3-17

Working capital is the difference between current assets and current liabilities. The current ratio is computed by dividing current assets by current liabilities. The acid-test ratio (or quick ratio) is computed by dividing quick assets (cash and cash equivalents, marketable securities, and accounts receivable) by current liabilities.

Question 3-18

Debt to equity ratio Times interest earned ratio = Total liabilities Shareholders' equity = Net income + interest + taxes Interest 3-4

Chapter 03 - The Balance Sheet and Financial Disclosures

Answers to Questions (concluded) Question 3-19

IAS No.1, revised, ―Presentation of Financial Statements,‖ provides authoritative guidance for balance sheet presentation under IFRS.

Question 3-20

Differences in balance sheet presentation between U.S. GAAP and IFRS include:

1. International standards specify a minimum list of items to be presented in the balance sheet. U.S. GAAP has no minimum requirements.

2. IAS No. 1, revised, changed the title of the balance sheet to statement of financial position, although companies are not required to use that title. Some U.S. companies use the statement of financial position title as well.

3. Under U.S. GAAP, we present current assets and liabilities before noncurrent assets and liabilities. IAS No. 1 doesn’t prescribe the format of the balance sheet, but balance sheets prepared using IFRS often report noncurrent items first.

Question 3-21

An operating segment is a component of an enterprise:

1. That engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same enterprise).

2. Whose operating results are regularly reviewed by the enterprise's chief operating decision-maker to make decisions about resources to be allocated to the segment, and to assess its performance. 3. For which discrete financial information is available.

Question 3-22

1. 2. 3. 4.

For areas determined to be reportable operating segments, the following disclosures are required: General information about the operating segment,

Information about reported segment profit or loss, including certain revenues and expenses included in reported segment profit or loss, segments assets, and the basis of measurement.

Reconciliations of the totals of segment revenues, reported profit or loss, assets, and other significant items to corresponding enterprise amounts. Interim period information.

U.S. GAAP requires companies to report information about reported segment profit or loss, including certain revenues and expenses included in reported segment profit or loss, segment assets, and the basis of measurement. The international standard on segment reporting, IFRS No. 8, requires that companies also disclose the total liabilities of its reportable segments.

Question 3-23

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Chapter 03 - The Balance Sheet and Financial Disclosures

Exercise 3-7

LOS GATOS CORPORATION Balance Sheet At December 31, 2011 Assets Current assets: Cash ......................................................................... Accounts receivable, net of allowance for uncollectible accounts of $5,000 ......................... Inventories ............................................................... Total current assets .............................................

$ 20,000 55,000 55,000 130,000

Investments: Bond sinking fund ................................................... $ 20,000 Note receivable ........................................................ 20,000 Total investments ............................................... 40,000

Property, plant, and equipment: Machinery ................................................................ 190,000 Less: Accumulated depreciation .............................. (70,000) Net property, plant, and equipment .................... 120,000

Intangible assets: Franchise .................................................................. Total assets ...................................................... Liabilities and Shareholders' Equity Current liabilities: Accounts payable ..................................................... Interest payable ........................................................ Note payable ............................................................ Total current liabilities ....................................... 30,000 $320,000 $ 50,000 5,000 50,000 105,000

Long-term liabilities: Bonds payable .......................................................... 110,000

Shareholders’ equity: Common stock, no par value; 100,000 shares authorized; 50,000 shares issued and outstanding $ 70,000 Retained earnings .................................................... 35,000 Total shareholders’ equity .................................. Total liabilities and shareholders’ equity ........ 105,000 $320,000

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Chapter 03 - The Balance Sheet and Financial Disclosures

Exercise 3-8

CONE CORPORATION Balance Sheet (Partial) At December 31, 2011

Assets

Current assets: Marketable securities ......................................... $ 40,000 Prepaid rent ........................................................ 12,000 Investments: Bond sinking fund .............................................. 50,000 Marketable securities ......................................... 40,000 Other assets: Prepaid rent (1) ................................................... 12,000

Liabilities and Shareholders' Equity

Current liabilities: Interest payable .................................................. $ 12,000 Current maturities of long-term debt ................. 20,000 Long-term liabilities: Note payable ...................................................... 180,000

(1) Note: In practice, companies often report all prepaid expenses as current assets.

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Chapter 03 - The Balance Sheet and Financial Disclosures

Exercise 3-9

See calculations below the balance sheet.

Korver Supply Company Balance Sheet At December 31, 2011 Assets Current assets: Cash ................................................................... Accounts receivable .......................................... Inventories ......................................................... Total current assets ....................................... $168,000 320,000 250,000 738,000 Property, plant, and equipment: Furniture and fixtures ........................................ Less: Accumulated depreciation ....................... Net property, plant, and equipment .............. Total assets ................................................. $300,000 (170,000) 130,000 $868,000 Liabilities and Shareholders' Equity Current liabilities: Accounts payable .............................................. Interest payable .................................................. Note payable ...................................................... Total current liabilities ................................. $180,000 6,000 200,000 386,000 Shareholders’ equity: Common stock ................................................... $100,000 Retained earnings .............................................. 382,000 Total shareholders’ equity ............................ Total liabilities and shareholders’ equity 482,000 $868,000

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Chapter 03 - The Balance Sheet and Financial Disclosures

Exercise 3-9 (concluded)

Beginning balance in cash

+ Cash collected from customers - Cash paid to suppliers

- Cash paid for operating expenses - Cash paid for interest Ending cash balance

Beginning balance in accounts receivable + Credit sales

- Cash collected from customers

Ending balance in accounts receivable

Beginning balance in inventories + Purchases

- Cost of merchandise sold Ending balance in inventories

Beginning balance in furniture and fixtures, net - Depreciation for the year

Ending balance in furniture and fixtures, net

Beginning balance in accounts payable + Purchases on account - Cash paid to suppliers

Ending balance in accounts payable

Beginning balance in retained earnings + Sales revenue - Cost of goods sold - Operating expenses - Depreciation expense - Interest expense

Ending balance in retained earnings

Accrued interest on note ($200,000 x 6% x 6/12)

3-19

$120,000 780,000 (560,000) (160,000) (12,000) $168,000 $300,000 800,000 (780,000) $320,000 $200,000 550,000 (500,000) $250,000 $150,000 (20,000) $130,000 $190,000 550,000 (560,000) $180,000 $274,000 800,000 (500,000) (160,000) (20,000) (12,000) $382,000 $6,000

Chapter 03 - The Balance Sheet and Financial Disclosures

Exercise 3-10

1. Inventory costing method

2. Information on related party transactions

3. Composition of property, plant, and equipment 4. Depreciation method

5. Subsequent event information

6. Basis of revenue recognition on long-term contracts 7. Important merger occurring after year-end 8. Composition of receivables

A B B A B A B B

Exercise 3-11

1. When related-party transactions occur, companies must disclose the nature of the

relationship, provide a description of the transaction, and report the dollar amounts of the transactions and any amounts due from or to related parties. 2. When an event that has a material effect on the company’s financial position

occurs after the fiscal year-end, but before the financial statements actually are issued, the event is disclosed in a subsequent event disclosure note.

3. The choice of the straight-line method to determine depreciation typically is

disclosed in the company’s summary of significant accounting policies disclosure note.

4. This information would be included in a disclosure note describing the

company’s debt.

5. The choice of the FIFO method to determine value inventory typically is

disclosed in the company’s summary of significant accounting policies disclosure note.

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Chapter 03 - The Balance Sheet and Financial Disclosures

Problem 3-7

HUBBARD CORPORATION Balance Sheet At December 31, 2011 Assets Current assets: Cash ........................................................................................ Marketable securities ............................................................. Accounts receivable (net) ...................................................... Inventories .............................................................................. Total current assets .......................................................... $ 60,000 20,000 120,000 160,000 360,000 Investments: Marketable securities .............................................................. $ 40,000 Land held for sale ................................................................... 50,000 Total investments ............................................................. 90,000 Property, plant, and equipment: 130,000 Land (1) .................................................................................. Buildings ................................................................................ 750,000 Machinery .............................................................................. 280,000 1,160,000 Less: Accumulated depreciation ............................................ (255,000) Net property, plant, and equipment ................................. 905,000 Intangible assets: Patent ...................................................................................... Total assets ................................................................... Liabilities and Shareholders' Equity Current liabilities: Accounts payable ................................................................... Current maturities of long-term debt ..................................... Total current liabilities .................................................... 100,000 $1,455,000 $ 215,000 25,000 240,000 Long-term liabilities: Notes payable ......................................................................... 475,000 Shareholders’ equity: Common stock, no par value; 100,000 shares authorized; 100,000 shares issued and outstanding ............ $ 430,000 310,000 Retained earnings (2) ............................................................. Total shareholders’ equity ............................................... Total liabilities and shareholders’ equity .....................

740,000 $1,455,000 (1) $250,000 - $50,000 in land held for sale - $70,000 increase in land (2) $380,000 - $70,000 increase in land

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Chapter 03 - The Balance Sheet and Financial Disclosures

Problem 3-8

Solve for missing amounts:

Liabilities ? Equity = 1.2 $18,000 ? Equity = 1.2

Equity = $18,000 ? 1.2 = $15,000

Beginning retained earnings + net income – dividends = Ending retained earnings $4,000 + 1,560 – 560 = $5,000

Total equity – retained earnings = Common stock $15,000 – 5,000 = $10,000

Assets = Liabilities + equity

Assets = $18,000 + 15,000 = $33,000

$33,000 – all other assets = Patent $33,000 – 27,600 = $5,400

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Chapter 03 - The Balance Sheet and Financial Disclosures

Problem 3-8 (concluded)

Sanderson Manufacturing Company Balance Sheet At December 31, 2011 ($ in 000s, except share data) Assets Current assets: Cash ................................................................................ Short-term investments ................................................... Accounts receivable, net of $400 allowance for uncollectible accounts ................................................. Inventories: Raw materials and work in process ............................. Finished goods ............................................................. Prepaid expenses ............................................................ Total current assets ................................................... $ 2,250 6,000 $ 1,250 3,000 3,100 8,250 1,200 16,800 Property, plant, and equipment: Equipment ...................................................................... Less: Accumulated depreciation ..................................... Net property, plant, and equipment .......................... 15,000 (4,200) 10,800 Intangible assets: Patent ........................................................................... Total assets ............................................................ 5,400 $33,000 $ 5,200 300 1,500 1,000 8,000 Liabilities and Shareholders' Equity Current liabilities: Accounts payable ............................................................ Interest payable ................................................................ Unearned revenue ........................................................... Current maturities of long-term debt .............................. Total current liabilities ............................................. Long-term liabilities: Unearned revenue ........................................................... Note payable ................................................................... Bonds payable ................................................................. 1,500 3,000 5,500 10,000 5,000 10,000 Shareholders’ equity: Common stock, no par, 400,000 shares authorized, ........ 250,000 shares issued and outstanding Retained earnings ........................................................... Total shareholders’ equity ........................................ Total liabilities and shareholders’ equity 15,000 $33,000 3-48

Chapter 03 - The Balance Sheet and Financial Disclosures

Problem 3-9

Current assets: Cash ........................................................................................ Investment in stocks ............................................................... Accounts receivable ............................................................... Inventories .............................................................................. Prepaid insurance ................................................................... Total current assets .......................................................... HHD, Inc. Balance Sheet At December 31, 2011 Assets $ 150,000 90,000 200,000 225,000 25,000 690,000 Investments: Investment in stocks ............................................................... $ 160,000 Bond sinking fund .................................................................. 250,000 Total investments ............................................................ 410,000 Property, plant, and equipment: Land ....................................................................................... Buildings ................................................................................ Equipment .............................................................................. Less: Accumulated depreciation ............................................ Net property, plant, and equipment ................................. 800,000 1,500,000 500,000 2,800,000 (800,000) 2,000,000 Intangible assets: Patent ...................................................................................... 110,000 Copyright ............................................................................... 90,000 Total intangible assets ..................................................... Total assets ................................................................... 200,000 $3,300,000 Liabilities and Shareholders' Equity Current liabilities: Accounts payable ................................................................. $ 100,000 Notes payable ....................................................................... 150,000 Taxes payable ....................................................................... 60,000 Total current liabilities .................................................. 310,000 Long-term liabilities: Notes payable ....................................................................... $ 90,000 Bonds payable ...................................................................... 1,100,000 Total long-term liabilities .............................................. 1,190,000 Shareholders’ equity: Common stock, no par, 500,000 shares authorized, 200,000 shares issued and outstanding .............................. 1,000,000 Retained earnings ................................................................. 800,000 Total shareholders’ equity ............................................. 1,800,000 Total liabilities and shareholders’ equity ................... $3,300,000 3-49

Chapter 03 - The Balance Sheet and Financial Disclosures

Problem 3-10

MELODY LANE MUSIC COMPANY Balance Sheet At December 31, 2011 Assets Current assets: Cash (1) .............................................................. Inventories ......................................................... Prepaid rent ........................................................ Total current assets ....................................... $167,000 100,000 3,000 270,000 Property, plant, and equipment: Equipment and furniture .................................... $ 40,000 Less: Accumulated depreciation ....................... (4,000) Net property, plant, and equipment .............. Total assets ................................................. Liabilities and Shareholders' Equity Current liabilities: Accounts payable (2) .......................................... Interest payable .................................................. Loan payable ..................................................... Total current liabilities ................................. 36,000 $306,000 $ 21,000 9,000 100,000 130,000 Shareholders’ equity: Common stock, no par, 100,000 shares authorized, 20,000 shares issued and outstanding ..... $100,000 Retained earnings (3) ......................................... 76,000 Total shareholders’ equity ............................ 176,000 Total liabilities and shareholders’ equity .. $306,000

(1) Cash receipts of $560,000 less cash disbursements of $393,000 (2) $20,000 owed to suppliers + $1,000 owed to utility company (3) Net income for the year

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Chapter 03 - The Balance Sheet and Financial Disclosures

Exercise 3-12

1. 2. 3. 4. 5. 6. 7. 8.

(B) in a separate disclosure note.

(A) in the summary of significant policies note. (C) on the face of the balance sheet. (B) in a separate disclosure note. (B) in a separate disclosure note.

(A) in the summary of significant policies note. (C) on the face of the balance sheet. (B) in a separate disclosure note.

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Chapter 03 - The Balance Sheet and Financial Disclosures

Exercise 3-13

Requirement 1

The topic number that provides guidance on information contained in the notes to the financial statements is ASC Topic 235: ―Notes to the Financial Statements.‖ Requirement 2

The specific citation that describes the information that companies must disclose in the accounting policies note is FASB ASC 235–10–50–3: ―Notes to Financial Statements–Overall–Disclosure–What to Disclose.‖

Requirement 3

Disclosure of accounting policies should identify and describe the accounting principles the company follows and the methods of applying those principles that materially affect the determination of financial position, cash flows, or results of operations. In general, the disclosure encompasses important judgments as to appropriateness of principles relating to recognition of revenue and allocation of asset costs to current and future periods. In particular, it encompasses those accounting principles and methods that involve any of the following:

a. A selection from existing acceptable alternatives. b. Principles and methods peculiar to the industry in which the entity operates, even if such principles and methods are predominantly followed in that industry. c. Unusual or innovative applications of GAAP.

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Chapter 03 - The Balance Sheet and Financial Disclosures

Exercise 3-14

The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles. The specific citation for each of the following items is:

1. What is the balance sheet classification for a note payable due in six months which is used to purchase a building?

FASB ASC 210–10–45–9: ―Notes to Financial Statements–Overall–Other Presentation Matters–Other Liabilities.‖

Other liabilities whose regular and ordinary liquidation is expected to occur within a relatively short period of time, usually 12 months, are also generally included, such as the following:

a. Short-term debts arising from the acquisition of capital assets. b. Serial maturities of long-term obligations.

c. Amounts required to be expended within one year under sinking fund provisions.

d. Agency obligations arising from the collection or acceptance of cash or other assets for the account of third persons. Loans accompanied by pledge of life insurance policies would be classified as current liabilities if, by their terms or by intent, they are to be repaid within 12 months. The pledging of life insurance policies does not affect the classification of the asset any more than does the pledging of receivables, inventories, real estate, or other assets as collateral for a short-term loan. However, when a loan on a life insurance policy is obtained from the insurance entity with the intent that it will not be paid but will be liquidated by deduction from the proceeds of the policy upon maturity or cancellation, the obligation shall be excluded from current liabilities.

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Chapter 03 - The Balance Sheet and Financial Disclosures

Exercise 3-14 (continued)

2. Which assets may be excluded from current assets?

FASB ASC 210–10–45–4: ―Notes to Financial Statements–Overall–Other Presentation Matters.‖

The concept of the nature of current assets contemplates the exclusion from that classification of such resources as the following:

a. Cash and claims to cash that are restricted as to withdrawal or use for other than current operations, are designated for expenditure in the

acquisition or construction of noncurrent assets, or are segregated for the liquidation of long-term debts. Even though not actually set aside in special accounts, funds that are clearly to be used in the near future for the liquidation of long-term debts, payments to sinking funds, or for similar purposes shall also, under this concept, be excluded from current assets. However, if such funds are considered to offset maturing debt that has properly been set up as a current liability, they may be included within the current asset classification.

b. Investments in securities (whether marketable or not) or advances that have been made for the purposes of control, affiliation, or other continuing business advantage.

c. Receivables arising from unusual transactions (such as the sale of capital assets, or loans or advances to affiliates, officers, or employees) that are not expected to be collected within 12 months. d. Cash surrender value of life insurance policies. e. Land and other natural resources. f. Depreciable assets.

g. Long-term prepayments that are fairly chargeable to the operations of several years, or deferred charges such as bonus payments under a long-term lease, costs of rearrangement of factory layout or removal to a new location.

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Chapter 03 - The Balance Sheet and Financial Disclosures

Exercise 3-14 (continued)

3. Should a note receivable from a related party be included in the balance sheet with notes receivable from customers?

FASB ASC 850–10–50–2: ―Related Party Disclosures–Overall–Disclosure.‖

Notes or accounts receivable from officers, employees, or affiliated entities must be shown separately and not included under a general heading such as notes receivable or accounts receivable.

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Chapter 03 - The Balance Sheet and Financial Disclosures

Exercise 3-14 (concluded)

4. What items are nonrecognized subsequent events that require a disclosure in the notes to the financial statements?

FASB ASC 855–10–55–2: ―Subsequent Events–Overall–Implementation Guidance and Illustrations–Nonrecognized Subsequent Events.‖ The following are examples of nonrecognized subsequent events addressed in paragraph 855-10-25-3:

a. Sale of a bond or capital stock issued after the balance sheet date but before financial statements are issued or are available to be issued. b. A business combination that occurs after the balance sheet date but before financial statements are issued or are available to be.

c. Settlement of litigation when the event giving rise to the claim took place after the balance sheet date but before financial statements are issued or are available to be issued.

d. Loss of plant or inventories as a result of fire or natural disaster that occurred after the balance sheet date but before financial statements are issued or are available to be issued.

e. Losses on receivables resulting from conditions (such as a customer’s major casualty) arising after the balance sheet date but before financial statements are issued or are available to be issued.

f. Changes in the fair value of assets or liabilities (financial or

nonfinancial) or foreign exchange rates after the balance sheet date but before financial statements are issued or are available to be issued. g. Entering into significant commitments or contingent liabilities, for example, by issuing significant guarantees after the balance sheet date but before financial statements are issued or are available to be issued.

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Chapter 03 - The Balance Sheet and Financial Disclosures

Exercise 3-15

List A List B

d 1. h 2. Balance sheet a. Will be satisfied through the use of current

assets. Liquidity b. Items expected to be converted to cash or b 3. j 4. a 5. k 6. m 7. l 8. g 9. e 10. i 11. c 12. f 13.

Current assets Operating cycle Current liabilities Cash equivalent Intangible asset Working capital Accrued liabilities Summary of significant accounting policies Subsequent events Unqualified opinion Qualified opinion consumed within one year or the operating cycle, whichever is longer. c. The statements are presented fairly in conformity with GAAP. d. An organized array of assets, liabilities, and equity. e. Important to a user in comparing financial information across companies. f. Scope limitation or a departure from GAAP. g. Recorded when an expense is incurred but not yet paid. h. Relates to the amount of time before an asset is converted to cash or a liability is paid. i. Occurs after the fiscal year-end but before the statements are issued. j. Cash to cash. k. One-month U.S. treasury bill. l. Current assets minus current liabilities. m. Lacks physical substance.

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Chapter 03 - The Balance Sheet and Financial Disclosures

Exercise 3-16

1. Current ratio 2. Acid-test ratio

3. Debt to equity ratio

4. Times interest earned ratio

[$200 + 150 + 200 + 350] ÷ $400 = 2.25 [$200 + 150 + 200] ÷ $400 = 1.375 [$400 + 350] ÷ [$750 + 400] = .65 [$160 + 40 + 100] ÷ $40 = 7.5 times

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Chapter 03 - The Balance Sheet and Financial Disclosures

Exercise 3-17

Requirement 1 a. Current ratio b. Acid-test ratio

c. Debt to equity ratio

d. Times interest earned ratio

$8,192 ÷ $8,435 = .97 [$498 + 11 + 1,868] ÷ $8,435 = .28 [$8,435 + 2,748] ÷ $4,643 = 2.4 [$1,003 + 94 + 674] ÷ $94 = 19 times

Requirement 2

Best Buy’s current and acid-test ratios both are lower than the industry averages, indicating questionable liquidity. The debt to equity ratio is significantly higher than the industry average, indicating that the company’s assets are primarily financed with liabilities rather than equity. However, the company’s times interest earned ratio is significantly higher than the industry average. Even with high leverage, Best Buy seems quite capable of meeting its debt interest obligations.

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Chapter 03 - The Balance Sheet and Financial Disclosures

Exercise 3-18

1. Acid-test ratio = Quick assets ÷ Current liabilities = Quick assets = Current assets - Inventories Quick assets = Current assets - $840,000

1.20

Current assets ÷ Current liabilities = Current assets - $840,000 ÷ Current liabilities = $840,000 ÷ Current liabilities = Current liabilities = $800,000 Current assets ÷ $800,000 = 2.25 Current assets = $1,800,000

2.25 1.20 1.05

2. Debt to equity ratio = Total liabilities ÷ Shareholders’ equity = 1.8

Total liabilities + Shareholders' equity = Total assets Total liabilities + Shareholders' equity = $2,800,000 Let x equal shareholders' equity 1.8 x + x = $2,800,000 x = $1,000,000 = Shareholders' equity

3. Noncurrent assets = Total assets - Current assets

Noncurrent assets = $2,800,000 – 1,800,000 = $1,000,000

4. Long-term liabilities = Total assets - Current liabilities - Shareholders' equity

Long-term liabilities = $2,800,000 - 800,000 - 1,000,000 = $1,000,000

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Chapter 03 - The Balance Sheet and Financial Disclosures

Exercise 3-19

1. Debt to equity ratio = Total liabilities ÷ Shareholders’ equity = 1.4 Total liabilities ÷ $2,500,000 = 1.4

Shareholders’ equity x 1.4 = total liabilities $2,500,000 x 1.4 = $3,500,000 = total liabilities

Total liabilities + equity = total assets

$3,500,000 + 2,500,000 = $6,000,000 = total assets

Total assets – noncurrent assets = current assets

$6,000,000 – 2,400,000 = $3,600,000 = current assets

Current ratio = Current assets ÷ current liabilities 2.0 = $3,600,000 ÷ current liabilities Current liabilities = $3,600,000 ? 2 = $1,800,000

2. Total assets = total liabilities + shareholders’ equity

Total assets = current liabilities + long-term liabilities + shareholders’ equity $6,000,000 = $1,800,000 + long-term liabilities + $2,500,000 Long-term liabilities = $1,700,000

3. Current assets = Cash + accounts receivable + prepaid expenses $3,600,000 = $1,300,000 + accounts receivable + $360,000 Accounts receivable = $1,940,000

4. Acid-test ratio = Quick assets ÷ Current liabilities Quick assets = Cash + accounts receivable

Quick assets = $1,300,000 + 1,940,000 = $3,240,000 Acid-test ratio = $3,240,000 ÷ $1,800,000 = 1.8

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Chapter 03 - The Balance Sheet and Financial Disclosures

Exercise 3-20

Current Acid-test Debt to Action Ratio Ratio Equity Ratio

1. Issuance of long-term bonds 2. Issuance of short-term notes 3. Payment of accounts payable 4. Purchase of inventory on account 5. Purchase of inventory for cash 6. Purchase of equipment with a 4-year note 7. Retirement of bonds 8. Sale of common stock 9. Write-off of obsolete inventory 10. Purchase of short-term investment for cash 11. Decision to refinance on a long-term basis some currently maturing debt

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I I I I D D I D N D N N D D I I D N N N I I I I D I N I D D I N N Chapter 03 - The Balance Sheet and Financial Disclosures

Exercise 3-21

Requirement 1

The pharmaceuticals, plastics and farm equipment segments are reportable. Only segments representing 10% or more of total company revenues, assets or net income must be reported. The electronics segment does not meet this criterion.

Requirement 2

For segments determined to be reportable, the following disclosures are required: a. General information about the operating segment.

b. Information about reported segment profit or loss, including certain revenues and expenses included in reported segment profit or loss, segments assets, and the basis of measurement.

c. Reconciliations of the totals of segment revenues, reported profit or loss, assets, and other significant items to corresponding enterprise amounts. d. Interim period information.

Exercise 3-22

In addition to revenues, profit or loss, and assets, IFRS also require the disclosure of total liabilities for each of the reportable segments.

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Chapter 03 - The Balance Sheet and Financial Disclosures

CPA / CMA REVIEW QUESTIONS

CPA Exam Questions

1. b. The principal would have to be due after April 30, 2012 to be considered as

a noncurrent asset at April 30, 2011. The accrued interest for eight months (since August 31, 2010) is a current asset at April 30, 2011. Since the principal is due August 31, 2012, additional interest would have to be recorded for the period September 1, 2011 to August 31, 2012.

2. a. Current liabilities are obligations that are expected to be paid within one

year or the operating cycle whichever is longer.

Accounts payable Bonds payable Dividends payable

Total current liabilities

$15,000 22,000 8,000 $45,000

The notes payable are not classified as current liabilities because they are not due until 2013.

3. a. Inventory pricing is a significant accounting policy which should be disclosed according to generally accepted accounting principles, but the composition of plant assets is not a policy disclosure.

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Chapter 03 - The Balance Sheet and Financial Disclosures

CPA Exam Questions (concluded)

4. c. The auditors’ standard report includes a statement that the financial

statements are the responsibility of the Company's management and that the auditors’ responsibility is to express an opinion on the financial statements.

5. b. Current ratio -- increased; Quick ratio -- decreased. Current ratio = Current assets ÷ Current liabilities.

When the current ratio is greater than 1 to 1, an equal decrease in current assets and current liabilities will result in an increase in the current ratio. The decrease in current liabilities (the smaller number) is proportionately greater than the decrease in current assets, resulting in an increase in the ratio.

Quick ratio = (Cash + Marketable Securities + Accounts receivable) ÷ Current liabilities

When the quick ratio is less than 1:1, an equal decrease in quick assets and current liabilities will result in a decrease in the ratio. The decrease in current liabilities (the larger number) is proportionately smaller than the decrease in quick assets, resulting in a decrease in the ratio.

6. a. Since inventory is not included in the quick ratio, the write-off of obsolete

inventory would have no effect on the quick ratio; however, it would decrease the current ratio as the write-off would reduce current assets.

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