Both interest expense on borrowing and dividends on common stock reduce net assets and reduce shareholders’ equity. Accountants treat interest as an expense in measuring net income but do not treat dividends on common stock as an expense. Explain the rationale for this apparent inconsistency.
> Jennings Company reported a balance in its Prepaid Rent (Advances to Landlord) account of $1,200 on January 1, 2014, for use of the building for the month of January 2014. On February 1, 2014, the firm paid $18,000 as the annual rental for the period fro
> Radion Corporation reported a balance in Income Taxes Payable of $78.1 million at the beginning of the year, $60.1 million at the end of the year, and income tax expense for the year of $161.5 million. Using the format of Exhibit 6.12, indicate the effec
> Gillette Limited borrowed £250 million on October 1 by issuing bonds. The debt carries an annual interest rate of 6%, which it must pay on April 1 and October 1 of each year. The debt matures 20 years after its issue date. Gillette’s accounting period en
> JAJ Incorporated reported a balance in retained earnings of $26,571 million at the beginning of the year and $28,132 million at the end of the year. Its dividends payable account increased by $233 million during the year. It reported net income for the y
> Yoshi Group reported in its reconciliation of net income to cash flow from operations a decrease in wages and salaries payable of ¥21 million during the year. It provided data showing that cash payments for wages and salaries to employees for the year we
> BrasPetro S.A., a large Brazilian petrochemical company, reported a balance of R$1,594.9 million in Accounts Receivable at the beginning of Year 7 and R$1,497.0 million at the end of Year 7. Its income statement reported total Sales Revenue of R$12,134.5
> The section showing cash flow from operations, using the indirect method, for Taylor Stores reported an increase in inventories of $5.7 million during the year. It reported also that the balance in accounts payable for inventories increased by $5.9 milli
> The section showing cash flow from operations, using the indirect method, for Electropin Company reported an increase in inventories during the year of $1,753 million and no change in accounts payable for inventories. The direct method would show cash pa
> Microchem Corporation reported a balance of €5,196 million in accounts receivable at the beginning of the year and €5,334 million at the end of the year. Its statement of cash flows using the direct method reported cash collections from customers of €33,
> Selected financial information for Oratel S.A.E. (Oratel), an Egyptian telecommunications firm, is shown in the following display for the years ended December 31, Year 13 and Year 12. Oratel applies Egyptian accounting standards and reports its results i
> Selected information from PharmaCare’s financial statements for the years ended December 31, Year 6 and Year 7, appear below. PharmaCare is a German pharmaceutical company that applies IFRS and reports its results in millions of euros (
> Selected information based on the comparative balance sheets for Solaronx Company (Solaronx), a U.S. defense manufacturer, appears in the following display for the years ended December 31, Years 10, 11, and 12. Solaronx applies U.S. GAAP and reports its
> Selected information based on the comparative balance sheets for MosTechi Corporation (MosTechi), a Japanese electronics manufacturer, appears next for the years ended March 31, Years 6, 7, and 8. MosTechi applies U.S. GAAP and reports its results in mil
> Selected information based on the comparative balance sheets and income statements of Palmgate Company (Palmgate), a U.S. manufacturer of consumer products, for the years ended December 31, Years 7, 8, and 9, appears in the following display. Palmgate ap
> Selected information based on the comparative balance sheets for James John Corporation (James John), a U.S. clothing designer, manufacturer, and retailer, for the years ended March 31, Years 10, 11, and 12, appears next. James John applies U.S. GAAP and
> Selected income statement information for Years 11, 12, and 13 for SwissTek, a Swiss engineering firm. SwissTek applies U.S. GAAP and reports its results in millions of U.S. dollars. Compute the missing amounts for each of the three years. Year 13
> What is the key difference between an adjusting entry and a correcting entry?
> Selected income statement information for Novo Limited (Novo), a Hong Kong personal computer manufacturer, for the years ended March 31, Years 9 and 10. Novo applies Hong Kong financial reporting standards and reports its results in thousands of U.S. dol
> Magtelkom, a Hungarian telecommunications company, reported the following balance sheet information for Year 11 and Year 12. Magtelkom applies IFRS and reports in millions of Hungarian forints (HUF). During Year 12, Magtelkom declared and paid dividend
> Tesco Plc. is a British-based grocer and retailer chain. It uses the accrual basis of accounting and recognizes revenue at the time it sells goods or renders services. It applies IFRS and reports in pounds sterling (£). Indicate the amount of expense rec
> Sun Microsystems uses the accrual basis of accounting and recognizes revenue at the time it sells goods or renders services. It applies U.S. GAAP and reports in U.S. dollars. Indicate the amount of expenses (if any) the firm recognizes during the months
> Fonterra Cooperative Group Limited (Fonterra), a New Zealand dairy cooperative, uses the accrual basis of accounting and recognizes revenue at the time it sells products or renders services. Fonterra applies New Zealand accounting standards and reports i
> Neiman Marcus, a U.S. retailer, uses the accrual basis of accounting and follows U.S. GAAP. It recognizes revenue at the time it sells merchandise. Indicate the amount of revenue (if any) the firm recognizes during the months of February, March, and Apri
> Duke University, a U.S. university, provides tuition support for up to eight semesters of undergraduate education for up to two children of faculty and staff of the university. To qualify for this tuition benefit, the faculty or staff member must have at
> After winning America’s Next Top Model, Danielle Evans signed a contract with Ford Models, was named a spokesmodel for CoverGirl, and signed a contract for a photo spread in Elle magazine. Although Ford did not disclose the details of the contract, typic
> Selected data based on the balance sheet amounts for Finmest Corporation, a Finnish paper company, for four recent years appear in the following table. Finmest applies IFRS and reports its results in millions of euros (€). Compute the mi
> Selected balance sheet amounts for Kyoto Corporation, a Japanese construction firm, are shown in the following table for four recent years. Kyoto applies Japanese accounting standards and reports its results in billions of yen (Â¥). Compute the
> What is the purpose of the income statement?
> Jennings Group, a Malaysian investment management company, reported the following data for four recent years. Jennings applies Malaysian accounting standards and reports its results in millions of ringgit (RM). Compute the missing balance sheet amounts f
> The balance sheet or income statement classifies various items in one of the following ways: CA—Current assets NA—Noncurrent assets CL—Current liabilities NL—Noncurrent liabilities CC—Contributed capital RE—Retained earnings NI—Income statement item (rev
> The following information is based on the fiscal Year 7 balance sheet of Delicious Foods Group, a Belgian food distributor. Delicious Foods applies IFRS and reports its results in millions of euros. Prepare a balance sheet for Delicious Foods that uses a
> The following information is based on the balance sheet of Aracel, a Brazilian manufacturer of paper pulp, for Year 6. Aracel applies U.S. GAAP and reports its results in thousands of U.S. dollars. (Adapted from the financial statements of Aracruz Celulo
> Consider the following hypothetical scenario for Royal Dutch Shell (Shell), a Netherlands-based oil and gas firm. One of Shell’s oil rig platforms collapsed, creating damage to the seafloor as well as environmental damage to surrounding ocean water. Give
> The following hypothetical events relate to the Berlin Philharmonic. Indicate whether each transaction immediately gives rise to a liability under U.S. GAAP and, separately, IFRS. If the Berlin Philharmonic recognizes a liability, state the account title
> The following transactions relate to Hana Microelectronic Public Company Limited (Hana Microelectronic), an electronics and semiconductor firm headquartered in Thailand. Indicate whether each transaction immediately gives rise to a liability under U.S. G
> The following hypothetical transactions relate to Ryanair Holdings, Plc. (Ryanair), an Irish airline. Indicate whether each transaction immediately gives rise to an asset under U.S. GAAP and, separately, IFRS. If Ryanair recognizes an asset, state the ac
> The following hypothetical transactions relate to Nestlé S.A., the Swiss chocolate manufacturer. Indicate whether each transaction immediately gives rise to an asset of the company under U.S. GAAP and separately, under IFRS. If Nestlé recognizes an asset
> Consider the following hypothetical series of events. While shopping in a Nordstrom store on July 5, 2013, a customer slips on the escalator and falls, sustaining back and neck injuries. On January 15, 2014, the customer sues Nordstrom for $1 million. Th
> What does “articulation of the balance sheet with the income statement” refer to?
> Assume that Jennifer’s Juice (JJ), an organic food retailer in the United States, recently purchased a new refrigeration system for its Chapel Hill, North Carolina, store. JJ paid $1.3 million for the refrigeration unit and paid an additional $120,000 to
> In the fiscal year ended December 31, Year 14, Bostick Enterprises paid $120,000 for equipment that it had purchased on January 1, Year 14. The equipment has an expected useful life of 10 years and zero salvage value. The firm recorded the acquisition by
> Comparative balance sheet data for Bondier Corporation (Bondier), a Canadian airplane manufacturer, as of January 31, Year 8, and January 31, Year 7, appear in the following display, based on Bondier’s financial reports as of January 31
> An Israeli drug company (IDC) reported Net Sales of $9,408 million for the year ended December 31, Year 7. Based on IDC’s financial reports for fiscal Year 7, the cost of these sales was $6,531 million. Assume that IDC made all sales on credit, and that
> A firm generated net income for the current year, but cash flow from operations was negative. How can this happen?
> Under what circumstances will the rate of return on equity exceed the rate of return on assets? Under what circumstances will it be less?
> The acquisition of equipment by assuming a mortgage is a transaction that firms cannot report in their statement of cash flows but must report in a supplemental schedule or note. Of what value is information about this type of transaction? What is the re
> Some of the assets of one firm correspond to the liabilities of another firm. For example, an account receivable on the seller’s balance sheet is an account payable on the buyer’s balance sheet. For each of the following items, indicate whether it is an
> Accounting treats cash discounts taken on the purchase of merchandise or equipment as a reduction in the amount recorded for the assets acquired. What justification can you see for this treatment?
> Why is it important to separate the income from discontinued operations from the income from continuing operations on the income statement?
> Distinguish between a cost and an expense.
> “The measurement of assets and liabilities relates closely to the measurement of revenues and expenses.” Explain.
> An entrepreneur claimed that her new company had generated both superior profit margin performance and superior asset turnover performance. Explain whether such an outcome is likely to happen.
> A Japanese car manufacturer (JCM) reported Sales of Products of ¥22,670 billion for the year ended March 31, Year 7. The Cost of Products Sold was ¥18,356 billion. Assume that JCM made all sales on credit. By March 31, Year 7, JCM had collected cash for
> Some have argued that for any given firm at a particular time, there is an optimal inventory turnover ratio. Explain.
> One company president stated, “The operations of our company are such that we must turn our assets over once every four weeks.” A company president in another industry stated, “The operations of our company are such that we can live comfortably with asse
> Explain why the return on equity of a company that has no preferred stock will be smaller than the return on equity of an otherwise similar firm that has preferred stock.
> A firm’s total assets turnover decreased, but its accounts receivable, inventory, and fixed asset turnover increased. Suggest possible explanations.
> In calculating return on assets, the simple ROA formula does not adjust for interest expense. Explain why is it technically more correct to make an adjustment for interest expense in calculating this ratio, and explain the form of the adjustment.
> “Financial ratios are useful metrics for relating two items in the financial statements. Interpreting changes in a particular financial ratio is difficult, however, because the explanation might relate to changes in the numerator, the denominator, or bot
> Given how financial leverage affects ROE, why does a firm not borrow as much as possible? That is, why doesn’t a firm increase borrowing to as close to 100% of financing as it can?
> The statement of cash flows classifies changes in accounts payable as an operating activity but classifies changes in short-term bank borrowing as a financing activity. Explain this apparent paradox.
> Under U.S. GAAP, the statement of cash flows classifies cash expenditures for interest on debt as an operating activity but classifies cash expenditures for dividends to shareholders as a financing activity. Explain this apparent paradox.
> The statement of cash flows classifies cash expenditures for interest expense as an operating activity but classifies cash expenditures to redeem debt as a financing activity. Explain this apparent paradox.
> A South African paper company, SAPC Limited (SAPC), reports noncurrent Interest-Bearing Borrowings of $1,634 million at September 30, Year 6. SAPC applies IFRS and reports its results in millions of U.S. dollars. At September 30, Year 7, this balance had
> A student remarked: “The direct method of computing cash flow from operations is easier to understand than the indirect method. Why do the majority of firms follow the indirect method in preparing their statements of cash flows?” Respond to this student.
> “The statement of cash flows provides information about changes in the structure of a firm’s assets and sources of financing.” Explain.
> “The accrual basis of accounting creates the need for a statement of cash flows.” Explain.
> “One can most easily accomplish the reporting objective of the income statement under the accrual basis of accounting and the reporting objective of the statement of cash flows by issuing a single income statement using the cash basis of accounting.” Eva
> The sale of equipment for an amount of cash greater than the carrying value of the equipment results in a cash receipt equal to the carrying value of the equipment plus the gain on the sale, which appears in income. How might the accountant treat this tr
> A firm operated at a net loss for the current year, but cash flow from operations was positive. How can this happen?
> One writer stated, “Depreciation expense is a firm’s chief source of cash for growth.” A reader criticized this statement by replying, “The fact remains that if companies had elected, in any year, to charge off $10 million more depreciation than they did
> Why might it be difficult to compare two otherwise similar firms in terms of their operating profits?
> Why is it important to separate gains from revenues?
> A customer has paid the firm, in advance, for merchandise the firm will deliver next month. Why is the firm not permitted to recognize revenue when it receives the cash?
> EBB Group (EBB), headquartered in Switzerland, is one of the world’s largest engineering companies. EBB applies U.S. GAAP, and reports its results in millions of U.S. dollars. Based on EBB’s financial reports for Year 7, at January 1, Year 7, EBB reporte
> In an accrual accounting system, firms recognize revenues even if they have not received cash. What criteria must sales transactions meet in order for the seller to recognize revenues before collecting cash?
> A student says, “It is inconceivable to me that a firm could report increasing net income yet run out of cash.” Clarify this seeming contradiction.
> Accounting typically does not recognize either assets or liabilities for mutually unexecuted contracts. What justification can you see for this treatment?
> Identify the underlying accounting principle that guides the items to include in the acquisition cost of inventories, equipment, buildings, and other similar assets. What is the rationale for this accounting principle?
> The word probable appears in the definitions of assets and liabilities and in the recognition criteria for liabilities with uncertain amount and/or timing. a. What is the meaning of probable as used in the definitions of assets and liabilities? b. How do
> What is the amount of the liability that the company recognizes in each of the following independent cases? a. A plaintiff files a lawsuit against the company. The probability is 90% that the company will lose. If it loses, the amount of the loss will mo
> For each of the following items, indicate whether the item meets all of the criteria in the definition of a liability. If so, how does the firm value it? a. Interest accrued but not paid on a note. b. Advances from customers for goods and services to be
> One of the criteria for the recognition of an asset or a liability is that there be an exchange. What justification can you see for this requirement?
> A group of investors owns an office building that it rents unfurnished to tenants. It purchased the building five years previously from a construction company. At that time, it expected the building to have a useful life of 40 years. Indicate the procedu
> Who might the accounting convention of conservatism hurt?
> Bonana Company, a U.S. clothing designer, manufacturer, and retailer, reported a balance in prepaid insurance of $24.0 million, based on its financial reports dated March 31, Year 8, the end of its fiscal year. Assume that all of this balance relates to
> Problem 25 presents financial statements for Bullseye Corporation for its fiscal years ending December 31, 2011, 2012, and 2013, as well as financial statement ratios. a. Prepare a set of pro forma financial statements for Bullseye Corporation for fiscal
> Effective financial statement analysis requires an understanding of a firm’s economic characteristics. The relations among various financial statement items provide evidence of many of these economic characteristics. Exhibit 7.28 pres
> Scantania is a Swedish company that manufactures trucks and other heavy vehicles and provides financing for its customers’ purchases. Exhibit 7.27 presents financial statement ratios for Scantania for 2011, 2012, and 2013. The amount on
> Depkline plc is a pharmaceutical company headquartered in the United Kingdom. Exhibit 7.26 presents financial statement ratios for Depkline for 2011, 2012, and 2013. Respond to each of the following questions. a. What are the likely reasons for the incre
> Gappo Group and Limito Brands maintain leading market positions in the specialty apparel retailing market. The products of Gappo (jeans, blouses, shirts) are more standardized than those of Limito. The products of Limito are more fashion-oriented and gli
> This problem compares the profitability and risk ratios of three leading discount chains: Cartoo, Taggle, and Wilmet. Cartoo is headquartered in Spain, and Taggle and Wilmet are headquartered in the United States. Exhibits 7.20 and 7.21 present profitabi
> Bullseye Corporation, headquartered in the United States, operates retail stores that offer clothing, household products, electronic products, sports products, toys, and entertainment products at discount prices. Bullseye differentiates itself from compe
> Top financial management wants to increase cash flow from operations. It asks you to implement the following strategies. Which of these, if implemented, will increase cash flow from operations contrasted to the amount if you do not implement the strategy
> Refer to Exhibit 6.35 for Fierce Fighters Corporation, which shows excerpts from its Statements of Cash Flows, with cash flow from operations presented with the indirect method, for three recent years. We use these years to illustrate a period of success
> Exhibit 6.34 presents statements of cash flow for eight companies for the same year: a. American Airlines (airline transportation) b. American Home Products (pharmaceuticals) c. Interpublic Group (advertising and other marketing services) d. Procter &
> On December 31, Year 6, the Merchandise Inventories account of a Japanese electronics firm had a balance of ¥408,710 million, based on the firm’s financial reports for fiscal Year 7. Assume that during Year 7, the firm purchased merchandise inventories o
> Exhibit 6.33 presents statements of cash flows for Spokane Paper Group, a forest products company, for three recent years. During this period, it faced financial difficulty, which you can see by noting the pattern of losses increasing with time. a. Spoka
> Exhibit 6.32 presents a statement of cash flows for Swoosh Shoes, Inc., for three years. a. Why did Swoosh experience increasing net income but decreasing cash flow from operations during this three-year period? b. What is the likely explanation for the
> Quintana Company presents the balance sheet shown in Exhibit 6.30 and the statement of cash flows shown in Exhibit 6.31 for 2013. The firm sold investments, equipment, and land for cash at their net book value. The accumulated depreciation of the equipme
