Depreciation expense, amortization of patents, and amortization of bond discount are examples of items that are added to net income when using the indirect method of presenting cash flows from operating activities. amortization of premium on bonds and a reduction in deferred taxes are examples of items that are deducted from net income when using the indirect method of presenting cash flows from operating activities. Explain why these adjustments to net income are made to compute cash flows from operating activities.
> Inventory that has a market value below the historical cost should be written down in order to recognize a loss. Comment
> What does the ratio total deposits times capital measure?
> What is usually the biggest expense item for a bank?
> For regulated utilities, why review the account Construction Work in Progress?
> Give an example of why a review of bank assets may indicate risk or opportunity of which you were not aware?
> Real estate companies contend that conventional accounting does not recognize the underlying value of the property and that this misleads investors. Discuss.
> For oil and gas companies, there is the potential for a significant difference between the reported income and cash flows from operations. Comment.
> When reviewing the financial statements of oil and gas companies, why is it important to note the method of costing (expensing) exploration and production costs?
> List the sections of annual reports where ratios are most frequently located, in order of use.
> Financial ratios are used extensively in annual reports to interpret and explain financial statements. Comment.
> CPAs regard which two financial ratios as the most significant? The highest rated profitability ratio? The highest debt ratio?
> An arbitrary write-off of inventory can be justified under the conservatism concept. Is this statement true or false? Discuss.
> List the top five financial ratios included in corporate objectives according to the study reviewed in this book. Indicate what each of these ratios primarily measures.
> Corporate controllers regard profitability financial ratios as very significant. Comment.
> Which two financial ratios do commercial loan officers regard as the most significant? Which two financial ratios appear most frequently in loan agreements?
> Commercial loan officers regard profitability financial ratios as very significant. Comment.
> It appears that most restatements are symptomatic of financial reporting fraud. Comment.
> We are interested in the future when valuing the stock equity of a company. Therefore, traditional financial statements are of little use in this endeavor. Comment.
> Comment on the importance of an assessment of company management when valuing a company from the perspective of analysts and fund managers.
> Multipored discounted valuation models do not seem to play a significant role in analysts’ normal valuation activity. Comment.
> The use of multiples and conventional financial reports is not well accepted by the traditional financial literature or many valuation books. Comment
> In valuation of stock equity, fundamental analysis makes extensive use of multipored discounted cash flow. Comment.
> In some countries where inflation has been material, an effort has been made to retain the significance of money as a measuring unit by adjusting the financial statements by an inflation factor. Can an accurate adjustment for inflation be made to the sta
> Describe a proper management of earnings. Describe an improper management of earnings.
> CFAs gave liquidity ratios a high significance rating. Comment.
> The surveyed CFAs gave the highest significance rating to which type of financial ratio?
> Indicate two possible problems with a pie graph for accounting data.
> List two things that can make a line graph misleading.
> List four popular forms of graphs used by accountants.
> You are the auditor of Pied more Corporation. You determine that the accounts receivable turnover has been much slower this period than in prior periods and that it is also materially lower than the industry average. How might this situation affect your
> No conclusive model has been developed to forecast financial failure. This indicates that financial ratios are not helpful in forecasting financial failure. Comment.
> Indicate a practical problem with computing a Z score for a closely held firm.
> What does a Z score below 2.675 indicate, according to the Altman model?
> Countries have had problems with the stability of their money. Briefly describe the problem caused for financial statements when money does not hold a stable value.
> According to the Beaver study, three current asset accounts should be given particular attention in order to forecast financial failure. List each of these accounts and indicate whether they should be abnormally high or low.
> According to the Beaver study, which ratios should be watched most closely, in order of their predictive power?
> Describe what is meant by a firm’s financial failure.
> All firms are required to expense R&D costs incurred each period. Some firms spend very large sums on R&D, while others spend little or nothing on this area. Why is it important to observe whether a firm has substantial or immaterial R&D expenses?
> Indicate which of the following accounting policies are conservative by placing an X under Yes or No. Assume inflationary conditions exist. Conservative Yes No a. LIFO inventory b. FIFO inventory c. Completed-contract method d. Percentage-of-completi
> What types of accounting policies are described as conservative?
> The study of annual reports reviewed in this chapter showed that earnings per share was disclosed in every annual report. Why?
> The commercial loan officers did not list the dividend payout ratio as a highly significant ratio, but they did indicate that the dividend payout ratio appeared frequently in loan agreements. Speculate on the reason for this apparent inconsistency
> You are in charge of preparing a comprehensive budget for your firm. Indicate how financial ratios can help determine an acceptable comprehensive budget?
> Indicate some possible uses of a reliable model that can be used to forecast financial failure.
> Which standard of measure is the best for measuring financial transactions?
> The study of annual reports reviewed in this chapter indicated that wide differences of opinion exist on how many ratios should be computed. Comment.
> According to a study of annual reports reviewed in this chapter, what type or types of financial ratios are most likely to be included in annual reports? Speculate on the probable reason for these ratios appearing in annual reports.
> What is the purpose of the statement of cash flows?
> What is the meaning of the term cash in the statement of cash flows?
> Indicate the three techniques that may be used to complete the steps in developing the statement of cash flows.
> The land account may be used only to explain a use of cash, but not a source of cash. Comment.
> Into what three categories are cash flows segregated on the statement of cash flows?
> Hornet Company had operating cash flow of $60,000 during a year in which it paid dividends of $11,000. What does this indicate about Hornet’s dividend-paying ability?
> 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?
