Discontinued Operations

If a firm ceases to operate (or plans to cease operating) a major segment of its business, separate income statement disclosure is required of its (1) continuing operations and (2) discontinued operations. Exhibit 4-4 contains the income statement e reluctant to buy and learn a system that will never be upgraded or improved. _ holders. Droved. The decline in sales would, of course, negatively affect SPI's share Should SPI disclose its strategy evaluation in its 2000 financial statements EXHIBIT...

Convertible Debt

Firms that borrow by issuing bonds frequently include a conversion privilege in the bond contract. Convertible bonds allow the bondholder to exchange the bonds for a specified number of shares of stock. As an example, let's assume that in 2001 the Digital E quipment Corporation, a leading developer and producer of computer hardware and software, reports the following information in its 1997 financial statements Stock options granted during 1997 3,750,800 shares at an average exercise price of...

Ratios

This section describes several ratios that can be computed from the statement of cash flows. Because the statement of cash flows is a relatively recent addition to GAAP, the development of cash flow ratios is at an early stage, and there is no general consensus about which ratios are the most informative. Also note that some of these ratios require information disclosed only by the direct approach for preparing the operating activities section.We will illustrate ways to estimate this...

Declaration and Payment of Cash Dividends

Du Pont paid dividends of 1,401 million to its shareholders in 1997. On the date of declaration, the dividend became a liability because Du Pont obligated itself to make the dividend payment. On that date, retained earnings were decreased and liabilities were increased by 1,401 million Management also specified a date of record, and the dividend was paid to investors who owned the shares on that specific date. Subsequently, the stock was considered ex dividend, which means that subsequent...

Accounting Changes LIFO to FIFO

14-62 The following consolidated financial statements, selected excerpts from the notes, and auditor's report for Zenith Electronics Corporation were obtained from the EDGAR database Zenith Electronics Corporation Statements of Consolidated Operations and Retained Earnings (Deficit) Year Ended December 31 1997 1996 1995 (In Millions, Except Per Share Amounts) Costs, expenses, and other Cost of products sold Selling, general and administrative (Note Four) Other operating expense (income), net...

Questions

2-1 Describe each part of the basic accounting equation. Identify one example of each item or term in this equation and describe why it fits in that particular category. 2-2 Using the definition of assets in this chapter, describe why each of the following items should not be listed as an asset on the firm's balance sheet c. Reputation for honesty and fairness d. Brand recognition in the market f. Customers' names, addresses, and product preferences 2-3 Executory contracts. a. Discuss the...

Translation of Foreign Currency Financial Statements

13-51 The balance sheet and income statement of Buchanen, Inc., a subsidiary of a U.S. company, is shown below. Buchanen, Inc.operates in New Zealand and prepares its financial statements in New Zealand dollars (NZ ). Buchanen, Inc. Balance Sheet and Income Statement December 31, 2000 (NZ in millions) Revenues NZ 1,200 Expenses (900) Liabilities Paid-in capital Retained earnings Supplementary information Exchange rates (US NZ ) Average during 2000 .55 Spot rate, December 31, 2000 .60 Historical...

Financial Reporting Subsequent to the Acquisition

Because Pepper Company has effective control of Shaker through ownership of all their voting shares, generally accepted accounting practices require that Pepper Company's financial statements be prepared on a consolidated basis. Consolidated financial statements report the combined financial position, cash flows, and operating results for all firms that are under the parent company's control. Consolidation looks beyond the fact that affiliated firms are distinct legal entities and focuses on...

Identify Underlying Reasons for Changes in CFOA

5-63 The following financial statements from SOS Staffing Services, Inc. were downloaded from the SEC's EDGAR database SOS STAFFING SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Fiscal Years Ended December 28, 1997, December 29, 1996 and December 31, 1995 Increase Decrease in Cash and Cash Equivalents CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash used in operating activities Depreciation and amortization Deferred income taxes Loss...

Notes Payable

Ersatz's current liabilities include 166.4 million of short-term debt, which consists mainly of notes payable to financial institutions. Business firms frequently borrow funds from banks or other lenders by signing a formal note payable with a fixed repayment date, and notes payable may be either interest-bearing or discounted. To illustrate the accounting for an interest-bearing note, assume that a firm borrows 200,000 from a bank to be repaid in six months at an interest rate of 12 per year....

Commitments Contingencies And Risks

Most financial statements include a footnote captioned commitments and contingencies. The purpose of this note is to alert financial statement users to the fact that a variety of actual and potential future claims exist that do not meet the FASB's criteria for recognition as liabilities at the balance sheet date. Yet these claims may be important to users in assessing the firm's debt position. Commitments are agreements with suppliers, customers, employers, or other entities that are not yet...

Ethics And Accounting

Accountants have a significant responsibility to the public. This responsibility exists because outside shareholders, creditors, employees, and others rely on financial statements in making various business decisions. Business organizations employ internal accountants to prepare financial statements. These statements are then audited by a firm of independent CPAs. Both the internal accountants and the external auditors have a responsibility to perform their tasks with integrity and due care....

Computing Liquidity Ratios

6-69 Owens-Corning values its inventories using LIFO.This presents a problem when comparing its current ratio against that of a company using FIFO. Locate the latest financial statements for Owens-Corning at the company page www.owens-corning.com or from the 10-K filed in the EDGAR archives www.sec.gov edgarhp.htm . a. Compute the current ratio and the number of days' sales NDS in ending inventory based on numbers reported on the balance sheet. b. Find the FIFO value of inventory reported in...

Interpreting Financial Statements Cash Flow Effects

5-57 From Appendix D,Wendy's International, Inc., review Wendy's cash flow statement and income statement. a. Evaluate Wendy's cash flow from operations. Calculate the relevant, cash-based ratios from this chapter. b. Compare Wendy's cash flow from operations to income before taxes alternatively, you could calculate its operating income from the data shown on the income statement . Prepare a graph to help show trends in each. c. Describe Wendy's cash management strategies as revealed in the...

Restrictive Covenants

Borrowers may agree to various restrictions on management's ability to invest, pay dividends, incur additional debt, or take other actions that can affect the firm's ability to meet its repayment obligations. Such restrictive covenants are often based on accounting measurements of assets, liabilities, and or income. Violation of these restrictions constitutes technical default on the debt and may allow lenders to increase interest rates or impose other penalties on the borrower. Exhibit 9-3...

Financial Statement Effects of Inventory Costing Methods First Year of Operations

6-42 Tom Hanky, a financial analyst specializing in the toy industry, has provided the following comments concerning the 1999 financial statements of Toys-U-Must Toys-U-Must began operations in 1999 and uses the LIFO method in costing its inventories. Because the typical firm in the industry uses FIFO costing, it is desirable to adjust the company's financial statements as ifFIFO costing had been used. Footnotes to the financial statements reveal that the use of FIFO would increase the...

Compare and Contrast CFOA for Two Companies

5-64 The following financial statements from Eli Lilly and Company and Pfizer INC. were downloaded from the SEC's EDGAR database Consolidated Statements of Cash Flows ELI LILLY AND COMPANY AND SUBSIDIARIES Dollars in millions Cash Flows From Operating Activities Net income loss Adjustments To Reconcile Net Income Loss to Cash Flows From Operating Activities Depreciation and amortization Change in deferred taxes Gain on sale of DowElanco, net of tax Asset impairment, net of tax Net gain on...

Gain or Loss on Disposal of Fixed Assets

7-43 Warhol Enterprises purchased a spray painter at the beginning of 1999 at a cost of 150,000. Warhol estimated that the spray painter would last five years and have a residual value of 30,000. The company decided to use straight-line depreciation. Two years later, at the end of 2000, Warhol sold the spray painter for 100,000. a. Calculate the book value of the spray painter at the end of 1999 and the end of 2000, prior to its sale. b. Calculate the gain or loss on the sale of the spray...

Control of Cash

As previously mentioned, because cash is so liquid and so easily transported, special care must be exercised to ensure that it is properly recorded and safeguarded. Most EXHIBIT 6-1 Disclosure of Cash Reporting Policy OshKosh B'Gosh, Inc. 1997 Annual Report Note 1 Partial Cash equivalents consist of highly liqu id debt instruments such as money market accounts and commercial paper with original maturities of three months or less. The Company's policy is to invest cash in conservative...

Required

Analyze the above transactions for March, using the basic accounting equation. b. Record necessary adjustments interest expense, insurance expense, and depreciation expense. Assume a 60-month life and zero residual value. c. What additional information is needed to fully analyze Hasty Bakery results for March 2-17 Find the missing elements in the following independent cases 2-18 Ascertain the missing items A, B, and C in the following situation Assets, January 1 Assets, December 31...

Property Plant and Equipment Ratio Analysis

7-45 The following financial statement information is from BRN, Inc. BRN is a global company specializing in high-tech components for the automotive, space, and computer industries. Property, plant, and equipment on the basis of cost in millions Less Accumulated depreciation Total property, plant, and equipment a. Comment on the changes in the property, plant, and equipment accounts. b. Calculate fixed asset turnover 1999 only and the percentage of PPE depreciated both years . c. Comment on...

Vertical Analysis

3-57 Locate the most recent set of financial statements for the companies listed below. You may use either the 10-K available at EDGAR www.sec.gov edaux searches.htm or the annual report available at the company page on the Web. The annual report is usually located in the Investor Information section. Xerox office products Ben amp Jerry's food Lewis Galoob Toys toys Eli Lilly pharmaceutical a. For each company, perform a vertical analysis for the four major categories of assets Current Assets...

Comparative Intercompany Analysis Current Assets and Current Liabilities

6-68 The following balance sheet segments were extracted from the SEC's EDGAR data base ELI LILLY AND COMPANY AND SUBSIDIARIES Cash and cash 1,947.5 813.7 Short-term Accounts receivable, net of allowances of 53.3 1997 and 82.4 Other Inventories Note Deferred income taxes Note Prepaid Total current Short-term borrowings Note 227.6 1,212.9 Accounts Employee Dividends Income taxes payable Note Other Total current liabilities 4,191.6 4,222.2 Accounts receivable, less allowance for doubtful accounts...

Immediate Recognition

The final method of applying the matching principle is immediate recognition. Some expenditures have no discernible future benefit. In these cases, the expenditure is expensed immediately. Officers' salaries, utilities, and interest are treated in this manner. Reality Check 4-2 addresses revenue and expense issues for Cendant Corporation. Cendant Corporation markets memberships in discount purchasing clubs. Typical subscriptions last one year. The first month is a trial membership members pay...

Footnote Disclosures Convert from LIFO to FIFOBased Measures of Cost of Goods Sold

6-41 Dolo's Building Block Company uses LIFO costing and reports the following information in a footnote to its financial statements If Dolo had used FIFO costing during 2000, the beginning and ending inventories would have been higher by 50 million and 70 million, respectively' a. Determine how much higher or lower Dolo's cost of goods sold would be during 2000 if the firm had used FIFO in costing its inventories. b. Assume that all of Dolo's income is taxed at 40 . How much higher or lower...

Ratio Calculations Effects of FIFO and LIFO

6-48 Two similar companies use different inventory valuation methods. LL Co. uses the LIFO inventory valuation method, and FF Co. uses FIFO. Ignore the effect of income taxes on each company. Selling, general, and administrative Income before interest expense Interest expense 12 Income before taxes Total current assets Fixed assets net Total assets Current liabilities Long-term liabilities Total liabilities Shareholders' equity Total equities 35,000 20,350 14,650 6,000 8,650 3,120 8,000 11,120...

Balance Sheet Analysis

3-53 The balance sheet for Reebok International LTD is shown in Appendix D. Required a. Conduct a vertical analysis of the balance sheet for each year, 1996 and 1997. b. Calculate the liquidity, asset management, and debt management ratios. c. Evaluate Reebok's liquidity in each year. d. Evaluate Reebok's asset management and debt management strategies. e. In which year was Reebok most successful Why

Reconstructing a Balance Sheet

3-51 Van Gogh's fragmentary balance sheet is shown below. Accounts receivable Inventories Prepaid expenses Total current assets Property, plant, and equipment Land Buildings and equipment Less Accumulated depreciation Net book value Total property, plant, Current liabilities Accounts payable Notes payable Accrued expenses Total current liabilities Noncurrent liabilities Bonds payable Mortgage payable Total noncurrent Shareholders' equity Invested capital Retained earnings Total shareholders'...

Transaction Analysis Expanded Accounting Equation

An engineering firm was formed when three engineers each invested 50,000 cash . 2. Each founder also invested an assortment of utility trucks, inclinometers, and other specialty equipment, valued at 10,000 each . 3. Borrowed 50,000 to provide additional operating funds. 4. Rented office space at 1,000 per month. 5. Paid the first month's rent. 6. Paid a security deposit of 2,000. 7. A wealthy individual also wanted to invest in the firm, but not as an owner, so the firm borrowed 500,000 from...

Interpreting Financial Statements Horizontal Analysis

4-72 Consider the following horizontal analysis of a firm's income statement assume that 1998 is the base year used for comparison, when all items equal 100 Product support and enhancement Total net revenue Operating expenses Cost of goods sold Sales and marketing Research, development and support General and administrative Total operating expenses Income loss from operations

Past Transactions and Other Economic Events

Past transactions and events are the raw materials for the financial accounting process. Transactions typically involve an exchange of resources between the firm and other parties. For example, purchasing equipment with cash is a transaction that would be incorporated in the firm's financial accounting records. Purchasing equipment on credit is also a transaction equipment is obtained in exchange for a promise to pay for it in the future. Financial accounting also incorporates significant...

The Basic Accounting Equation

A balance sheet, illustrated in Exhibit 2-1, contains three sections assets, liabilities, and owners' equity. The total of the left side assets equals the total of the right side liabilities and owners' equity . Financial accounting is based on one simple, three-element equation, referred to as the basic accounting equation ASSETS LIABILITIES OWNERS' EQUITY The basic accounting equation is simply an algebraic form of the balance sheet. The following sections elaborate on the definitions of the...