Intermediate Accounting 14th Chapter 5

Questions 1. The proportion rag of paper generates information about the personality and summations of enthronements in first step resources, obligations to enterprise creditors, and the owners equity in net income enterprise resources. That information not scarce complements information about the components of income, but also contributes to monetary reporting by providing a basis for (1) computing rates of return, (2) evaluating the pileus structure of the enterprise, and (3) assessing the liquid state and financial flexibility of the enterprise. 2. Solvency refers to the ability of an enterprise to pay its debts as they mature.For example, when a caller-out carries a high level of semipermanent debt relative to pluss, it has pull down solvency. Information on long-term obligations, much(prenominal) as long-term debt and tuberositys storey payable, in comparison to total summations can be used to assess resources that go away be needed to meet these fixed o bligations (such as interest and read/write head payments). 3. Financial flexibility is the ability of an enterprise to take effective actions to alter the measuring rods and timing of currency feasts so it can respond to unexpected call for and opportunities.An enterprise with a high degree of financial flexibility is intermit able to survive bad times, to recover from unexpected setbacks, and to take benefit of profitable and unexpected investment opportunities. Generally, the greater the financial flexibility, the lower the assay of enterprise failure. 4. some(a) situations in which estimates affect add ups report in the proportion sheet admit (a)allowance for doubtful accounts. (b)depreciable lives and estimated salvage think of for constitute and equipment. (c)warranty returns. d)determining the numerate of grosss that should be record as unearned. 5. An ontogeny in inventories increases menses assets, which is in the numerator of the reliable ratio. Therefor e, inventory increases will increase the flowing ratio. In general, an increase in the ongoing ratio indicates a companion has better fluidity, since there atomic number 18 more present-day(prenominal) assets relative to watercourse liabilities. 6. Liquidity describes the substance of time that is expected to elapse until an asset is reborn into money or until a indebtedness has to be paid.The ranking of the assets given up in fix up of liquidity is (1) (d) Short-term investments. (2) (e) Accounts receivable. (3) (b) Inventory. (4) (c) Buildings. (5) (a) Goodwill. 7. The major limitations of the equaliser sheet are (a)The values stated are generally historical and not at carnival value. (b)Estimates have to be used in many instances, such as in the determination of collectibility of receivables or finding the approximate useful life story of long-term tangible and intangible assets. c)Many items, even though they have financial value to the business, presently are no t save. One example is the value of a companys human resources. 8. Some items of value to engineering companies such as Intel or IBM are the value of research and instruction (new products that are being developed but which are not yet marketable), the value of the intellectual capital of its workforce (the ability of the companies employees to come up with new ideas and products in the fast changing technology industry), and the value of the company reputation or name brand (e. . , the Intel Inside logo). In some cases, the reasons why the value of these items are not recorded in the balance sheet concern the lack of faithful representation of the estimates of the future funds flows that will be generated by these assets (for all three types) and the ability to hold the use of the asset (in the case of employees). Being able to reliably footfall the expected future benefits and to control the use of an item are of the essence(p) elements of the definition of an asset, accor ding to the Conceptual Framework. 9.Classification in financial masterys helps users by mathematical group items with similar characteristics and separating items with diffe claim characteristics. menstruation assets are expected to be converted to cash inside one year or one run cycle, whichever is longerproperty, plant and equipment will provide cash inflows over a longer period of time. Thus, separating long-term assets from genuine assets facilitates computation of useful ratios such as the current ratio. 10. Separate amounts should be reported for accounts receivable and notes receivable.The amounts should be reported gross, and an amount for the allowance for doubtful accounts should be deducted. The amount and nature of any nontrade receivables, and any amounts designated or pledged as collateral, should be clearly identified. 11. No. Available-for- sales agreement securities should be reported as a current asset only if management expects to convert them into cash as n eeded within one year or the operating cycle, whichever is longer. If available-for-sale securities are not held with this expectation, they should be reported as long-term investments. 2. The relationship between current assets and current liabilities is that current liabilities are those obligations that are reasonably expected to be liquidated each through the use of current assets or the creation of otherwise current liabilities. 13. The total selling price of the season tickets is $20,000,000 (10,000 X $2,000). Of this amount, $8,000,000 has been earned by 12/31/12 (16/40 X $20,000,000). The remaining $12,000,000 should be reported as unearned revenue, a current financial obligation in the 12/31/12 balance sheet (24/40 X $20,000,000). 14.Working capital is the excess of total current assets over total current liabilities. This excess is sometimes called net working capital. Working capital represents the net amount of a companys relatively liquid resources. That is, it is th e liquidity buffer available to meet the financial demands of the operating cycle. 15. (a)Shareholders fair-mindedness. Treasury argumentation (at comprise). (b)Current Assets. Included in exchange. (c)Investments. Land held as an investment. (d)Investments. Sinking fund. (e)Long-term debt (adjunct account to bonds payable). Unamortized tribute on bonds payable. (f)Intangible Assets. Copyrights. (g)Investments. Employees reward fund, with subcaptions of currency and Securities if desired. (Assumes that the company still owns these assets. ) (h)Shareholders Equity. Premium on capital simple eye or Additional paid-in capital. (i)Investments. Nature of investments should be given together with parenthetical information as follows pledged to secure loans payable to wedges. 16. (a) adjustment for doubtful accounts receivable should be deducted from accounts receivable in current assets. b)Merchandise held on consignment should not appear on the consignees balance sheet e xcept possibly as a note to the financial statements. (c)Advances legitimate on sales contract are normally a current liability and should be shown as such in the balance sheet. (d)Cash gloam value of life insurance should be shown as a long-term investment. (e)Land should be reported in property, plant, and equipment unless held for investment. (f)Merchandise out on consignment should be shown among current assets under the heading of inventories. (g)Franchises should be itemized in a partition for intangible assets. h)Accumulated depreciation of plant and equipment should be deducted from the plant and equipment accounts. (i)Materials in skip over should not be shown on the balance sheet of the buyer, if purchased f. o. b. destination. 17. (a)Trade accounts receivable should be stated at their estimated amount collectible, often referred to as net manageable value. The method most generally followed is to deduct from the total accounts receivable the amount of the allowance f or doubtful accounts. (b)Land is generally stated in the balance sheet at cost. (c)Inventories are generally stated at the lower of cost or market. d)Trading securities (consisting of common ocellus of other companies) are stated at fair value. (e)Prepaid expenses should be stated at cost less the amount apportioned to and written murder over the previous accountancy system periods. 18. Assets are defined as probable future economic benefits obtained or controlled by a particular entity as a result of past minutes or events. If a building is take aimd under a capital lease, the future economic benefits of using the building are controlled by the lessee (tenant) as the result of a past event (the signing of a lease agreement). 19. Battle is incorrect.Retained earnings is a source of assets, but is not an asset itself. For example, even though the funds obtained from issuing a note payable are invested in the business, the note payable is not reported as an asset. It is a source of assets, but it is reported as a liability be nonplus the company has an obligation to repay the note in the future. Similarly, even though the earnings are invested in the business, bear earnings is not reported as an asset. It is reported as part of shareholders equity because it is, in effect, an investment by owners which increases the ownership interest in the assets of an entity. 20.The notes should appear as long-term liabilities with full disclosure as to their terms. Each year, as the profit is determined, notes of an amount equal to dickens-thirds of the years profits should be transferred from the long-term liabilities to current liabilities until all of the notes have been liquidated. 21. The office of a statement of cash flows is to provide relevant information about the cash receipts and cash payments of an enterprise during a period. It differs from the balance sheet and the income statement in that it reports the sources and uses of cash by operating, investing , and financing activity classifications.While the income statement and the balance sheet are accruement basis statements, the statement of cash flows is a cash basis statementnoncash items are omitted. 22. The difference between these two amounts may be imputable to increases in current assets (e. g. , an increase in accounts receivable from a sale on account would result in an increase in revenue and net income but have no effect yet on cash). Similarly a cash payment that results in a decrease in an existing current liability (e. g. , accounts payable would decrease cash provided by operations without affecting net income). 3. The difference between these two amounts could be cod to noncash charges that appear in the income statement. Examples of noncash charges are depreciation, depletion, and amortization of intangibles. Expenses recorded but unpaid (e. g. , increase in accounts payable) and collection of previously recorded sales on credit (i. e. , now decreasing accounts r eceivable) also would cause cash provided by operating activities to exceed net income. 24. Operating activities command the cash effects of transactions that enter into the determination of net income.Investing activities include making and collecting loans and acquiring and disposing of debt and equity instruments property, plant, and equipment and intangibles. Financing activities involve liability and owners equity items and include obtaining capital from owners and providing them with a return on (dividends) and a return of their investment and borrowing money from creditors and repaying the amounts borrowed. 25. (a) authorise income is adjusted downward by deducting $5,000 from $90,000 and reporting cash provided by operating activities as $85,000. (b)The issuance of the favorite(a) stock is a financing activity.The issuance is reported as follows Cash flows from financing activities Issuance of like stock $1,150,000 (c) Net income is adjusted as follows Cash flows from o perating activities Net income $90,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense 14,000 Premium amortization (5,000) Net cash provided by operating activities $99,000 (d)The increase of $20,000 reflects an investing activity. The increase in Land is reported as follows Cash flows from investing activitiesInvestment in Land $(20,000) 26. The company appears to have good liquidity and reasonable financial flexibility. Its current cash debt coverage ratio is 1. 20, which indicates that it can pay off its current liabilities in a given year from its operation. In addition its cash debt coverage ratio is also good at . 80 which indicates it can pay off approximately 80% of its debt out of current operations 27. Free cash flow = $860,000 $75,000 $30,000 = $755,000. 28. Free cash flow is net cash provided by operating activities less capital expenditures and dividends.The purpose of free cash flow analysis is to determine the amount of discretionary cash flow a company has for purchasing additional investments, preceding(a) its debt, purchasing treasury stock, or simply adding to its liquidity and financial flexibility. 29. Some of the techniques of disclosure for the balance sheet are (a)Parenthetical explanations. (b)Notes to the financial statements. (c)Cross references and contra items. (d)Supporting schedules. 30. A note entitled Summary of Significant Accounting Policies would indicate the basic accounting principles used by that enterprise.This note should be very useful from a comparative standpoint, since it should be easy to determine whether the company uses the same accounting policies as other companies in the same industry. 31. General debt obligations, lease contracts, pension arrangements and stock option plans are four items for which disclosure is mandatory in the financial statements. The reason for disclosing these contractual situations is that these commitments are of a long- term nature, are often significant in amount, and are very important to the companys well-being. 32.The profession has recommended that the use of the word surplus be give up in balance sheet presentations of owners equity. This term has a connotation exterior accounting that is quite different from its meaning in the accounts or in the balance sheet. The use of the terms capital surplus, paid-in surplus, and earned surplus is confuse to the non-accountant and leads to misinterpretation. Brief employ 1. Current assets Cash $ 30,000 Accounts receivable $110,000 less(prenominal) requital for doubtful accounts 8,000 102,000 Inventory 290,000 Prepaid insurance 9,500 tally current assets $431,500Exercise (a)If the investment in preferred stock is readily marketable and held generally for sale in the near term to generate income on short-term price differences, then the account should appear as a current asset and be included with trading investments. If, on the other hand, the preferred stock is not a trading security, it should be sort as available-for-sale. Available for sale securities are classified as current or non-current depending upon the circumstances. (b)If the company accounts for the treasury stock on the cost basis, the account should the right way be shown as a reduction of total shareholders equity. c)Shareholders equity. (d)Current liability. (e)Property, plant, and equipment (as a deduction). (f)If an asset in process of construction is being constructed for another party, it is properly classified as an inventory account in the current asset section. This account will be shown net of any billings on the contract. On the other hand, if the asset is being constructed for the use of this particular company, it should be classified as a separate item in the property, plant, and equipment section. (g)Current asset. (h)Current liability. (i)Retained earnings. j)Current asset. (k)Current liability. 4. GULISTAN INC. Balance Sheet declin ation 31, 20XX Assets Current assets Cash $thirty Less Cash restricted for plant expansion thirty $thirty Accounts receivable xxx Less Allowance for doubtful accounts xxx XXX Notes receivable XXX Receivablesofficers XXX Inventories sinless goods XXX Work in process XXX Raw materials XXX XXX sum up current assets $XXX Long-term investments Preferred stock investments XXX Land held for future plant site XXX Cash restricted for plant expansion XXX impart long-term investments XXX Property, plant, and equipment Buildings XXX Less Accum. depreciation buildings XXX XXX Intangible assets Copyrights XXX entire assets $XXX Liabilities and Shareholders Equity Current liabilities Salaries and wages payable $XXX Notes payable, short-term XXX Unearned subscriptions revenue XXX Unearned rent revenue XXX nitty-gritty current liabilities $XXX Long-term debt Bonds payable, due in four years $XXX Less Discou nt on bonds payable (XXX) XXX integrality liabilities XXX Stockholders equity Capital stock Common stock XXX Additional paid-in capital Paid in capital in excess of parcommon stock XXX summation paid-in capital XXX Retained earnings XXX entirety paid-in capital and retained earnings XXX Less Treasury stock, at cost (XXX) Total stockholders equity XXX Total liabilities and stockholders quity $XXX 7. Current assets Cash $ 92,000* Less Cash restricted for plant expansion 50,000 $ 42,000 Equity investments (fair value) (cost, $31,000) 29,000 Accounts receivable (of which $50,000 is pledged as collateral on a bank loan) 161,000 Less Allowance for doubtful accounts 12,000 149,000 Interest receivable ($40,000 X 6%) X 8/12 1,600 Inventory (lower-of-cost (determined using LIFO)-or-market) Finished goods 52,000 Work-in-process 34,000 Raw materials 187,000 273,000 Total current assets $494,600 8. a. Dividends payable of $1, 900,000 will be reported as a current liability (1,000,000 50,000) X $2. 00 b. Bonds payable of $25,000,000 and interest payable of $2,500,000 ($100,000,000 X 10% X 3/12) will be reported as a current liability. Bonds payable of $75,000,000 will be reported as a long-term liability. c. Customer advances of $17,000,000 will be reported as a current liability ($12,000,000 + $30,000,000 $25,000,000). 12. VIVALDI CORPORATION Balance Sheet celestial latitude 31, 2012Assets Current assets Cash $197,000 Debt investments 153,000 Accounts receivable $435,000 Less Allowance for doubtfulaccounts 25,000 410,000 Inventory 597,000 Total current assets $1,357,000 Long-term investments Debt investments 299,000 Equity investments 277,000 Total long-term investments 576,000 Property, plant, and equipment Land 260,000 Buildings 1,040,000 Less Accum. depreciation 352,000 688,000 Equipment 600,000 Less Accum. epreciation 60,000 540,000 Total property, plant, a nd equipment 1,488,000 Intangible assets Franchises 160,000 Patents 195,000 Total intangible assets 355,000 Total assets $3,776,000 Liabilities and Stockholders Equity Current liabilities Accounts payable $ 455,000 Notes payable (short-term) 90,000 Dividends payable 136,000 Accrued liabilities 96,000 Total current liabilities $ 777,000 Long-term debt Bonds payable 1,000,000 Notes payable (long-term) 900,000 Total long-term liabilities 1,900,000 Total liabilities 2,677,000 Stockholders equity Paid-in capital Common stock ($5 par) $1,000,000 Paid-in capital in excess of par 80,000 1,080,000 Retained earnings* 210,000 Total paid-in capital and retained earnings 1,290,000 Less Treasury stock 191,000 Total stockholders equity 1,099,000 Total liabilities and stockholders equity $3,776,000 Sales $7,900,000 Investment revenue 63,000 Extraordinary gain 80,000 address of goods sold (4,800,000) Selling expenses (2,000,0 00) Administrative expenses (900,000) Interest expense (211,000) Net income $ 132,000 blood retained earnings $ 78,000 Net income 132,000 finishing retained earnings $ 210,000 Or ending retained earnings can be computed as follows Total stockholders equity $1,099,000 AddTreasury stock 191,000 Less Paid-in capital 1,080,000 Ending retained earnings $ 210,000