Financial accounting harrison 8ed

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net Chapter The Financial Statements Short Exercises (5 min.) S 1-1 Computed amounts in boxes Total Assets = Total Liabilities + Stockholders’ Equity a $340,000 = $130,000 + $210,000 b 250,000 = 70,000 + 180,000 c 190,000 = 110,000 + 80,000 (5 min.) S 1-2 Ethics is a factor that should be included in every business and accounting decision, beyond the potential economic and legal consequences Ideally, for each decision, honesty and truthfulness should prevail, considering the rights of others The decision guidelines at the end of the chapter spell out the considerations we should take when making decisions Chapter The Financial Statements To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net Simply, we might ask ourselves three questions: (1) is the action legal? (2) Who will be affected by the decision? (3) How will the decision make me feel afterward? Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net (10 min.) S 1-3 a Corporation, Limited-liability partnership (LLP) and Limitedliability company (LLC) If any of these businesses fails and cannot pay its liabilities, creditors cannot force the owners to pay the business’s debts from the owners’ personal assets b Proprietorship There is a single owner of the business, so the owner is answerable to no other owner c Partnership If the partnership fails and cannot pay its liabilities, creditors can force the partners to pay the business’s debts from their personal assets A partnership affords more protection for creditors than a proprietorship because there are two or more owners to share this liability (5 min.) S 1-4 The entity assumption applies Application of the entity assumption will separate Newman’s personal assets from the assets of Quality Food Brands This will help Newman, investors, and lenders know how much in assets the business controls, and this knowledge will help all parties evaluate the business realistically Chapter The Financial Statements To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net (5-10 min.) S 1-5 (5 min.) S 1-6 a Historical cost principle b Stable-monetary-unit assumption c Entity assumption d Historical cost principle Owners’ Equity = Assets − Liabilities This way of determining the amount of owners’ equity applies to any company, your household, or a single Denny’s restaurant Liabilities = Assets − Owners’ Equity Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net (5 min.) S 1-7 Assets are the economic resources of a business that are expected to produce a benefit in the future Owners’ equity represents the insider claims of a business, the owners’ interest in its assets Assets and owners’ equity differ in that assets are resources and owners’ equity is a claim to assets Assets must be at least as large as owners’ equity, so equity can be smaller than assets Both liabilities and owners’ equity are claims to assets Liabilities are the outsider claims to the assets of a business; they are obligations to pay creditors Owners’ equity represents the insider claims to the assets of the business; they are the owners’ interest in its assets Chapter The Financial Statements To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net (5-10 min.) a Accounts payable L g Accounts receivable A b Common stock S h Long-term debt L c Supplies A i Merchandise inventory A d Retained earnings S j Notes payable e Land A k Expenses payable L f Prepaid expenses A l Equipment A L (5 min.) Revenues and expenses Net income (or net loss) S 1-8 Financial Accounting 8/e Solutions Manual S 1-9 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net (5 min.) S 1-10 Call Anywhere Wireless, Inc Income Statement Year Ended December 31, 2010 Millions $ 94 23 $ 71 Revenues…………………………………… Expenses…………………………………… Net income………………………………… (5 min.) S 1-11 Roam Corp Statement of Retained Earnings Year Ended December 31, 2010 Millions Retained earnings: Balance, December 31, 2009……… Net income ($380 − $250)…….…… Less: Dividends……………………… Balance, December 31, 2010………… Chapter $210 130 (43) $297 The Financial Statements To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net (10 min.) S 1-12 Tommer Products Balance Sheet December 31, 2010 ASSETS Current assets: Cash…………………………………………………… Receivables………………………………………… Inventory……………………………………………… Total current assets………………………………… Equipment……………………………………………… Total assets…………………………………………… LIABILITIES Current liabilities: Accounts payable…………………………………… Total current liabilities…………………………… Long-term liabilities: Long-term notes payable………………………… Total liabilities……………………………………… STOCKHOLDERS’ EQUITY Common stock………………………………………… Retained earnings……………………………………… Total stockholders’ equity………………………… Total liabilities and stockholders’ equity………… $ 12,000 5,000 42,000 59,000 82,000 $141,000 $ 17,000 17,000 78,000 $95,000 14,800 31,200* 46,000 $141,000 _ *Computation of retained earnings: Total assets ($141,000) − current liabilities ($17,000) − longterm notes payable ($78,000) − common stock ($14,800) = $31,200 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net (10-15 min.) Lanos Medical, Inc Statement of Cash Flows Year Ended December 31, 2010 Cash flows from operating activities: Net income……………………………………… Adjustments to reconcile net income to net cash provided by operating activities… Net cash provided by operating activities Cash flows from investing activities: Purchases of $(35,000) equipment………… Net cash used for investing activities…… Cash flows from financing activities: Payment of $(15,000) dividends…………… Net cash used for financing activities…… Net increase in cash……………………………… Cash balance, December 31, 2009……………… Cash balance, December 31, 2010……………… Chapter S 1-13 $ 95,000 (20,000) 75,000 (35,000) (15,000) 25,000 25,000 $ 50,000 The Financial Statements To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net Sell higher profit-margin products Cost of sales is 68.2% of sales, compared to 64.8% for the industry average Consequently, gross profit is only 31.8% of net sales, which is less than the 35.2% industry average Cut operating expenses below their current level of 37.1% of sales by finding cheaper ways of doing business The company should consider operating out of a less expensive building, spending less on advertising, laying off employees, and other cost-cutting measures to trim operating expenses 1096 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net Ethical Issue Req The ethical issue is: Should Turnberry reclassify its investments from long-term to short-term? Req and Req The stakeholders in the decision are Turnberry Corporation, its officers and directors, and its current and future creditors Economic analysis: Reclassifying the long-term investments as short-term will increase current assets and, therefore, increase the current ratio Turnberry’s financial position is not improved by this reclassification because the company’s asset position has not changed However, its short-term debt paying ability will appear to be improved and thus might entice current or future creditors to loan money to the corporation that they would otherwise not lend, subjecting them to possible loan losses in the future, should Turnberry prove unable to service their debt Chapter 13 Financial Statement Analysis 1097 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net Legal analysis: If Turnberry’s management truly believes that they intend to sell the investments within a year, thus justifying reclassification of the investments to current assets, nothing illegal has happened However, intentionally falsifying financial statements is considered illegal in all states, and is also a federal crime, with criminal or civil penalties, or both Ethical analysis: Reclassifying a long-term investment as current to meet a debt agreement does not, in itself, brand Turnberry managers as unethical The managers may have honestly intended to sell the investments in order to meet the company’s obligations In that case, the managers took appropriate action Req Reclassifying the investments from current back to long-term may suggest to some observers that managers are playing a shell game However, the case states that sales subsequent to the first reclassification have improved the current ratio Under these circumstances, Turnberry may not need to sell the investments The managers may prefer to hold the investments beyond one year and, therefore, need to 1098 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net reclassify them as long-term In that case, the managers’ action is appropriate This case illustrates how gray accounting can be Here the debt agreement depends on the current ratio, which is affected by an asset classification that managers control simply by their intentions Because the managers’ intentions cannot be observed, it would be hard to prove that the managers are acting unethically Chapter 13 Financial Statement Analysis 1099 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net Focus on Financials: Amazon.com, Inc (1-2 hours) Req 1 Ability to pay current liabilities Ratio Computation 2008 2007 Interpretation 6,157/4,746 = 1.3 5,164/3,714 = 1.4 Declined slightly Current CA*/CL (2,769 + (2,539 + Declined slightly Acid-test QA**/CL 958)/4,746 = 78 573)/3,714 = 83 (Quick) CA = Current Assets QA = Quick Assets (Cash and equivalents + Marketable securities) Ability to sell inventory and collect receivables Ratio Computation 2008 2007 Interpretation 14,896/1,300 = 11,482/1,039 = Improved slightly Inventory COS/Avg 11.45 11.05 turnover Inventory* 19,166/766 = 14,835/552 = Declined slightly but Accounts Net 25.02 26.88 still high receivable sales/Avg turnover receivables** 766 552 Lengthened slightly Days sales Avg (19,166/365) = (14,835/365) = but still low in receivables**/ 14.59 days 13.58 days receivables daily sales *Avg inventory 2008: (1,399 + 1,200)/2 = 1,300 2007: (1,200 + 8771)/2 = 1,039 **Avg receivables 2008: (827 + 705)/2 = 766 2007: (705 + 3991)/2 = 552 Obtained from 2007 annual report at www.sec.gov 1100 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net (continued) Focus on Financials: Amazon.com, Inc Ability to pay long-term debt Ratio Debt Ratio Computation Total debt/Total current assets 2008 2007 (4,746 + 409 + 487) /8,314 (3,714 + 1,282 + 292)/6,485 Interpretation Improved significantly = 678 Times Interest Earned Income from operations/interest expense 842/83 = = 815 655/90 = = 10.14 = 7.28 Chapter 13 Improved significantly Financial Statement Analysis 1101 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net (continued) Focus on Financials: Amazon.com, Inc Profitability Ratio ROS ROA ROE EPS Computation Net income/Net sales Net income + Interest expense /Average total assets* Net income – preferred dividends/Average stockholders’ equity** Net income – preferred dividends/Average common shares outstanding 2008 2007 Interpretation 645/19,166 476/14,835 Improved slightly = 034 (645 + 71) 7,400 = 032 (476 + 77) 5,424 Declined slightly but still relatively strong = 097 = 102 645 – 1,935 476 – 814 = 333 584 645 – (428 + 416)/2 476 – (416 + 414 )/2 =$1.52 $1.15 Declined but still strong In both years, exceeded ROA Improved *Average total assets 2008: ($8,314 + $6,485)/2 = 7,400 2007: ($6,485 + $4,363 )/2 = 5,424 **Average s/e 2008: ($2,672 + $1,197)/2 = 1,935 2007: ($1,197 + $431 )/2 = 814 Obtained prior year data from 2007 annual report at www.sec.gov 1102 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net (continued) Focus on Financials: Amazon.com, Inc Cash flow from operations: 2008: $1,697 (per share = $1,697/423) = $4.01 2007: $1,405 (per share = $1,405/413) = $3.40 Cash flow from operations substantially improved, both on a total and per share basis In 2008, cash flow from operations exceeded net income by about 263% In 2007, cash flow from operations exceeded net income by 295% The company is generating significant amounts of cash from operations and using it wisely Evaluating stock as an investment Student opinions on this question will vary The following statistics will bolster their positions Ratio Price/ earnings Computation Market price at year end/EPS Dividend per share of common stock Book Stockholders’ value per equity – preferred common equity/ Common share shares outstanding 20081 20071 51.28 1.52 92.64 1.15 = 33.73 = 80.55 0 Dividend yield 2,672 – 428 1,197 – 416 = 6.24 2.87 Chapter 13 Interpretation Down significantly Partly due to market factors Stock still a strong performer, given the bear market at 12/31/2008 No dividends paid Substantially higher Financial Statement Analysis 1103 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net Amazon.com, Inc appears to be well positioned for the future Most would say their stock would be a decent buy at $51.28 a share On April 24, 2009, the stock was selling for $84.46, so in retrospect, it would have been a very good investment on December 31, 2008 It increased in price by 64% in months 1104 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net Focus on Analysis: Foot Locker, Inc (20 min.) Req Trend analysis: Net sales……………………………………… Cost of sales………………………………… Gross profit ($)…(sales – cost of sales) Gross profit …… Income from continuing operations, before tax …… Net income (net loss)…………………… 2007 96% 102% $1,420 83% -112% 2006 102% 102% $1,736 102% 96% 19% 95% 2005 100% 100% $1,709 100% 100% 100 The trend analysis paints an unfavorable trend in Foot Locker’s operations over the 2005 to 2007 period Sales increased very little in 2006, and then started to decline in 2007 Meanwhile, cost of sales in 2007 continued at an increased level, causing gross margin to decline to only 83% of its 2005 level Operating expenses also remained high, forcing the company into a loss from continuing operations in 2007 Req The following figures come from Foot Locker, Inc.’s 2008 annual report (compared to 2005 used as a base year): Sales $5,237 ($5,653) Cost of sales $3,777 ($3,944) Gross profit $1,460 ($1,709) Chapter 13 Financial Statement Analysis 1105 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net (continued) Focus on Analysis: Foot Locker, Inc Income, continuing operations, before tax ($100) $405 Net income ($ 80) $264 In horizontal analysis percentages, these numbers are: Sales 93% Cost of sales 96% Gross profit 85% Income, continuing operations, before tax -125% Net income -130% 100% 100% 100% 100% 100% Req Student views on this part will vary Foot Locker, Inc., like other mid-size retailers, is really suffering from the effects of the global economic recession of 2008 and 2009 The company will probably have to cut back significantly on expenses in the future in order to survive, which will mean closing its unprofitable stores and laying off employees in order to conserve cash until economic times improve They will 1106 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net probably survive, but not without some pain in the near to intermediate term Their stock closed at $11.90 a share on April 24, 2009 Analysts ratings on that day were mixed between buy and hold Chapter 13 Financial Statement Analysis 1107 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net Group Projects (2-3 hours) Student responses will vary on this assignment 1108 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net San Jose State University Financial Statement Analysis F/S Adjustment Issues Revenue Recognition and Earnings Management Returned merchandise volume A/R aging Level of warranty expense Earnings management vs earnings fraud Inventory Cost Flows LIFOFIFO restatement Choice of cost flow assumption LIFO liquidation layers Obsolescent and/or slow-moving inventory Inventory financing Capital Assets Historical vs current value Depreciable lives and methods Maintenance and repair policies Intangibles Hidden values on the balance sheet Cost expiration periods In-process R&D and goodwill issues Intrinsic nature of recorded and unrecorded intangibles Liabilities Expense recognition Solvency and liquidity Contingencies Off balance sheet financing (leases) Hybrid securities—what is really debt? Concentration of risk Leases Operatingcapital lease conversion FASB 13 rationale for classification as capital lease Retirement Benefits Underfunding/overfunding analysis Reasonableness of assumptions Magnitude of actuarial gains and losses Income Taxes Composition of deferred liabilities and assets Composition of income tax expense Effective tax rate Use of the valuation allowance To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com www.elsolucionario.net Equity and Comprehensive Income Earnings sustainability impact Corporate Acquisitions Method used; earnings/cash drag impact Earnings management via reserves and “hidden” assets Investments Classification Unrealized gains or losses Equity method impact on cash and income Consolidation policies Foreign Exchange Reporting Functional currency determination Currency movement risk Consistency with respect to unrealized gains and losses on translation/remeasurement Segment Reporting Shifts in source of profitable operations FX exposure Industry exposure ... (2) Who will be affected by the decision? (3) How will the decision make me feel afterward? Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit... company, your household, or a single Denny’s restaurant Liabilities = Assets − Owners’ Equity Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit... Prepaid expenses A l Equipment A L (5 min.) Revenues and expenses Net income (or net loss) S 1-8 Financial Accounting 8/e Solutions Manual S 1-9 To download more slides, ebook, solutions and test bank,