Intermediate Accounting 14th Chapter 5

Questions 1. The isotropy shadowvas provides information approximately the spirit and measuring rods of investitures in attempt resources, obligations to enterprise creditors, and the owners impartiality in sack incomework enterprise resources. That information non completely complements information about the comp whiznts of income, simply also contri butes to monetary reporting by providing a basis for (1) computation rates of return, (2) evaluating the bang-up structure of the enterprise, and (3) assessing the lucidity and fiscal flexibility of the enterprise. 2. Solvency refers to the ability of an enterprise to pay its debts as they mature.For example, when a comp any(prenominal) carries a high take aim of long-run debt relative to assets, it has lower solvency. Information on long-term obligations, such as long-term debt and tick asides pay sufficient, in com comparisonison to total assets apprize be apply to assess resources that forget be needed to agree these fixed obligations (such as interest and principal payments). 3. pecuniary flexibility is the ability of an enterprise to take telling actions to alter the tot ups and timing of property flows so it can respond to unannounced needs and opportunities.An enterprise with a high degree of monetary flexibility is expose able to survive bad times, to rec everyplace from unexpected setbacks, and to take advantage of profitable and unexpected investment opportunities. Generally, the greater the monetary flexibility, the lower the risk of enterprise failure. 4. Some situations in which estimates affect amounts inform in the end canvas tent include (a)allowance for provisionary considers. (b)depreciable lives and estimated scavenge values for whole caboodle and equipment. (c)warranty returns. d)determining the amount of taxations that should be put down as unearned. 5. An accession in inventories increases underway assets, which is in the numerator of the ca tamenia proportion. Therefore, inventory increases leave behind increase the underway ratio. In general, an increase in the topical ratio indicates a lodge has better liquidity, since there atomic number 18 more circulating(prenominal) assets relative to current liabilities. 6. fluidity describes the amount of time that is expected to elapse until an asset is diversifyed into immediate payment or until a indebtedness has to be paid.The ranking of the assets given in arrangement of liquidity is (1) (d) Short-term investments. (2) (e) Accounts collectable. (3) (b) stock. (4) (c) Buildings. (5) (a) Goodwill. 7. The major limitations of the balance tatter be (a)The values express atomic number 18 broadly historical and not at fair value. (b)Estimates piss to be used in many instances, such as in the determination of collectibility of dues or purpose the approximate useful life of long-term existent and intangible assets. c)Many items, even though they have financi al value to the business, presently atomic number 18 not recorded. iodine example is the value of a fraternitys human resources. 8. Some items of value to technology companies such as Intel or IBM argon the value of enquiry and development (new products that atomic number 18 being developed but which atomic number 18 not yet marketable), the value of the apt uppercase 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 high society reputation or do brand (e. . , the Intel Inside logo). In roughly cases, the reasons wherefore the value of these items are not recorded in the balance sheet concern the lack of close representation of the estimates of the future bills flows that will be generated by these assets (for all three types) and the ability to subdue the use of the asset (in the case of employees). Being able to reliably measure the expected future benefits and to stop the use of an item are essential elements of the interpretation of an asset, according to the Conceptual Framework. 9.Classification in financial storys helps users by grouping items with similar characteristics and separating items with different characteristics. circulating(prenominal) assets are expected to be converted to currency within one twelvemonth or one direct cycle, whichever is longerproperty, form and equipment will provide cash inflows over a longer period of time. Thus, separating long-term assets from current assets facilitates computation of useful ratios such as the current ratio. 10. Separate amounts should be account for accounts receivable and notes receivable.The amounts should be report 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 verifying, should be understandably identified. 11. No. Available-for- deal securi ties should be reported as a current asset only if management expects to convert them into cash as needed within one year or the operational 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 affinity between current assets and current liabilities is that current liabilities are those obligations that are reasonably expected to be liquidated all through the use of current assets or the origin of other current liabilities. 13. The total selling outlay 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 rest $12,000,000 should be reported as unearned revenue, a current indebtedness in the 12/31/12 balance sheet (24/40 X $20,000,000). 14.Working with child(p) is the excess of total current assets over total current liabilities. This excess is sometimes called net working capital. Working capit al represents the net amount of a companys relatively liquid resources. That is, it is the liquidity buffer available to meet the financial demands of the in operation(p) cycle. 15. (a)Shareholders Equity. Treasury fund (at cost). (b)Current Assets. Included in immediate payment. (c)Investments. bolt down held as an investment. (d)Investments. Sinking fund. (e)Long-term debt (adjunct account to bonds collectable). Unamortized indemnity on bonds collectable. (f)Intangible Assets. Copyrights. (g)Investments. Employees pension fund, with subcaptions of gold and Securities if desired. (Assumes that the company slake owns these assets. ) (h)Shareholders Equity. Premium on capital stock or summariseitional paid-in capital. (i)Investments. Nature of investments should be given together with parenthetical information as follows pledged to catch loans payable to banks. 16. (a) stipend for doubtful accounts receivable should be deducted from accounts receivable in curren t assets. b)Merchandise held on consignment should not push through on the consignees balance sheet except possibly as a note to the financial averments. (c)Advances received on sales acquire are normally a current financial obligation and should be shown as such in the balance sheet. (d) capital surrender value of life insurance should be shown as a long-term investment. (e) knock down 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 section for intangible assets. h)Accumulated depreciation of plant and equipment should be deducted from the plant and equipment accounts. (i)Materials in transit 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, a right-hand(a) deal referred to a s net realizable value. The method most generally followed is to deduct from the total accounts receivable the amount of the allowance for 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 stock of other companies) are stated at fair value. (e)Prepaid expenses should be stated at cost less the amount apportioned to and written off over the previous account statement periods. 18. Assets are defined as probable future sparing benefits obtained or controlled by a particular entity as a result of past proceeding or events. If a construct is occupyd 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 net income is a source of assets, but is not an asset itself. For example, even though the cash in hand 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 pee the company has an obligation to repay the note in the future. Similarly, even though the stipend are invested in the business, contain requital is not reported as an asset. It is reported as part of shareholders impartiality 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 divine revelation as to their terms. apiece year, as the profit is determined, notes of an amount equal to two-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 purpose of a tale of cash flows is to provide relevant information about the cash receipts and cash payments of an enterpri se 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 financial backing activity classifications.While the income statement and the balance sheet are accrual basis statements, the statement of cash flows is a cash basis statementnoncash items are omitted. 22. The difference between these two amounts may be due 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 diminish in an existing current liability (e. g. , accounts payable would decrease cash provided by operations without alter net income). 3. The difference between these two amounts could be due to noncash charges that appear in the income statement. Examples of noncash charges are depreciation, depletion, and amortization of intangibles. Expenses r ecorded but unpaid (e. g. , increase in accounts payable) and collection of previously recorded sales on credit (i. e. , now decreasing accounts receivable) also would cause cash provided by operating activities to exceed net income. 24. Operating activities enquire the cash effects of transactions that enter into the determination of net income.Investing activities include qualification 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) cyberspace income is correct downward by deducting $5,000 from $90,000 and reporting cash provided by operating activities as $85,000. (b)The issuance of the best-loved 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 operating activities Net income $90,000 Adjustments to pay off 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 commonsense 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 addendum 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 arbitrary cash flow a company has for get additional investments, retiring 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 news report 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 disclo sure is required in the financial statements. The reason for disclosing these contractual situations is that these commitments are of a long-term nature, are often authoritative in amount, and are very important to the companys well-being. 32.The profession has recommended that the use of the word tautologic be discontinued in balance sheet presentations of owners equity. This term has a connotation outside 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 confusing to the non-accountant and leads to misinterpretation. Brief physical exercise 1. Current assets Cash $ 30,000 Accounts receivable $110,000 slight compensation for doubtful accounts 8,000 102,000 Inventory 290,000 Prepaid insurance 9,500 gibe current assets $431,500Exercise (a)If the investment in preferred stock is readily marketable and held primarily 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 out as available-for-sale. Available for sale securities are separate 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 properly 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 serve 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 equipm ent section. (g)Current asset. (h)Current liability. (i)Retained earnings. j)Current asset. (k)Current liability. 4. GULISTAN INC. Balance Sheet December 31, 20XX Assets Current assets Cash $ xxx little Cash restricted for plant intricacy thirty $ xxx Accounts receivable xxx slight Allowance for doubtful accounts xxx XXX Notes receivable XXX Receivablesofficers XXX Inventories perfect goods XXX Work in process XXX cutting 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 essential long-term investments XXX Property, plant, and equipment Buildings XXX slight Accum. depreciation buildings XXX XXX Intangible assets Copyrights XXX radical assets $XXX Liabilities and Shareholders Equity Current liabilities Salaries and wages payable $XXX Notes payable, short-term XXX Unearned subscripti ons revenue XXX Unearned rent revenue XXX wide current liabilities $XXX Long-term debt Bonds payable, due in four years $XXX Less Discount on bonds payable (XXX) XXX count liabilities XXX Stockholders equity Capital stock public stock XXX Additional paid-in capital compensable in capital in excess of parcommon stock XXX rack up paid-in capital XXX Retained earnings XXX lend 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)-o r-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 December 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 Buil dings 1,040,000 Less Accum. depreciation 352,000 688,000 Equipment 600,000 Less Accum. epreciation 60,000 540,000 Total property, plant, and 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 bizarre gain 80,000 Cost of goods sold (4,800,000) Selling expenses (2,000,000) administrative expenses (900,000) Interest expense (211,000) Net income $ 132,000 Beginning retained earnings $ 78,000 Net income 132,000 resultant 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