Expert answer:Need accounting help with Problem Set II

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PROBLEM 2-6A
(a)
Put the answer in the yellow cell.
2011
Earnings per share.
=$60,000/30,000 shares
(b)
Working capital.
=($20,000 + $62,000 + $73,000) – $70,000
(c)
Current ratio.
= $155,000 / $70,000
(d)
Debt to total assets ratio.
= $160,000 / $685,000
(e)
Free cash flow.
$56,000 – $38,000 – $15,000
(f)
Fill in your narative answer:
PROBLEM 13-2A
(a)
Earnings per share =
=$218,000 / 59,000
60,000* + 58,000** 
(1) 


2
*$300,000
$5
**$290,000
$5
(b)
Return on common stockholders’ equity =
=$218,000/(($465,400+$603,400)/2)
(c)
Return on assets =
=$218,000/(($852,800+$1,026,900)/2)
(d)
Current ratio =
=$377,900/$203,500
(e)
Receivables turnover =
=$1,890,540/(($102,800+$117,800)/2)
(f)
Average collection period = 365 days ÷ 17.1 = 21.3 days
=365 days / 17.1
(g)
Inventory turnover =
=$1,058,540/(($115,500+$126,000)/2)
(h)
Days in inventory =
=365 days / 8.8
(i)
Times interest earned =
= 332,000 / $22,000
(j)
Asset turnover =
=$1,890,540/(($1,026,900+$852,800)/2)
(k)
Debt to total assets =
= 423,500 / $1,026,900
(l)
Current cash debt coverage =
=$220,000/(($187,400+$203,500)/2)
(m)
Cash debt coverage =
=$220,000/(($387,400+$423,500)/2)
(n)
Free cash flow =
=$220,000 – $136,000-$70,000
Answer
2012
=$70,000/33,000 shares
=($28,000 + $70,000 + $90,000) – $75,000
= $188,000 / $75,000
= $155,000 / $760,000
$82,000 – $45,000 – $20,000
Fill in your narative answer:
Answer
CHAPTER 2: A FURTHER LOOK AT FINANCIAL
STATEMENTS
© mattjeacock/iStockphoto
The Navigator
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Scan Learning Objectives
Read Feature Story
Scan Preview
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Read Text and Answer
p. 52
Work Using the Decision Toolkit
Review Summary of Learning Objectives
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Work Comprehensive
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Answer Self-Test Questions
Complete Assignments
Go to WileyPLUS for practice and tutorials
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p. 71
Read A Look at IFRS p. 95
LEARNING OBJECTIVES
p. 53
p. 62
p. 66
After studying this chapter, you should be able to:
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1 Identify the sections of a classified balance sheet.
2 Identify tools for analyzing financial statements and ratios for computing a company’s
profitability.
3 Explain the relationship between a retained earnings statement and a statement of
stockholders’ equity.
4 Identify and compute ratios for analyzing a company’s liquidity and solvency using a
balance sheet.
5 Use the statement of cash flows to evaluate solvency.
6 Explain the meaning of generally accepted accounting principles.
7 Discuss financial reporting concepts.
Feature Story: JUST
FOOLING AROUND?
Few people could have predicted how dramatically the Internet would change the
investment world. One of the most interesting results is how it has changed the way
ordinary people invest their savings. More and more people are striking out on their
own, making their own investment decisions.
Two early pioneers in providing investment information to the masses were Tom and
David Gardner, brothers who created an online investor website called The Motley Fool.
The name comes from Shakespeare’s As You Like It. The fool in Shakespeare’s plays was
the only one who could speak unpleasant truths to kings and queens without being
killed. Tom and David view themselves as 21st-century “fools,” revealing the “truths” of
Wall Street to the small investor, who they feel has been taken advantage of by Wall
Street insiders. The Motley Fool’s online bulletin board enables investors to exchange
information and insights about companies.
Critics of these bulletin boards contend that they are simply high-tech rumor mills that
cause investors to bid up stock prices to unreasonable levels. For example, the stock
of PairGain Technologies jumped 32 percent in a single day as a result of a bogus
takeover rumor on an investment bulletin board. Some observers are concerned that
small investors—ironically, the very people the Gardner brothers are trying to help—will
be hurt the most by misinformation and intentional scams.
To show how these bulletin boards work, suppose that in a recent year you had $10,000
to invest. You were considering Best Buy Company, the largest seller of electronics
equipment in the United States. You scanned the Internet investment bulletin boards
and found messages posted by two different investors. Here are excerpts from actual
postings during the same year:
•
TMPVenus: “Where are the prospects for positive movement for this company? Poor margins,
poor management, astronomical P/E!” broachman: “I believe that this is a LONG TERM
winner, and presently at a good price.”
One says sell, and one says buy. Whom should you believe? If you had taken
“broachman’s” advice and purchased the stock, the $10,000 you invested would have
been worth over $300,000 five years later. Best Buy was one of America’s bestperforming stocks during that period of time.
Rather than getting swept away by rumors, investors must sort out the good information
from the bad. One thing is certain—as information services such as The Motley Fool
increase in number, gathering information will become even easier. Evaluating it will be
the harder task.
INSIDE CHAPTER 2…
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Can a Company Be Too Liquid? (p. 59)
When Debt Is Good (p. 60)
The Korean Discount (p. 63)
What Do These Companies Have in Common? (p. 64)
PREVIEW OF CHAPTER 2
If you are thinking of purchasing Best Buy stock, or any stock, how can you decide what
the stock is worth? If you manage J. Crew’s credit department, how should you
determine whether to extend credit to a new customer? If you are a financial executive
of IBM, how do you decide whether your company is generating adequate cash to
expand operations without borrowing? Your decision in each of these situations will be
influenced by a variety of considerations. One of them should be your careful analysis of
a company’s financial statements. The reason: Financial statements offer relevant and
reliable information, which will help you in your decision-making.
In this chapter, we take a closer look at the balance sheet and introduce some useful
ways for evaluating the information provided by the financial statements. We also
examine the financial reporting concepts underlying the financial statements. We begin
by introducing the classified balance sheet.
The Classified Balance Sheet
In Chapter 1, you learned that a balance sheet presents a snapshot of a company’s
financial position at a point in time. It lists individual asset, liability, and stockholders’
equity items. However, to improve users’ understanding of a company’s financial
position, companies often use a classified balance sheet instead. A classified
balance sheet groups together similar assets and similar liabilities, using a number of
standard classifications and sections. This is useful because items within a group have
similar economic characteristics. A classified balance sheet generally contains the
standard classifications listed in Illustration 2-1.
LEARNING OBJECTIVE 1
Identify the sections of a classified balance sheet.
Illustration 2-1: Standard balance sheet
classifications
Assets
Liabilities and Stockholders’ Equity
Current assets
Current liabilities
Long-term investments
Long-term liabilities
Property, plant, and equipment Stockholders’ equity
Intangible assets
These groupings help financial statement readers determine such things as (1) whether
the company has enough assets to pay its debts as they come due, and (2) the claims of
short- and long-term creditors on the company’s total assets. Many of these groupings
can be seen in the balance sheet of Franklin Corporation shown in Illustration 2-2. In
the sections that follow, we explain each of these groupings.
CURRENT ASSETS
Illustration 2-2: Classified balance sheet
FRANKLIN CORPORATION
Balance Sheet October 31, 2014
Assets
Current assets
Cash
$ 6,600
Debt investments
2,000
Accounts receivable
7,000
Notes receivable
1,000
Inventory
3,000
Supplies
2,100
Prepaid insurance
400
Total current assets
$22,100
Long-term investments
Stock investments
5,200
Investment in real estate
2,000 7,200
Property, plant, and equipment
Land
10,000
Equipment
$24,000
Less: Accumulated depreciation—equipment 5,000
19,000 29,000
Intangible assets
Patents
3,100
Total assets
$61,400
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable
$11,000
Accounts payable
2,100
Unearned sales revenue
900
Salaries and wages payable
1,600
Interest payable
450
Total current liabilities
$16,050
Long-term liabilities
Mortgage payable
10,000
Notes payable
1,300
Total long-term liabilities
11,300
Total liabilities
27,350
Stockholders’ equity
Common stock
14,000
Retained earnings
20,050
Total stockholders’ equity
34,050
Total liabilities and stockholders’ equity
$61,400
Helpful Hint
Recall that the accounting equation is Assets = Liabilities + Stockholders’ Equity.
Current assets are assets that a company expects to convert to cash or use up within
one year or its operating cycle, whichever is longer. In Illustration 2-2, Franklin
Corporation had current assets of $22,100. For most businesses, the cutoff for
classification as current assets is one year from the balance sheet date. For example,
accounts receivable are current assets because the company willcollect them and convert
them to cash within one year. Supplies is a current asset because the company expects to
use the supplies in operations within one year.
Some companies use a period longer than one year to classify assets and liabilities as
current because they have an operating cycle longer than one year. The operating
cycle of a company is the average time required to go from cash to cash in producing
revenue—to purchase inventory, sell it on account, and then collect cash from
customers. For most businesses, this cycle takes less than a year, so they use a one-year
cutoff. But for some businesses, such as vineyards or airplane manufacturers, this
period may be longer than a year. Except where noted, we will assume that
companies use one year to determine whether an asset or liability is current
or long-term.
Common types of current assets are (1) cash, (2) investments (such as short-term U.S.
government securities), (3) receivables (accounts receivable, notes receivable, and
interest receivable), (4) inventories, and (5) prepaid expenses (insurance and
supplies). Companies list current assets in the order in which they expect to
convert them into cash. Follow this rule when doing your homework.
Illustration 2-3 presents the current assets of Southwest Airlines Co. in a recent year.
Illustration 2-3: Current assets section
SOUTHWEST AIRLINES CO.
Balance Sheet (partial) (in millions)
Current assets
Cash and cash equivalents
$1,390
SOUTHWEST AIRLINES CO.
Balance Sheet (partial) (in millions)
Short-term investments
369
Accounts receivable
241
Inventories
181
Prepaid expenses and other current assets 420
Total current assets
$2,601
As explained later in the chapter, a company’s current assets are important in assessing
its short-term debt-paying ability.
LONG-TERM INVESTMENTS
Long-term investments are generally: (1) investments in stocks and bonds of other
corporations that are held for more than one year, (2) long-term assets such as land or
buildings that a company is not currently using in its operating activities, and (3) longterm notes receivable. In Illustration 2-2, Franklin Corporation reported total longterm investments of $7,200 on its balance sheet.
Alternative Terminology
Long-term investments are often referred to simply as investments.
Yahoo! Inc. reported long-term investments on its balance sheet in a recent year as
shown inIllustration 2-4.
Illustration 2-4: Long-term investments section
YAHOO! INC.
Balance Sheet (partial) (in thousands)
Long-term investments
Investments in securities $90,266
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are assets with relatively long useful lives that are
currently used in operating the business. This category includes land, buildings,
equipment, delivery vehicles, and furniture. In Illustration 2-2, Franklin Corporation
reported property, plant, and equipment of $29,000.
Alternative Terminology
Property, plant, and equipment is sometimes called fixed assets or plant assets.
Depreciation is the allocation of the cost of an asset to a number of years. Companies
do this by systematically assigning a portion of an asset’s cost as an expense each year
(rather than expensing the full purchase price in the year of purchase). The assets that
the company depreciates are reported on the balance sheet at cost less accumulated
depreciation. The accumulated depreciationaccount shows the total amount of
depreciation that the company has expensed thus far in the asset’s life. In Illustration
2-2, Franklin Corporation reported accumulated depreciation of $5,000.
International Note
In 2007, China adopted International Financial Reporting Standards (IFRS). This was
done in an effort to reduce fraud and increase investor confidence in financial reports.
Under these standards, many items, such as property, plant, and equipment, may be
reported at current fair values rather than historical cost.
Illustration 2-5 presents the property, plant, and equipment of Cooper Tire & Rubber
Company in a recent year.
Illustration 2-5: Property, plant, and equipment
section
COOPER TIRE & RUBBER COMPANY
Balance Sheet (partial) (in thousands)
Property, plant, and equipment
Land and land improvements $ 41,553
Buildings
298,706
Machinery and equipment
1,636,091
COOPER TIRE & RUBBER COMPANY
Balance Sheet (partial) (in thousands)
Molds, cores, and rings
268,158 $2,244,508
Less: Accumulated depreciation
1,252,692
$ 991,816
INTANGIBLE ASSETS
Many companies have assets that do not have physical substance and yet often are very
valuable. We call these assets intangible assets. One common intangible is goodwill.
Others include patents, copyrights, and trademarks or trade names that give the
company exclusive right of use for a specified period of time. Franklin Corporation
reported intangible assets of $3,100.
Helpful Hint
Sometimes intangible assets are reported under a broader heading called “Other assets.”
Illustration 2-6 shows the intangible assets of media giant Time Warner, Inc. in a
recent year.
Illustration 2-6: Intangible assets section
TIME WARNER, INC.
Balance Sheet (partial) (in millions)
Intangible assets
Goodwill
Film library
Customer lists
Cable television franchises
Sports franchises
Brands, trademarks, and other intangible assets
$40,953
2,690
2,540
38,048
262
8,313
$92,806
ASSETS SECTION OF CLASSIFIED
BALANCE SHEET
Baxter Hoffman recently received the following information related to Hoffman
Corporation’s December 31, 2014, balance sheet.
Prepaid
insurance
$
2,300
Cash
800
Equipment
10,700
Inventory
$3,400
Accumulated depreciation—
equipment
Accounts receivable
2,700
1,100
Prepare the assets section of Hoffman Corporation’s classified balance sheet.
Action Plan
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Present current assets first. Current assets are cash and other resources that the company
expects to convert to cash or use up within one year.
Present current assets in the order in which the company expects to convert them into cash.
Subtract accumulated depreciation—equipment from equipment to determine net
equipment.
Solution
HOFFMAN CORPORATION
Balance Sheet (partial)
December 31, 2014
Assets
Current assets
Cash
Accounts receivable
Inventory
Prepaid insurance
Total current assets
Property, plant, and equipment
Equipment
$
800
1,100
3,400
2,300
$
10,700
7,600
HOFFMAN CORPORATION
Balance Sheet (partial)
December 31, 2014
Less: Accumulated depreciation—equipment
Total assets
Related exercise material: BE2-2,
2,700
8,000
$15,600
2-1, and E2-4.
CURRENT LIABILITIES
In the liabilities and stockholders’ equity section of the balance sheet, the first grouping
is current liabilities. Current liabilities are obligations that the company is to pay
within the next year or operating cycle, whichever is longer. Common examples are
accounts payable, salaries and wages payable, notes payable, interest payable, and
income taxes payable. Also included as current liabilities are current maturities of longterm obligations—payments to be made within the next year on long-term obligations.
In Illustration 2-2, Franklin Corporation reported five different types of current
liabilities, for a total of $16,050.
Illustration 2-7 shows the current liabilities section adapted from the balance sheet
of Marcus Corporation in a recent year.
Illustration 2-7: Current liabilities section
MARCUS CORPORATION
Balance Sheet (partial) (in thousands)
Current liabilities
Notes payable
$ 239
Accounts payable
24,242
Current maturities of long-term debt 57,250
MARCUS CORPORATION
Balance Sheet (partial) (in thousands)
Other current liabilities
Income taxes payable
Salary and wages payable
Total current liabilities
27,477
11,215
6,720
$127,143
LONG-TERM LIABILITIES
Long-term liabilities (long-term debt) are obligations that a company expects to
pay after one year. Liabilities in this category include bonds payable, mortgages
payable, long-term notes payable, lease liabilities, and pension liabilities. Many
companies report long-term debt maturing after one year as a single amount in the
balance sheet and show the details of the debt in notes that accompany the financial
statements. Others list the various types of long-term liabilities. InIllustration 2-2,
Franklin Corporation reported long-term liabilities of $11,300.
Illustration 2-8 shows the long-term liabilities that The Procter & Gamble
Company reported in its balance sheet in a recent year.
Illustration 2-8: Long-term liabilities section
THE PROCTER & GAMBLE COMPANY
Balance Sheet (partial) (in millions)
Long-term liabilities
Long-term debt
Deferred income taxes
Other noncurrent liabilities
Total long-term liabilities
$23,375
12,015
5,147
$40,537
STOCKHOLDERS’ EQUITY
Stockholders’ equity consists of two parts: common stock and retained earnings.
Companies record as common stock the investments of assets into the business by the
stockholders. They record asretained earnings the income retained for use in the
business. These two parts, combined, make upstockholders’ equity on the balance
sheet. In Illustration 2-2 (page 49), Franklin reported common stock of $14,000 and
retained earnings of $20,050.
Alternative Terminology
Common stock is sometimes called capital stock.
BALANCE SHEET CLASSIFICATIONS
The following financial statement items were taken from the financial statements
of Callahan Corp.
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_____ Salaries and wages payable
_____ Service revenue
_____ Interest payable
_____ Goodwill
_____ Debt investments (short-term)
_____ Mortgage payable (due in 3 years)
_____ Investment in real estate
_____ Equipment
_____ Accumulated depreciation—equipment
_____ Depreciation expense
_____ Retained earnings
_____ Unearned service revenue
Match each of the items to its proper balance sheet classification, shown below. If
the item would not appear on a balance sheet, use “NA.”
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Current assets (CA)
Long-term investments (LTI)
Property, plant, and equipment (PPE)
Intangible assets (IA)
Current liabilities (CL)
Long-term liabilities (LTL)
Stockholders’ equity (SE)
Action Plan
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Analyze whether each financial statement item is an asset, liability, or stockholders’ equity
item.
Determine if asset and liability items are current or long-term.
Solution
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CL Salaries and wages payable
NA Service revenue
CL Interest payable
IA Goodwill
•
CA Debt investments (short-term)
LTL Mortgage payable (due in 3 years)
LTI Investment in real estate
PPE Equipment
PPE Accumulated depreciation—equipment
NA Depreciati …
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