Intermediate Accounting Stice Stice Skousen

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CHAPTER 21

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 Analysis of Financial Statements St atements MULTIPLE CHOICE QUESTIONS Theory/Definitional Qe!tion!

1 2 3 4 # & +   1 11 12 13 14 1# 1& 1+ 1 1

Usefulness of the common-size financial statement Use of common-size statements True/false st statements ab about fifinancial st statement an analysis Effect of current asset/liability increase on worin! ca"ital $urrent ratio as measure of short-term sol%ency Effect of F'F( to )'F( chan!e *ust before risin! "r "rices E,am"les of transactions increasin! current ratio Use of tra.e recei%ables in in aci. test an. recei%able tu turno%er   0hether a hi!her cu current ratio al always me means a better co com"any efinition of of historical co cost/constant .o .ollar ac accountin! efinition of current cost/nominal .ollar accountin! efinition of an unrealize. hol.in! !ain E,am"le of monetary item ol.in! bo bon.s "a "ayable as as a he.!e a! a!ainst inflationary titimes E,am"le of nonmonetary item $urrent cost accountin!- -can be either nominal .ollars or constant .ollars rimary factor in in .e .eterminin! fu functional cu currency of subsi.iary isclosure of translation a. a.*ustments 5eetin! the nee.s of international in%estors

Co"#tational Qe!tion!

2 21 22 23 24 2# 2& 2+ 2 2 3

$om"utation of current ratio $om"utation of accounts recei%able turno%er   $om"utation of in%entory turno%er   $om"utation of !ross mar!in $om"utation of times bon. interest earne. $om"utation of return on common stochol.ers6 e7uity $om"utation of number of .ays8 sales in a%era!e in%entories $om"utation of "rice-earnin!s ratio $om"utation of times interest earne. ratio $om"utation of in%entory turno%er   $om"utation of "rice-earnin!s ratio 1

2

$ha"ter 21  Analysis of Financial Statements

31 32 33 34

Effect of of "r "re"arin! fifinancial st statements a. a.*uste. fo for "r "rice-le -le%el ch chan!es 9aluation of machinery on a "rice-le%el a.*uste. balance sheet $om"utation of of "urchasin! "o "ower loss on on ne net monetary items $om"utation of of re realize. ho hol.in! !a !ain un un.er cu current co cost/nominal .o .ollar  accountin! etermination of of en en.in! in in%entory on on co com"arati%e co constant "u "urchasin! "ower a.*uste. balance sheet $om"utation of unrealize. hol.in! !ain un.er current cost/nominal .ollar accountin! $om"utation of unrealize. hol.in! !ain $om"utation of net monetary "osition $om"utation of translate. net income $om"utation of of translation a. a.*ustment amount

3# 3& 3+ 3 3 4

PRO$LEMS 1 2

re"are common-size balance sheet com"arin! "ercenta!es $om"utation of of in in%entory tu turno%er ra rate an an. nu number of of .a .ays6 sa sales in in in%entory $om"utation of of current ratio: ne net an. !r !ross mar!in: .ebt-to-e7 -e7uity ratio:

3 etc; 4 # & +    1 11  12  12  13  13 14 1# 1& 1+ 1 1 2

$om"utation of of in in%entory tu turno%er: nu number of of .a .ays6 sa sales in in in in%entory: !ross mar!in $om"utation of recei%ables turno%er: number of .ays6 sales in recei%ables $om"utation of o f ea earnin!s on o n e7 e7uity: ti times bo bon. in interest ea earne.: E ES: "rice-earnin!s ratio: boo %alue "er share: .ebt-to-e7uity ratio $om"utation o f to total e7ui"ment "u " urchases: ca c ash " ai ai. fo f or ta t a,es an a n. .i%i.en.s $om"utation of en. of year "urchasin! "ower !ains/losses re"are balance sheet restatement $om"utation of of re realize. ho hol.in! !a !ain or or lo loss an an. un unrealize. ho hol.in! !ain or loss re"are an an in income st statement re restate. in in te terms of of en en.-of-year co constant .ollars; re"are translate. balance sheet re"are translate. trial balance re"aration of Form 2F reconciliation $om"rehensi%e statement of cash flows Accountin! .ifferences an. ratio analysis Accountin! .ifferences an. ratio analysis Accountin! .ifferences an. ratio analysis re"aration of Form 2F reconciliation re"aration of Form 2F reconciliation

Test etu >eturn rn on on in%es in%estm tmen entt .; Total tal asset asset turn turno% o%er  er  &; 'f a fir firm m cha chan! n!es es its its in% in%en ento tory ry me metho. tho. fro from F' F'F( to )'F )'F( ( *us *ustt "ri "rior or to to a "erio. of ris risin! in! "ri "rice ces s: the effect in the ne,t e,t "erio. rio. will be $urrent $urrent >atio >atio 'n%ent 'n%entory ory Turno% Turno%er  er  a; @o effect 'ncrease b; @o effect ecrease c; 'ncrease ecrease .; ecrease 'ncrease

b )(1

+; 0hich 0hich of of the the fol follo lowi win! n! tra trans nsac acti tion ons s wou woul. l. inc incre reas ase e a fir firm6 m6s s cur curre rent nt rat ratio io= = a; urchase of in%entory on account b; aymen aymentt of of accou accounts nts "ayable "ayable c; $ollecti $ollection on of of acco account unts s recei% recei%able able .; urchas urchase e of tem"ora tem"orary ry in%estm in%estment ents s for cash cash

c )(1

; ow ow are are tra tra.e .e rec recei ei%a %abl bles es use use. . in the the calc calcul ulat atio ion n of each each of of the the fol follo low win!= in!= >ecei%able $urrent >atio Turno%er a; @ot use. @umerator   b; @umerator @umerator   c; @umerator enominator   .; enominator @umerator  

b )(1 )(1

c )(4

; 'n com"arin! the current ratios of two com"anies: why is it in%ali. to assume that hat the the com" com"an any y with the the hi! hi!he herr cur curre rent nt rat ratio is the bett better er com" com"an any y= a; A hi!h current current ratio may in.icate ina.e7uate ina.e7uate in%entory in%entory on han.; han.; b; A hi!h hi!h current current ratio may in.ica in.icate te ineffic inefficient ient use of %arious %arious assets assets an. liabilities; c; The two two com"anies com"anies may .efine worin! worin! ca"ital ca"ital in .iff .ifferent erent terms; terms; .; The two two com"ani com"anies es may be .iffer .ifferent ent sizes sizes;; 1; 1; A met metho ho. . of accou account ntin in! ! base. base. on meas measur ures es of hist histor oric ical al "rice "rices s in .olla .ollars rs:: each of wh which ha has th the sa same !eneral "u "urchasin! "ower: is a; current current cost/ cost/cons constant tant .oll .ollar ar accounti accountin!; n!; b; current current cost/ cost/nom nominal inal .olla .ollarr accounti accountin!; n!; c; historic historical al cost/con cost/constan stantt .ollar .ollar account accountin!; in!;

Test ate when .i%i.en.s were .eclare. an. "ai.;;;;;;;;;;;;;;;;;;;;;; ;2## Translate. net income for 22 is a; C&41:2#; b; C&+:#; c; C131:2#; .; C+:#;

b )(#

4; Toyo Enter"rises: a subsi.iary of 0orl.wi.e Enter"rises base. in allas: re"orte. the followin! information at the en. of its first year of o"erations all in yenB assets--11::? e,"enses--41::? liabilities-+:#:? ca"ital stoc--#:#:? re%enues--4::; >ele%ant e,chan!e rates are as followsB (n .ate subsi.iary stoc was "urchase.;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C;#  A%era!e rate for the year;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; ;+  At year en.;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; ;+#  As a result of the translation "rocess: what amount is recor.e. on the financial statements as the translation a.*ustment= a; C21: .ebit a.*ustment b; C+&: .ebit a.*ustment c; C21: cre.it a.*ustment .; C+&: cre.it a.*ustment

PRO$LEMS Problem 1

$om"arati%e balance sheet .ata for the A..yson $o; at the en. of 21 an. 22 followsB  A..yson $om"any $on.ense. $om"arati%e etaine. earnin!s;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; Total stochol.ers6 e7uity;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; Total liabilities an. stochol.ers6 e7uity;;;;;;;;;;;;;;;;;;;;;;;;;;;;

C

+:# #: 4&: 13:3 C2&: C34+:4

C

+:# #: 4&: 13&: C24:4 C22:3

re"are a common-size balance sheet com"arin! financial structure "ercenta!es for the two-year "erio.; Solution 1

)(1  A..yson $om"any $on.ense. $ommon-Size etaine. earnin!s;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; Total stochol.ers6 e7uity;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; Total liabilities an. stochol.ers6 e7uity;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;

Problem 2 

The in%entory of efun. >ecei%able;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1:+#

C 2:2 41:# +: 3: #:  3# 1:4

The followin! a..itional information relates to 22B a @et income for the year: C1:; b e"reciation e,"ense for the year: C+:4; c 'ncome ta, e,"ense for the year: C3#:; . urin! the year: e7ui"ment was o%erhaule. at a cost of C2:#; The cost was .ebite. to accumulate. .e"reciation; e urin! the year: e7ui"ment with a boo %alue of C1: was sol.; A loss of C1:1 was realize. on the sale; $om"ute the followin!B 1 Total e7ui"ment "urchases .urin! the year; 2 $ash "ai. for income ta,es .urin! the year; 3 $ash "ai. for .i%i.en.s .urin! the year; Solution  

)(& 1

etaine. Earnin!s;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;

C2:# C3: 3+:# 1#: C2:#

The !eneral "rice in.e, for 22 is as followsB ate rice 'n.e, Danuary 1 1 Duly 1 11 urin! the first half of 22: the !eneral "rice in.e, rose e%enly an. the followin! transactions occurre.B  A"ril 1 5ay 1 Duly 1

urchase. e7ui"ment with a three-year estimate. useful life an. no sal%a!e %alue for C#2:# cash strai!ht-line .e"reciation use.; ai. C1#: towar. the outstan.in! liability; >ecor.e. .e"reciation on e7ui"ment .e"reciation is the amount of  o"eratin! loss as there were no re%enue-"ro.ucin! acti%ities;

re"are a balance sheet restate. in terms of Duly 1: 22: .ollars; Solution "

)(4 0estlon $or"; ealize. hol.in! !ain;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C 3#: Unrealize. hol.in! !ain;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;

C14: :

4 $urrent costOOOOOOOOOOOOOOOOOOO; C 2: urchase "rice;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; +: >ealize. hol.in! !ainOOOOOOOOOOOOOOO C 12: Unrealize. hol.in! loss;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;

C #: &:

C &:

C 1: 

Problem 11

The income statement "re"are. in con%entional form for the Thon $o; on ecember 31: 22: is as followsB Thon $o; 'ncome Statement For Hear En.e. ecember 31: 22 Sales;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; $ost of !oo.s sol.B 'n%entory: Danuary 1: 22;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C1#+:# urchases;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; #+: oo.s a%ailable for sale;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C+2+:# 'n%entory: ecember 31: 22;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 2:# ross "rofit on sales;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; ("eratin! e,"enses;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 'ncome before income ta,es;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 'ncome ta,es;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; @et income;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;

C:

&4#: C34#: 22#: C12: 4+:# C +2:1#

The followin! .ata were a%ailable in a.*ustin! the income statementB $onsumer rice 'n.e, etaine. earnin!s;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;  

&4: +4: 12:# 2:# 1+:

The e,chan!e rate for Jorean won on Duly 1#: 22: is C;+; re"are a translate. balance sheet as of Duly 1#: 22; Solution 12 

)(# 'n Jorean 0on

E,chan!e

$ash;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;  Accounts recei%able;;;;;;;;;;;;;;;;;;;; 'n%entory;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; lant assets net;;;;;;;;;;;;;;;;;;;;;;;;  Accounts "ayable;;;;;;;;;;;;;;;;;;;;;;;; @on-current liabilities;;;;;;;;;;;;;;;;;; $a"ital stoc;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; >etaine. earnin!s;;;;;;;;;;;;;;;;;;;;;;;  

in thousan.s 11:2# &2:# #+:2# 4: 1+:

>ate C;+ ;+ ;+ ;+

'n U;S; C C +:+# 43+:# 4:+# 342:3 C1:2#:3

&4: +4: 12:# 2:#

;+ ;+ ;+ ;+

C 44: #24:3 +:# 1:# 1+:

C1:2#:3 Problem 13

Financial information for Toro Enter"rises at the en. of 22 is as followsB French Francs $urrent assets;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 14:#: E7ui"ment;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; :+#: $urrent liabilities;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; &:#: )on!-term .ebt;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 3:2: $a"ital stoc;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1:&: >etaine. earnin!s Danuary 1: 22;;;;;;;;;;;;;;;; :2#: >e%enues;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1:4#: E,"enses;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; &:+#: >ele%ant e,chan!e rates are as followsB 0hen Toro was "urchase.;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; $urrent e,chan!e rate;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;  A%era!e rate for the year;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;

C ;2 ;32 ;2

'n a..ition: the com"ute. retaine. earnin!s balance from the "rior year8s translate. financial statements is C2:4#:; re"are a translate. trial balance for Toro Enter"rises;

Solution 13

)(# $urrent assets;;;;;;;;;;;;;;;;;;;;;;;;;;;;; E7ui"ment;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; E,"enses;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;

'n Francs in thousan.s 14:# :+# &:+# 31:

$urrent liabilities;;;;;;;;;;;;;;;;;;;;;;;;; &:# )on!-term .ebt;;;;;;;;;;;;;;;;;;;;;;;;;;;; 3:2 $a"ital stoc;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1:& >etaine. earnin!s Danuary 1: 1:2#com"ute. >e%enues;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1:4# Translation a.*ustment;;;;;;;;;;;;;;;; 31:

E,chan!e >ate ;32 ;32 ;2 ;32 ;32 ;2 2:4# ;2

'n U;S; C in thousan.s C 4:&4 3:12 1: C :&# C 2: 1:24 32 2:2& # C :&#

Problem 14

The followin! financial information is a%ailable for aul $om"any: a hy"othetical nonU;S; firm with shares liste. on a U;S; stoc e,chan!eB @et income com"ute. accor.in! to home country AAOOOO;; : Stochol.ers8 e7uity com"ute. accor.in! to home country AA;; :: ossible obli!ation for se%erance benefits to be "ai. to em"loyees in future years? reco!nize. this yearOOOOOOOOOOOOO; 3:: oo.will recor.e. as a subtraction from e7uity rather than as an asset occurre. three years a!oOOOOOOOOOOOOOO;; 3:2: 'f aul were followin! U;S; AA: the !oo.will woul. ha%e been recor.e. as an asset an. amortize. o%er a "erio. of 4 years; Accor.in! to U;S; AA: the "ossible obli!ation for se%erance benefits woul. not be reco!nize. until it ha. become "robable; re"are a reconciliation of aul8s re"orte. stochol.ers8 e7uity an. net income to the amounts of these items un.er U;S; AA;

Solution 14

)(3 aul $om"any >econciliation of Stochol.ers8 E7uity to U;S; AA Stochol.ers8 e7uity com"ute. accor.in! to U;S; AAOOOO C :: A.*ustments re7uire. to conform to U;S; AAB oo.will: a.*uste. for amortizationB 3:2: P M3:2: , 3/4NOOOOOOOOOOOO 2:&: ossible obli!ation for se%erance benefitsOOOOOOOOO; 3:: Stochol.ers8 e7uity in accor.ance with U;S; AAOOOOO; C13:&: aul $om"any >econciliation of @et 'ncome to U;S; AA @et income accor.in! to home country AAOOOOOOO;; A.*ustments re7uire. to conform to U;S; AAB ossible obli!ation for se%erance benefitsOOOOOOO; oo.will amortization 3:2:/4 yearsOOOOOO;; @et income in accor.ance with U;S; AAOOOOOOOO;;

C

:

3:: : C3:+2:

Problem 15 

The followin! sche.ule shows the net chan!es in the balance sheet accounts at ecember 31: 21: as com"are. to ecember 31: 22: for the 0illiams $om"any; The statement of cash flows for the year en.e. ecember 31: 22: has not been "re"are.;   'ncrease  Assets ecrease $ash an. cash e7ui%alents;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;C &:  Accounts recei%able net;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; &&: 'n%entories;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 3+: re"ai. e,"enses;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 2: ro"erty: "lant: an. e7ui"ment net;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; &3: Total assets;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;C22:   )iabilites  Accounts "ayable;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;C 4&: Short-term notes "ayable;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 2:  Accrue. liabilities;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 2:# etaine. earnin!s;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 43+:+  A""ro"riation of retaine. earnin!s for "ossible "lant e,"ansion;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 3: Total stochol.ers8 e7uity;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;C22:3 The followin! a..itional information has been !athere.B a The net income for the year en.e. ecember 31: 22: was C1+2:3; b urin! the year en.e. ecember 31: 22: uncollectible accounts recei%able of C2&:4 were written off by a .ebit to Allowance for oubtful Accounts; c A com"arison of ro"erty: lant: an. E7ui"ment: as of the en. of each year  followsB ecember 31 'ncrease 22 21 ecrease ro"erty: "lant: an. e7ui"ment;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;C#+:# C#1: C&:# )essB Accumulate. .e"reciation;;;;;;;;;;;;;;;;;;;;;;;;;;; 22#:# 22: 2:# C34#: C22: C&3:

. e

f !

urin! 22: machinery was "urchase. at a cost of C4#:; 'n a..ition: machinery that was ac7uire. in 1# at a cost of C4: was sol. for  C3:&; At the .ate of sale: the machinery ha. an un.e"reciate. cost of  C4:2; The remainin! increase in "ro"erty: "lant: an. e7ui"ment resulte. from the ac7uisition of a tract of lan. for a new "lant site; The bon.s "ayable mature at the rate of C2: e%ery year; 'n Danuary 22: the com"any issue. an a..itional 1: shares of  common stoc at C14 "er share u"on e,ercise of outstan.in! stoc o"tions hel. by ey em"loyees; 'n 5ay 22: the com"any .eclare. an. issue. a #G stoc .i%i.en. on its outstan.in! stoc; urin! the year: a cash .i%i.en. was "ai. on the common stoc; (n ecember 31: 22: there were 4: shares of common stoc outstan.in!; The a""ro"riation of retaine. earnin!s was ma.e in antici"ation of the construction of a new "lant; The notes "ayable relate to o"eratin! acti%ities;

re"are a statement of cash flows for the year en.e. ecember 31: 22: usin! the in.irect metho.;

Solution 15 

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0illiams $om"any Statement of $ash Flows For the Hear En.e. ecember 31: 22 $ash flows from o"eratin! acti%itiesB @et income;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;C1+2:3  A.*ustmentsB e"reciation;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 41:3 1  Amortization of bon. .iscount;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1:2 )oss on sale of machinery;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; & 2 'ncrease in accounts recei%able;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; &&: 'ncrease in in%entory;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 3+: 'ncrease in "re"ai. e,"enses;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 2: ecrease in accounts "ayable;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 4&: ecrease in short-term notes "ayable;;;;;;;;;;;;;;;;;;;;;;;;;;;; 2: 'ncrease in accrue. liabilities;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 2:# @et cash flow "ro%i.e. by o"erations;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;

C +2:

$ash flows from in%estin! acti%itiesB Sale of machinery;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;C 3:& urchase of machinery;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 4#: urchase of lan.;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; &3:# 3 @et cash flow use. by in%estin! acti%ities;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 14: $ash flows from financin! acti%itiesB 'ssuance of common stoc4;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;C14: >etirement of bon.s;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 2: ayment of .i%i.en.s;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 2: # @et cash flow "ro%i.e. by financin! acti%ities;;;;;;;;;;;;;;;;;;;;;;; 2: @et increase in cash an. cash e7ui%alents;;;;;;;;;;;;;;;;;;;;;;;;;;;; C &: @oteB $om"letion of the formal statement of cash flows woul. re7uire .isclosure of  the be!innin! an. en.in! cash an. cash e7ui%alents; $om"utationsB 1

 Accumulate. .e"reciation--be!innin! balance;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; Accumulate. .e"reciation--machine sol. C4: - C4:2;;;;;;;;  Accumulate. .e"reciation--en.in! balance;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; e"reciation e,"ense for the year 22;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;

C22: 43: 22#:# C 41:3

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$ha"ter 21  Analysis of Financial Statements 2

eturn on sales I C4: ÷ C3: I ;1 The followin! a..itional information has been assemble.B a Dames uses the )'F( metho. of in%entory %aluation; 8s sole .e"reciable asset was "urchase. on Danuary 1: 1; The asset cost C12: an. is bein! .e"reciate. o%er + years with no estimate. sal%a!e %alue; Althou!h the +-year life is within the acce"table ran!e: most firms in $>8s in.ustry .e"reciate similar assets o%er 12 years;

%)

$ha"ter 21  Analysis of Financial Statements

c For 22: $> .eci.e. to reco!nize only #G of an C1: liability for future en%ironmental cleanu" costs; 5ost other firms in $>8s in.ustry ha%e similar  en%ironmental cleanu" obli!ations but ha%e .eci.e. that the amounts of the obli!ations are reasonably estimable an. ha%e reco!nize. the full amount of  the liability; Show how the %alues for the 3 ratios com"ute. abo%e .iffer if $> ha. use. )'F(: .e"reciate. the asset o%er 12 years: an. reco!nize. the full amount of its en%ironmental cleanu" obli!ation; $om"ute how the financial statements woul. .iffer  if the alternati%e accountin! metho.s ha. been use.; o not treat the use of these alternati%e metho.s as accountin! chan!es; '!nore any income ta, effects; Solution 1! 

)(2  A.*ustmentsB a Usin! )'F(B En.in! in%entory .ecreases by C1#:# C43: - C#:#; @et income for 22 .ecreases by C3:# MC43: - C3&: - C#:# C4:N;