Ch24 Full Disclosure in Financial Reporting

CHAPTER 24 FULL DISCLOSURE IN FINANCIAL REPORTING TRUE-FALSE—Conceptual Anse! F T T F F T F T F T F T F T F T F T T F

No" 1. 2. 3. ". $. (. ). +. ,. 1-. 11. 12. 13. 1". 1$. 1(. 1). 1+. 1,. 2-.

Desc!#pt#on Items affected by FASB standards. SEC reporting requirements. efinition of accounting po!icies. #e!ated party transactions disc!osure. %ost&ba!ance&s'eet disc!osures. FASB 131 requirements A!!ocation of *oint or common costs. isc!osure of ma*or customers. #eporting under t'e integra! approac'. Accounting princip!es in interim reports. #eporting etraordinary items in interim reports. Computing taes in an interim period. /pinions issued by auditor. efinition of qua!ified opinion. 0anagements discussion and ana!ysis section. Information proided by 0A section. efinition of financia! pro*ection. Financia! forecast s. financia! pro*ection. Fraudu!ent financia! reporting. Interna! enironment inf!uences.

$ULTIPLE CHOICE—Conceptual Anse! d c c d b b c d d b d b c d a d a d

No" 21. 22. 23. S 2". 2". S 2$. 2$. S 2(. 2(. % 2). 2). 2+. 2,. 3-. 31. 32. 33. 3". S 3$. 3$. S 3(. 3(. % 3). 3). 3+.

Desc!#pt#on isc!osure of significant accounting po!icies. isc!osure of inentory accounting po!icy. efinition of errors and irregu!arities. Fu!! Fu!! dis disc! c!os osur ure e prin princi cip! p!e e desc descri ript ptio ion. n. A%B A%B /pi /pini nion on 4o. 4o. 22 dis disc!os c!osur ure. e. #e! #e!ated ated part party y tran trans sacti action ons s. %ost %ost&b &ba! a!an ance ce&s &s'e 'eet et een eents ts.. Subsequent eents disc!osure. #ecognition of subsequent eents. #eenue of a segment. Segment reenue test. Segment reenue test. isc!osure of operating segment information. Bases of reporting disaggregated information. Item Items s rec recon onci ci!e !ed d in in seg segme ment nt repo report rtin ing. g. Acco Accoun unti ting ng prin princi cip! p!es es used used in inte interi rim m rep report orts. s. %!an %!anne ned d o!u o!ume me ar aria ianc nce e in int inter erim im per perio iod. d. Interim financia! reporting.

24 - 2

Test %an& 'o! Inte!(e)#ate Account#n*+ Tel't, E)#t#on

$ULTIPLE CHOICE—Conceptual cont". Anse! d b a c c b c c a a b b d c c c d

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Desc!#pt#on App!ication of accounting princip!es on interim reporting. 0et'ods of inentory a!uation5year end s. interim. %artia! 6I 6IF/ !i!iquidation re reported in in in interim st statements. isc!osing information in interim statements. Etraordinary items in interim reports. Iss Issuing uing qua! qua!if ifiied opin opinio ion. n. Ite Items co coered ered in 0A A sect sectio ion. n. iffer ifferenc ence e bet7 bet7een een financ financia! ia! foreca forecast st and financ financia! ia! pro*ec pro*ectio tion. n. isc!osures in financia! forecasts. Acid&test ratio and current ratio. #eceiab!es turnoer ratio. #ate of return on common stoc9 equity. %ayout ratio. 0eas 0easur ure e of !ong !ong&t &ter erm m so! so!en ency cy.. 4umber of times interest earned. :sing aerage amounts. 6imitations of ratio ana!ysis.

%

T'ese questions a!so appear in t'e %rob!em&So!ing Suria! ;uide. T'ese questions a!so appear in t'e Study ;uide. 8 T'is topic is dea!t 7it' in an Appendi to t'e c'apter.

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$ULTIPLE CHOICE—Co(putat#onal Anse! b c a c d c d c c d b c a a c c c

No"

Desc!#pt#on

$(. $). $+. $,. 8(-. 8(1. 8(2. 8(3. 8(". 8($. 8((. 8(). 8(+. 8(,. 8)-. 8)1. 8)2.

etermine reportab!e operating segments. Bonus e epense in in fifirst quarter in interim in income st statement. %roperty taes and p!ant repairs recogni
24 - 2


$ULTIPLE CHOICE—Conceptual cont". Anse! d b a c c b c c a a b b d c c c d

N/o" 3,. "-. "1. "2. "3. S "". "". % "$. "$. S "(. "). 8"+. 8",. 8$-. 8$1. 8$2. 8$2. 8$3. 8$". 8$$.

Desc!#pt#on App!ication of accounting princip!es on interim reporting. 0et'ods of inentory a!uation5year end s. interim. %artia! 6I 6IF/ !i!iquidation re reported in in in interim st statements. isc!osing information in interim statements. Etraordinary items in interim reports. Iss Issuing uing qua! qua!if ifiied opin opinio ion. n. Ite Items co coered ered in 0A A sect sectio ion. n. iffer ifferenc ence e bet7 bet7een een financ financia! ia! foreca forecast st and financ financia! ia! pro*ec pro*ectio tion. n. isc!osures in financia! forecasts. Acid&test ratio and current ratio. #eceiab!es turnoer ratio. #ate of return on common stoc9 equity. %ayout ratio. 0eas 0easur ure e of !ong !ong&t &ter erm m so! so!en ency cy.. 4umber of times interest earned. :sing aerage amounts. 6imitations of ratio ana!ysis.

%

T'ese questions a!so appear in t'e %rob!em&So!ing Suria! ;uide. T'ese questions a!so appear in t'e Study ;uide. 8 T'is topic is dea!t 7it' in an Appendi to t'e c'apter.

S

$ULTIPLE CHOICE—Co(putat#onal Anse! b c a c d c d c c d b c a a c c c

No"

Desc!#pt#on

$(. $). $+. $,. 8(-. 8(1. 8(2. 8(3. 8(". 8($. 8((. 8(). 8(+. 8(,. 8)-. 8)1. 8)2.

etermine reportab!e operating segments. Bonus e epense in in fifirst quarter in interim in income st statement. %roperty taes and p!ant repairs recogni
Fu!! isc!osure in Financia! #eporting

$ULTIPLE CHOICE—CPA A)apt A)apte) e) Anse! c c b b b c b c c d c

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Desc!#pt#on Significant accounting po!icies disc!osed for p!ant assets. Criteria for reporting disaggregated information. Identification of of reportab!e se segments. Identification of a reportab!e segment. Adertising co costs5year en end s s. in interim re reporting. Tota! epense to be reported in interim statements. Etraordinary !oss reported in interim statements. Etraordinary gain reported in interim statements. Acid&test ra ratio an and in inentory tu turnoer ra ratio. Acid&test ratio and debt to tota! assets ratio. #eceiab!es turnoer and payout ratio.

E0ERCISES I te ( E2"&+" &+" E2"&+$ E2"&+( E2"&+) E2"& E2"&++ ++ E2"&+, 8E2"&,8E2"&,1 8E2"&,2

Desc!#pt#on 4otes to financia! statements. Segment reporting. Segment reporting. Interim re reports. Ine Inent ntor ory y and and cos costt of of goo goods ds so!d so!d at inte interi rim m dat dates es.. Forecasts. Financia! st statement an ana!ysis. Se!ected fi financia! ra ratios. Computation of of se se!ected ra ratios.

PRO%LE$S I te ( %2"&,3 %2"&,"

Desc!#pt#on Segment #eporting. Interim #e #eports.

CHAPTER LEARNING O%1ECTIES 1. #eie7 #eie7 t'e fu!! fu!! disc!osur disc!osure e princip!e princip!e and describ describe e imp!ementa imp!ementation tion prob!ems prob!ems.. 2. Ep!ain Ep!ain t'e use of of notes notes in financia! financia! statem statement ent preparat preparation. ion. 3. iscuss iscuss t'e t'e disc!osu disc!osure re requiremen requirements ts for for ma*or business business segment segments. s. ". escribe escribe t'e t'e accountin accounting g prob!ems prob!ems associ associated ated 7it' 7it' interim interim reporti reporting. ng. $. Identify Identify t'e ma*or disc!osure disc!osures s in t'e auditor=s auditor=s report. report. (. :nderstand :nderstand management managements s respon responsibi! sibi!ities ities for financia!s. financia!s. ). Identify Identify issues issues re!ated re!ated to financia! financia! forecasts forecasts and pro*ect pro*ections. ions. +. escribe escribe t'e t'e professio profession=s n=s respons response e to fraudu! fraudu!ent ent financia financia!! reporting. reporting. 8,. :nderstand :nderstand t'e approac' approac' to to financi financia! a! stateme statement nt ana!ys ana!ysis. is. 81-. Identify Identify ma*or ma*or ana!ytic ana!ytic ratios ratios and describe describe t'eir ca!cu!ation ca!cu!ation.. 811. 811. Ep!ai Ep!ain n t'e !imita !imitatio tions ns of ratio ratio ana!y ana!ysis sis..

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SU$$AR OF LEARNING O%1ECTIES % 5UESTIONS Item

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24 - :

TRUE-FALSE—Conceptual 1.

FASB standards direct!y affect financia! statements@ notes to t'e financia! statements@ and managements discussion and ana!ysis.

2.

T'e SEC requires t'at companies report to it certain substantie information t'at is not found in t'eir annua! reports.

3.

Accounting po!icies are t'e specific accounting princip!es and met'ods a company uses and considers most appropriate to present fair!y its financia! statements.

".

In order to ma9e adequate disc!osure of re!ated party transactions@ companies s'ou!d report t'e !ega! form@ rat'er t'an t'e economic substance@ of t'ese transactions.

$.

If t'e !oss on an account receiab!e resu!ts from a customers ban9ruptcy after t'e ba!ance s'eet date@ t'e company on!y disc!oses t'is information in t'e notes to t'e financia! statements.

(.

FASB Statement 131 requires t'at genera! purpose financia! statements inc!ude se!ected information on a sing!e basis of segmentation.

).

T'e FASB requires a!!ocations of *oint@ common@ or company&7ide costs for eterna! reporting purposes.

+.

If 1- percent or more of company reenue is deried from a sing!e customer@ t'e company must disc!ose t'e tota! amount of reenue from eac' suc' customer by segment.

,.

Companies s'ou!d report accounting transactions as t'ey occur@ and epense recognition s'ou!d not c'ange 7it' t'e period of time coered under t'e integra! approac'.

1-.

Companies s'ou!d genera!!y use t'e same accounting princip!es for interim reports and for annua! reports.

11.

Companies report etraordinary items in interim reports by prorating t'em oer t'e four quarters.

12.

To compute t'e year&to&date ta@ companies app!y t'e estimated annua! effectie ta rate to t'e year&to&date ordinary income at t'e end of eac' interim period.

13.

In most situations@ an auditor issues a qua!ified opinion or disc!aims an opinion.

1".

A qua!ified opinion is issued 7'en t'e eception to t'e standard opinion is not of sufficient magnitude to ina!idate t'e statements as a 7'o!e.

1$.

0anagements discussion and ana!ysis section coers t'ree financia! aspects of an enterprises business&!iquidity@ profitabi!ity@ and so!ency.

1(.

T'e 0A section must proide information about t'e effects of inf!ation and c'anging prices@ if t'ey are materia! to financia! statement trends.


24 - ;

1).

A financia! pro*ection is a set of prospectie financia! statements t'at present a companys epected financia! position and resu!ts of operations.

1+.

T'e difference bet7een a financia! forecast and a financia! pro*ection is t'at a forecast proides information on 7'at is epected to 'appen@ 7'i!e a pro*ection proides information on 7'at mig't ta9e p!ace.

1,.

Fraudu!ent financia! reporting is intentiona! or rec9!ess conduct@ 7'et'er act or omission@ t'at resu!ts in materia!!y mis!eading financia! statements.

2-.

Inf!uences in a companys interna! enironment may re!ate to industry conditions@ poor interna! contro! systems@ or !ega! and regu!atory considerations.

T!ue-False Anse!s—Conceptual Ite(

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11. 12. 13. 1". 1$.

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$ULTIPLE CHOICE—Conceptual 21.

'ic' of t'e fo!!o7ing s'ou!d be disc!osed in a Summary of Significant Accounting %o!icies a. Types of eecutory contracts b. Amount for cumu!atie effect of c'ange in accounting princip!e c. C!aims of equity 'o!ders d. epreciation met'od fo!!o7ed

22.

An eamp!e of an inentory accounting po!icy t'at s'ou!d be disc!osed in a Summary of Significant Accounting %o!icies is t'e a. amount of income resu!ting from t'e ino!untary !iquidation of 6IF/. b. ma*or bac9!ogs of inentory orders. c. met'od used for pricing inentory. d. composition of inentory into ra7 materia!s@ 7or9&in&process@ and finis'ed goods.

23.

Errors and irregu!arities are defined as intentiona! distortions of facts. a. b. c. d.

Errors es es 4o 4o

Irregu!arities es 4o es 4o


24 - <

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2".

T'e fu!! disc!osure princip!e@ as adopted by t'e accounting profession@ is best described by 7'ic' of t'e fo!!o7ing a. A!! information re!ated to an entity=s business and operating ob*ecties is required to be disc!osed in t'e financia! statements. b. Information about eac' account ba!ance appearing in t'e financia! statements is to be inc!uded in t'e notes to t'e financia! statements. c. Enoug' information s'ou!d be disc!osed in t'e financia! statements so a person 7is'ing to inest in t'e stoc9 of t'e company can ma9e a profitab!e decision. d. isc!osure of any financia! facts significant enoug' to inf!uence t'e *udgment of an informed reader.

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2$.

T'e focus of APB Opinion No. 22 is on t'e disc!osure of accounting po!icies. T'is information is important to financia! statement readers in determining a. net income for t'e year. b. 7'et'er accounting po!icies are consistent!y app!ied from year to year. c. t'e a!ue of obso!ete items inc!uded in ending inentory. d. 7'et'er t'e 7or9ing capita! position is adequate for future operations.

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2(.

If a business entity entered into certain re!ated party transactions@ it 7ou!d be required to disc!ose a!! of t'e fo!!o7ing information except the a. nature of t'e re!ations'ip bet7een t'e parties to t'e transactions. b. nature of any future transactions p!anned bet7een t'e parties and t'e terms ino!ed. c. do!!ar amount of t'e transactions for eac' of t'e periods for 7'ic' an income state& ment is presented. d. amounts due from or to re!ated parties as of t'e date of eac' ba!ance s'eet presented.

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2).

Eents t'at occur after t'e ecember 31@ 2--+ ba!ance s'eet date Dbut before t'e ba!ance s'eet is issued and proide additiona! eidence about conditions t'at eisted at t'e ba!ance s'eet date and affect t'e rea!i
2+.

'ic' of t'e fo!!o7ing post&ba!ance&s'eet eents 7ou!d genera!!y require disc!osure@ but no ad*ustment of t'e financia! statements a. #etirement of t'e company president b. Sett!ement of !itigation 7'en t'e eent t'at gae rise to t'e !itigation occurred prior to t'e ba!ance s'eet date. c. Emp!oyee stri9es d. Issue of a !arge amount of capita! stoc9

2,.

'ic' of t'e fo!!o7ing subsequent eents Dpost&ba!ance&s'eet eents 7ou!d require ad*ustment of t'e accounts before issuance of t'e financia! statements a. 6oss of p!ant as a resu!t of fire b. C'anges in t'e quoted mar9et prices of securities 'e!d as an inestment c. 6oss on an unco!!ectib!e account receiab!e resu!ting from a customers ma*or f!ood !oss d. 6oss on a !a7suit@ t'e outcome of 7'ic' 7as deemed uncertain at year end.

24 - =

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3-.

#eenue of a segment inc!udes a. on!y sa!es to unaffi!iated customers. b. sa!es to unaffi!iated customers and intersegment sa!es. c. sa!es to unaffi!iated customers and interest reenue. d. sa!es to unaffi!iated customers and ot'er reenue and gains.

31.

An operating segment is a reportab!e segment if a. its operating profit is 1- or more of t'e combined operating profit of profitab!e segments. b. its operating !oss is 1- or more of t'e combined operating !osses of segments t'at incurred an operating !oss. c. t'e abso!ute amount of its operating profit or !oss is 1- or more of t'e company=s combined operating profit or !oss. d. none of t'ese.

32.

A segment of a business enterprise is to be reported separate!y 7'en t'e reenues of t'e segment eceed 1- percent of t'e a. tota! combined reenues of a!! segments reporting profits. b. tota! reenues of a!! t'e enterprise=s industry segments. c. tota! eport and foreign sa!es. d. combined net income of a!! segments reporting profits.

33.

A!! of t'e fo!!o7ing information about eac' operating segment must be reported except a. unusua! items. b. interest reenue. c. cost of goods so!d. d. depreciation and amorti
3".

T'e profession requires disaggregated information in t'e fo!!o7ing 7ays> a. products or serices. b. geograp'ic areas. c. ma*or customers. d. a!! of t'ese.

3$.

In presenting segment information@ 7'ic' of t'e fo!!o7ing items must be reconci!ed to t'e entity=s conso!idated financia! statements

a. b. c. d. S

3(.

#eenues es 4o es es

/perating %rofit D6oss es es 4o es

Identifiab!e Assets es es es 4o

APB Opinion No. 28 indicates t'at

a. a!! companies t'at issue an annua! report s'ou!d issue interim financia! reports. b. t'e discrete ie7 is t'e most appropriate approac' to ta9e in preparing interim financia! reports. c. t'e t'ree basic financia! statements s'ou!d be presented eac' time an interim period is reported upon. d. t'e same accounting princip!es used for t'e annua! report s'ou!d be emp!oyed for interim reports.

Fu!! isc!osure in Financia! #eporting %

24 - ?

3).

onnegan 0anufacturing Company emp!oys a standard cost system. A p!anned o!ume ariance in t'e first quarter of 2--+@ 7'ic' is epected to be absorbed by t'e end of t'e fisca! year@ ordinari!y s'ou!d a. be deferred at t'e end of t'e first quarter@ regard!ess of 7'et'er it is faorab!e or unfaorab!e. b. neer be deferred beyond t'e quarter in 7'ic' it occurs. c. be deferred at t'e end of t'e first quarter if it is faorab!eG unfaorab!e ariances are to be recogni
3+.

In considering interim financia! reporting@ 'o7 does t'e profession conc!ude t'at suc' reporting s'ou!d be ie7ed a. As a Hspecia!H type of reporting t'at need not fo!!o7 genera!!y accepted accounting princip!es. b. As usefu! on!y if actiity is een!y spread t'roug'out t'e year so t'at estimates are unnecessary. c. As reporting for a basic accounting period. d. As reporting for an integra! part of an annua! period.

3,.

Accounting princip!es are modified for t'e fo!!o7ing at interim dates. a. b. c. d.

"-.

6osses es 4o es 4o

T'e fo!!o7ing met'ods of estimating inentory can be used at interim dates for inentory pricing. 0ay t'ey a!so be used at year end a. b. c. d.

"1.

#eenue es es 4o 4o

;ross %rofit 0et'od 4o 4o es es

#etai! Inentory 0et'od 4o es 4o es

A company t'at uses t'e !ast&in@ first&out D6IF/ met'od of inentory pricing finds at an interim reporting date t'at t'ere 'as been a partia! !iquidation of t'e base period inentory !ee!. T'e dec!ine is considered temporary and t'e partia! !iquidation is epected to be rep!aced prior to year end. T'e amount s'o7n as inentory at t'e interim reporting date s'ou!d a. be s'o7n at t'e actua! !ee!@ and cost of sa!es for t'e interim reporting period s'ou!d inc!ude t'e epected cost of rep!acement of t'e !iquidated 6IF/ base. b. be s'o7n at t'e actua! !ee!@ and cost of sa!es for t'e interim reporting period s'ou!d ref!ect t'e 'istorica! cost of t'e !iquidated 6IF/ base. c. not gie effect to t'e 6IF/ !iquidation@ and cost of sa!es for t'e interim reporting period s'ou!d ref!ect t'e 'istorica! cost of t'e !iquidated 6IF/ base. d. be s'o7n at t'e actua! !ee!@ and t'e decrease in inentory !ee! s'ou!d not be ref!ected in t'e cost of sa!es for t'e interim reporting period.

24 - 9>


"2.

Companies s'ou!d disc!ose a!! of t'e fo!!o7ing in interim reports except a. basic and di!uted earnings per s'are. b. c'anges in accounting princip!es. c. post&ba!ance&s'eet eents. d. seasona! reenue@ cost@ or epenses.

"3.

T'e required approac' for 'and!ing etraordinary items in interim reports is to a. prorate t'em oer a!! four quarters. b. prorate t'em oer t'e current and remaining quarters. c. c'arge or credit t'e !oss or gain in t'e quarter t'at it occurs. d. disc!ose t'em on!y in t'e notes.

S

"".

If t'e financia! statements eamined by an auditor !ead t'e auditor to issue an opinion t'at contains an eception t'at is not of sufficient magnitude to ina!idate t'e statement as a 7'o!e@ t'e opinion is said to be a. unqua!ified. b. qua!ified. c. aderse. d. eceptiona!.

%

"$.

T'e 0A section of an enterprise=s annua! report is to coer t'e fo!!o7ing t'ree items> a. income statement@ ba!ance s'eet@ and statement of o7ners= equity. b. income statement@ ba!ance s'eet@ and statement of cas' f!o7s. c. !iquidity@ capita! resources@ and resu!ts of operations. d. c'anges in t'e stoc9 price@ mergers@ and acquisitions.

S

"(.

'ic' of t'e fo!!o7ing best c'aracteri
").

A financia! forecast per professiona! pronouncements presents to t'e best of t'e responsib!e party=s 9no7!edge and be!ief@ a. an entity=s epected financia! position@ resu!ts of operations@ and cas' f!o7s. b. an assessment of t'e company=s abi!ity to be successfu! in t'e future. c. gien one or more 'ypot'etica! assumptions@ an entity=s epected financia! position@ resu!ts of operations@ and cas' f!o7s. d. an assessment of t'e company=s abi!ity to be successfu! in t'e future under a number of different assumptions.

8"+.

Cas'@ s'ort&term inestments@ and net receiab!es are t'e numerator for Acid&Test #atio Current #atio a. es 4o b. es es c. 4o 4o d 4o es


24 - 99

8",.

T'eoretica!!y@ in computing t'e receiab!es turnoer@ t'e numerator s'ou!d inc!ude a. net sa!es. b. net credit sa!es. c. sa!es. d. credit sa!es.

8$-.

T'e rate of return on common stoc9 equity is ca!cu!ated by diiding a. net income by aerage common stoc9'o!ders equity. b. net income !ess preferred diidends by aerage common stoc9'o!ders equity. c. net income by ending common stoc9'o!ders equity. d. net income !ess preferred diidends by ending common stoc9'o!ders equity.

8$1.

T'e payout ratio is ca!cu!ated by diiding a. diidends per s'are by earnings per s'are. b. cas' diidends by net income p!us preferred diidends. c. cas' diidends by mar9et price per s'are. d. cas' diidends by net income !ess preferred diidends.

8$2.

'ic' of t'e fo!!o7ing ratios measures !ong&term so!ency a. Acid&test ratio b. #eceiab!es turnoer c. ebt to tota! assets d. Current ratio

8$3.

T'e ca!cu!ation of t'e number of times interest is earned ino!es diiding a. net income by annua! interest epense. b. net income p!us income taes by annua! interest epense. c. net income p!us income taes and interest epense by annua! interest epense. d. none of t'ese.

8$".

'en s'ou!d an aerage amount be used for t'e numerator or denominator a. 'en t'e numerator is a ba!ance s'eet item or items b. 'en t'e denominator is a ba!ance s'eet item or items c. 'en a ratio consists of an income statement item and a ba!ance s'eet item d. 'en t'e numerator is an income statement item or items

8$$.

T'e basic !imitations associated 7it' ratio ana!ysis inc!ude a. t'e !ac9 of comparabi!ity among firms in a gien industry. b. t'e use of estimated items in accounting. c. t'e use of 'istorica! costs in accounting. d. a!! of t'ese.

24 - 92


$ult#ple C,o#ce Anse!s —Conceptual Ite(

21. 22. 23. 2". 2$.

Ans"

d c c d b

Ite(

2(. 2). 2+. 2,. 3-.

Ans"

b c d d b

Ite(

31. 32. 33. 3". 3$.

Ans"

d b c d a

Ite(

3(. 3). 3+. 3,. "-.

Ans"

d a d d b

Ite(

"1. "2. "3. "". "$.

Ans"

Ite(

Ans"

Ite(

Ans"

a c c b c

"(. "). 8"+. 8",. 8$-.

c a a b b

8$1. 8$2. 8$3. 8$" 8$$.

d c c c d

So!utions to t'ose mu!tip!e c'oice questions for 7'ic' t'e ans7er is none of t'ese>J 31.

T'e abso!ute amount of its profit or !oss is 1- or more of t'e greater@ in abso!ute amount@ of Da t'e combined profit of a!! operating segments t'at did not incur a !oss@ or Db t'e combined !oss of a!! operating segments t'at did incur a !oss.

$ULTIPLE CHOICE—Co(putat#onal $(.

%resented be!o7 are four segments t'at 'ae been identified by ;regg %roductions> Segments A B C 

Tota! #eenue D:naffi!iated K2$$@--(--@--22$@--,-@---

/perating %rofit D6oss K3-@--D$$@--- "@--(@---

Identifiab!e Assets K,--@--+--@--"$-@--22$@---

For 7'ic' of t'e segments 7ou!d information 'ae to be disc!osed in accordance 7it' professiona! pronouncements a. Segments A@ B@ C@ and  b. Segments A@ B@ and C c. Segments A and B d. Segments A and  $).

In Lanuary 2--+@ /tto@ Inc. estimated t'at its year&end bonus to eecuties 7ou!d be K)2-@--- for 2--+. T'e actua! amount paid for t'e year&end bonus for 2--) 7as K((-@---. T'e estimate for 2--+ is sub*ect to year&end ad*ustment. 'at amount@ if any@ of epense s'ou!d be ref!ected in /tto=s quarter!y income statement for t'e t'ree mont's ended 0arc' 31@ 2--+ a. K &-&. b. K1($@---. c. K1+-@---. d. K)2-@---.

$+.

/n Lanuary 1$@ 2--+@ See!ey Company paid property taes on its factory bui!ding for t'e ca!endar year 2--+ in t'e amount of K$(-@---. In t'e first 7ee9 of Apri! 2--+@ See!ey made unanticipated ma*or repairs to its p!ant equipment at a cost of K1@"--@---. T'ese repairs 7i!! benefit operations for t'e remainder of t'e ca!endar year. Mo7 s'ou!d t'ese epenses be ref!ected in See!ey=s quarter!y income statements


a. b. c. d. $,.

3N31N-+ K1"-@--K1"-@--K$(-@--K",-@---

T'ree 0ont's Ended (N3-N-+ ,N3-N-+ K(-(@(() K(-(@(() K1@$"-@--K1"-@--K1@"--@--K &-& K",-@--K",-@---

24 - 93

12N31N-+ K(-(@(() K1"-@--K &-& K",-@---

An inentory !oss from mar9et dec!ine of K1@(--@--- occurred in 0ay 2--+@ after its 0arc' 31@ 2--+ quarter!y report 7as issued. 4one of t'is !oss 7as recoered by t'e end of t'e year. Mo7 s'ou!d t'is !oss be ref!ected in t'e company=s quarter!y income statements T'ree 0ont's Ended 3N31N-+ (N3-N-+ ,N3-N-+ 12N31N-+ a. K &-& K &-& K &-& K1@(--@--b. K &-& K$33@333 K$33@333 K$33@333 c. K &-& K1@(--@--K &-& K &-& d. K"--@--K"--@--K"--@--K"--@---

:se t'e fo!!o7ing information for questions (- t'roug' (3. Information for 0ora!es Corp. is gien be!o7> 0ora!es Corp. Ba!ance S'eet ecember 31@ 2--+ Assets Cas' Accounts receiab!e Dnet Inentories %!ant and equipment@ net of depreciation %atents /t'er intangib!e assets Tota! Assets

K 1--@--($-@--+13@--((1@--+)@--2$@--K2@33(@---

Equities Accounts payab!e K 21-@--Federa! income ta payab!e (3@--0isce!!aneous accrued payab!es )$@--Bonds payab!e D1-@ due 2-12 (2$@--%referred stoc9 DK1-- par@ ( cumu!atie nonparticipating 2$-@--Common stoc9 Dno par@ 2-@--s'ares aut'ori
0ora!es Corp. Income Statement ear Ended ecember 31@ 2--+ 4et sa!es Cost of goods so!d ;ross profit /perating epenses Dinc!uding bond interest epense Income before income taes Income ta 4et income

K3@---@--2@---@--1@---@--$--@--$--@--1$-@--K 3$-@---

24 - 94


Additiona! information> T'ere are no preferred diidends in arrears@ t'e ba!ances in t'e Accounts #eceiab!e and Inentory accounts are unc'anged from Lanuary 1@ 2--+@ and t'ere 7ere no c'anges in t'e Bonds %ayab!e@ %referred Stoc9@ or Common Stoc9 accounts during 2--+. Assume t'at preferred diidends for t'e current year 'ae not been dec!ared. 8(-.

At ecember 31@ 2--+@ t'e current ratio 7as a. )$- O 21-. b. 2@22$ O 2)3. c. 1@$(3 O 2)3. d. 1@$(3 O 3"+.

8(1.

T'e number of times interest 7as earned during 2--+ 7as a. 3$- O (2.$. b. $-- O (2.$. c. $(2 O (2.$. d. "3) O (2.$.

8(2.

At ecember 31@ 2--+@ t'e boo9 a!ue per s'are of common stoc9 7as a. K$$.((. b. K$+.1(. c. K$,."1. d. K$+.($.

8(3.

T'e rate of return for 2--+ based on t'e year&end common stoc9'o!ders= equity 7as a. 3$- O 1@1)3. b. 3$- O 1@1++. c. 33$ O 1@1)3. d. 33$ O 1@1++.

:se t'e fo!!o7ing information for questions (" t'roug' (,. T'e fo!!o7ing data are proided> Cas' Accounts receiab!e Dnet Inentories %!ant assets Dnet Accounts payab!e Taes payab!e Bonds payab!e 1- %referred stoc9@ K$- par Common stoc9@ K1- par %aid&in capita! #etained earnings 4et credit sa!es Cost of goods so!d /perating epenses 4et income

ecember 31 2--+ 2--) K 3)$@--K 2$-@--"--@--3--@--($-@--$$-@--2@---@--1@(2$@--2)$@--2--@--$-@--2$@--3$-@--3$-@--$--@--$--@--(--@--"$-@--"--@--32$@--1@---@--+)$@--3@2--@--2@1--@--)2$@--3)$@---


24 - 9:

Additiona! information> epreciation inc!uded in cost of goods so!d and operating epenses is K3-$@---. /n 0ay 1@ 2--+@ 1$@--- s'ares of common stoc9 7ere issued. T'e preferred stoc9 is cumu!atie. T'e preferred diidends 7ere not dec!ared during 2--+. 8(".

T'e receiab!es turnoer for 2--+ is a. 3@2-- O "--. b. 2@1-- O "--. c. 3@2-- O 3$-. d. 2@1-- O 3$-.

8($.

T'e inentory turnoer for 2--+ is a. 3@2-- O ($-. b. 2@1-- O ($-. c. 3@2-- O (--. d. 2@1-- O (--.

8((.

T'e profit margin on sa!es for 2--+ is a. 1@1-- O 3@2--. b. 3)$ O 3@2--. c. 1@1-- O 2@1--. d. 3)$ O 2@1--.

8().

T'e rate of return on common stoc9 equity for 2--+ is a. 3)$ O 1@+--. b. 3)$ O 2@---. c. 32$ O 1@+--. d. 32$ O 2@---.

8(+.

T'e boo9 a!ue per s'are of common stoc9 at 12N31N-+ is a. 1@,$- O (-. b. 1@,"- O (-. c. 1@,$- O $$. d. 2@--- O $$.

8(,.

At ecember 31@ 2--+@ t'e acid&test ratio 7as a. ))$ O 32$. b. ))$ O $"-. c. 1@-$- O "--. d. 1@"2$ O 32$.

8)-.

%resented be!o7 is information re!ated to #amsey Company. Current Assets Cas' S'ort&term inestments Accounts receiab!e Inentories %repaid epenses Tota! current assets

K

+@--1$-@--122@--22-@--(-@--K$(-@---

24 - 9;


Tota! current !iabi!ities are K2--@---. 'at is t'e acid&test ratio a. 2.+ to 1. b. 2.$ to 1. c. 1." to 1. d. -.+ to 1. 8)1.

6ope< Company=s net accounts receiab!e 7ere K(--@--- at ecember 31@ 2--) and K((-@--- at ecember 31@ 2--+. 4et cas' sa!es for 2--+ 7ere K3,-@---. T'e accounts receiab!e turnoer for 2--+ 7as ).-. 'at 7ere 6ope<=s tota! net sa!es for 2--+ a. K2@)3-@---. b. K"@"1-@---. c. K"@+--@---. d. K"@-2-@---.

8)2.

uring 2--+@ 4ob!e@ Incorporated purc'ased K3@2--@--- of inentory. T'e cost of goods so!d for 2--+ 7as K3@(--@--- and t'e ending inentory at ecember 31@ 2--+@ 7as K"--@---. 'at 7as t'e inentory turnoer for 2--+ a. $.3. b. +.-. c. (.-. d. ,.-.

$ult#ple C,o#ce Anse!s —Co(putat#onal Ite(

Ans"

Ite(

Ans"

Ite(

Ans"

Ite(

Ans"

Ite(

Ans"

Ite(

Ans"

b c a

$,. 8(-. 8(1.

c d c

8(2. 8(3. 8(".

d c c

8($. 8((. 8().

d b c

8(+. 8(,. 8)-.

a a c

8)1. 8)2.

c c

$(. $). $+.

$ULTIPLE CHOICE—CPA A)apte) )3.

'ic' of t'e fo!!o7ing facts concerning p!ant assets s'ou!d be inc!uded in t'e summary of significant accounting po!icies a. b. c. d.

)".

epreciation 0et'od 4o es es 4o

Composition es es 4o 4o

%arr@ Inc. is a mu!tidiisiona! corporation 7'ic' 'as bot' intersegment sa!es and sa!es to unaffi!iated customers. %arr s'ou!d report segment financia! information for eac' diision meeting 7'ic' of t'e fo!!o7ing criteria a. Segment profit or !oss is 1- or more of conso!idated profit or !oss. b. Segment profit or !oss is 1- or more of combined profit or !oss of a!! company segments. c. Segment reenue is 1- or more of combined reenue of a!! t'e company segments. d. Segment reenue is 1- or more of conso!idated reenue.

Fu!! isc!osure in Financia! #eporting )$.

24 - 9<

#eese Corp. and its diisions are engaged so!e!y in manufacturing operations. T'e fo!!o7ing data Dconsistent 7it' prior years= data pertain to t'e industries in 7'ic' operations 7ere conducted for t'e year ended ecember 31@ 2--+. Assets Industry #eenue %rofit 12N31N-+ A K +@---@--K1@32-@--K1(@---@--B (@"--@--1@12-@--1"@---@--C "@+--@--,(-@--1-@---@-- 2@"--@--""-@--$@2--@--E 3@"--@--$"-@--$@(--@--F 1@2--@--1+-@--2@"--@--K2(@2--@--K"@$(-@--K$3@2--@--In its segment information for 2--+@ 'o7 many reportab!e segments does #eese 'ae a. T'ree b. Four c. Fie d. Si

)(.

T'e fo!!o7ing information pertains to 0aris Corp. and its diisions for t'e year ended ecember 31@ 2--+. Sa!es to unaffi!iated customers K2@$--@--Intersegment sa!es of products simi!ar to t'ose so!d to unaffi!iated customers )$-@--Interest earned on !oans to ot'er operating segments $-@--0aris and a!! of its diisions are engaged so!e!y in manufacturing operations. 0aris 'as a reportab!e segment if t'at segment=s reenue eceeds a. K33-@---. b. K32$@---. c. K2$$@---. d. K2$-@---.

)).

Adertising costs may be accrued or deferred to proide an appropriate epense in eac' period for Interim ear&end Financia! #eporting Financia! #eporting a. es 4o b. es es c. 4o 4o d. 4o es

)+.

6ane Corp. 'as estimated t'at tota! depreciation epense for t'e year ending ecember 31@ 2--+ 7i!! amount to K3--@---@ and t'at 2--+ year&end bonuses to emp!oyees 7i!! tota! K(--@---. In 6ane=s interim income statement for t'e si mont's ended Lune 3-@ 2--+@ 7'at is t'e tota! amount of epense re!ating to t'ese t7o items t'at s'ou!d be reported a. K-. b. K1$-@---. c. K"$-@---. d. K,--@---.

24 - 9=

),.


Eddy Corp. 'ad t'e fo!!o7ing transactions during t'e quarter ended 0arc' 31@ 2--+> 6oss from 'urricane damage %ayment of fire insurance premium for ca!endar year 2--+

K3$-@--$--@---

'at amount s'ou!d be inc!uded in Eddy=s income statement for t'e quarter ended 0arc' 31@ 2--+ Etraordinary 6oss Insurance Epense a. K3$-@--K$--@--b. K3$-@--K12$@--c. K+)@$-K12$@--d. KK$--@--+-.

For interim financia! reporting@ an etraordinary gain occurring in t'e second quarter s'ou!d be a. recogni
8+1.

Mo7 is t'e aerage inentory used in t'e ca!cu!ation of eac' of t'e fo!!o7ing Acid&Test DPuic9 #atio Inentory Turnoer #atio a. 4umerator 4umerator b. 4umerator enominator c. 4ot :sed enominator d. 4ot :sed 4umerator

8+2.

'ic' of t'e fo!!o7ing ratios isDare usefu! in assessing a company=s abi!ity to meet current maturing or s'ort&term ob!igations Acid&Test #atio ebt to Tota! Assets #atio a. 4o 4o b. 4o es c. es es d. es 4o

8+3.

'ic' of t'e fo!!o7ing ratios s'ou!d be used in ea!uating t'e effectieness 7it' 7'ic' t'e company uses its assets #eceiab!es Turnoer %ayout #atio a. es es b. 4o 4o c. es 4o d. 4o es

$ult#ple C,o#ce Anse!s —CPA A)apte) Ite(

)3. )".

Ans"

c c

Ite(

)$. )(.

Ans"

b b

Ite(

)). )+.

Ans"

b c

Ite(

),. +-.

Ans"

b c

Ite(

8+1. 8+2.

Ans"

Ite(

Ans"

c d

8+3.

c


24 - 9?

DERIATIONS — Co(putat#onal No" Anse! $(. b

De!#8at#on #eenue test> Tota! reenue ? K1@1)-@--- Q 1- ? K11)@---. /perating profit test> K$$@--- Q 1- ? K$@$--. Asset test> Tota! assets ? K2@3)$@--- Q 1- ? K23)@$--.

$).

c

K)2-@--- O " ? K1+-@---.

$+.

a

K$(-@--- O " ? K1"-@---. K1@"--@--- O 3 ? K2((@(() R K1"-@--- ? K(-(@(().

$,.

c

Conceptua!.

8(-.

d

DK1--@--- R K($-@--- R K+13@--- 1@$(3 5555555555555555 ? 555 DK21-@--- R K(3@--- R K)$@--- 3"+

8(1.

c

K$--@--- R DK(2$@--- × .1- $(2.$ 5555555555555 ? 555 K(2$@--- × .1(2.$

8(2.

d

K3)$@--- R K+13@---  D.-( Q K2$-@---U 5555555555555555555 ? K$+.($. 2-@---

8(3.

c

K3$-@---  D.-( Q K2$-@--- 5555555555555555555 ? 33$ O 1@1)3. K3)$@--- R K+13@---  D.-( × K2$-@---U

8(".

c

K3@2--@--555555555555 ? 3@2-- O 3$-. DK3--@--- R K"--@--- O 2

8($.

d

K2@1--@--555555555555 ? 2@1-- O (--. DK($-@--- R K$$-@--- O 2

8((

b

K3)$@--- O K3@2--@--- ? 3)$ O 3@2--.

8().

c

55555555555555555555555555555555555

K3)$@---  DK$--@--- Q.1-

DK(--@--- R K"--@--- R K1@---@---  K$-@--- R DK"$-@--- R K32$@--- R K+)$@---U O 2

? 32$ O 1@+--. 8(+.

a

K(--@--- R K"--@--- R DK1@---@---  K$-@--- 555555555555555555555 ? 1@,$- O ((-@---

8(,.

a

K3)$@--- R K"--@--5555555555 ? ))$ O 32$. K2)$@--- R K$-@---

8)-.

c

K+@--- R K1$-@--- R K122@--55555555555555 ? 1."- to 1. K2--@---

24 - 2>


DERIATIONS — Co(putat#onal cont". No" Anse! 8)1.

c

8)2.

c

De!#8at#on DV  K3,-@--- 555555555555 ? ).-@ V ? K"@+--@---. DK(--@--- R K((-@--- ÷ 2 K3@(--@--- R K"--@---  K3@2--@--- ? K+--@---. K3@(--@--555555555555 ? (. DK+--@--- R K"--@--- O 2

DERIATIONS — CPA A)apte) No" Anse! )3. c

De!#8at#on Conceptua!.

)".

c

Conceptua!.

)$.

b

#eenue test> K2(@2--@--- Q 1- ? K2@(2-@--%rofit test> K"@$(-@--- Q 1- ? K"$(@-- Asset test> K$3@2--@--- Q 1- ? K$@32-@-- A@ B@ C@ E.

)(.

b

DK2@$--@--- R K)$-@--- Q 1- ? K32$@---.

)).

b

Conceptua!.

)+.

c

DK3--@--- R K(--@--- O 2 ? K"$-@---.

),.

b

Etraordinary !oss ? K3$-@--Insurance epense ? K$--@--- O " ? K12$@---.

+-.

c

Conceptua!.

8+1.

c

Conceptua!.

8+2.

d

Conceptua!.

8+3.

c

Conceptua!.


24 - 29

E0ERCISES E@" 24-=454otes to financia! statements.

An artic!e in un=s #eie7 made t'e fo!!o7ing comments> HEery ot'er year@ say@ companies s'ou!d print t'e notes in big type and t'e base figures in sma!!er ones.H Inst!uct#ons

Da

Are notes considered as part of t'e financia! statements and 7'at basic purpose do t'ey sere

Db

'at are t'e genera! types of notes

Solut#on 24-=4

Da

4otes are an integra! part of t'e financia! statements of a business enterprise. 4otes are t'e accountant=s means of more fu!!y disc!osing data re!eant to t'e interpretation of t'e statements. Information pertinent to specific financia! statement items can be ep!ained in qua!itatie terms@ and supp!ementary data of a quantitatie nature can be proided to epand on t'e information in t'e financia! statements. #estrictions imposed by financia! arrangements or basic contractua! agreements can be ep!ained in notes.

Db

T'e more common types of notes disc!ose suc' items as t'e fo!!o7ing> D1 accounting met'ods used@ D2 contingent assets or !iabi!ities@ D3 eamination of creditor c!aims@ D" c!aims of equity 'o!ders@ and D$ eecutory commitments.

E@" 24-=:5Segment reporting.

FASB Statement 4o. 131@ #eporting isaggregated Information about a Business EnterpriseJ requires t'e reporting of disaggregated financia! data about t'e different types of business actiities in 7'ic' an enterprise engages. Inst!uct#ons

Identify " of t'e ( items of disaggregated information t'e FASB requires t'at an enterprise report.

Solut#on 24-=:

T'e FASB requires t'at an enterprise report t'e fo!!o7ing disaggregated information> 1. ;enera! information about its operating segments. 2. Segment profit and !oss and re!ated information. 3. Segments tota! assets. ". #econci!iation of t'e tota! of operating segments profits and !osses to its income before income taes. $. Information about products and serices and geograp'ic areas. (. Tota! amount of reenues deried from ma*or customers.

24 - 22


E@" 24-=;5Segment reporting.

Me!ton Company=s condensed income statement is presented be!o7> #eenues Epenses Cost of goods so!d /perating and administratie epenses epreciation epense Income before taes Income ta epenses 4et income

K1@---@--K"--@--2--@--"-@---

("-@--3(-@--1-+@--K 2$2@---

Earnings per s'are D1--@--- s'ares

K2.$2

T'e fo!!o7ing data is compi!ed re!atie to Me!ton=s operating segments> %ercent Identified 7it' Segment Mote!s ;rains Candy #eenues "2 $- + Cost of goods so!d "+ ", 3 /perating and administratie epense 3$ $1$ epreciation epense "( "2 12 Inc!uded in t'e amounts a!!ocated to eac' segment on t'e aboe percentages are t'e fo!!o7ing epenses 7'ic' re!ate to genera! corporate actiities> /perating Segment Mote!s ;rains Candy Tota!s /perating and administratie epense K12@--K,@--K3@--K2"@--epreciation epense 3@$-"@--2@$-1-@--Inst!uct#ons

Da Db

%repare a sc'edu!e s'o7ing t'e amounts distributed to eac' segment. Based on!y on t'e aboe information@ 7'ic' segments must be reported and 7'y

Solut#on 24-=;

Da #eenues D1 Epenses5 Cost of goods so!d D1 /perating and admin. epense D2 epreciation epense D3 Tota! epenses /perating profit

/perating Segment Mote!s ;rains Candy Tota!s K"2-@--K$--@--K+-@--- K1@---@--1,2@--$+@--1"@,-2("@,-K1$$@1--

D1

Tota! times segment percentage.

D2

Mote!s ? DK2--@--- Q 3$  K12@--- ? K$+@--;rains ? DK2--@--- Q $-  K,@--- ? K,1@--Candy ? DK2--@--- Q 1$  K3@--- ? K2)@---

1,(@--,1@--12@+-2,,@+-K2--@2--

12@--2)@--2@3-"1@3-K3+@)-- K

"--@--1)(@--3-@--(-(@--3,"@---


24 - 23

Solut#on 24-=; Dcont.

D3

Db

Mote!s ? DK"-@--- Q "(  K3@$-- ? K1"@,-;rains ? DK"-@--- Q "2  K"@--- ? K12@+-Candy ? DK"-@--- Q 12  K2@$-- ? K2@3--

T7o segments@ Mote!s and ;rains@ must be reported because t'ey satisfy t'e reenue testG t'at is@ t'e segment=s reenues are 1- or more of t'e combined reenues of a!! operating segments. In addition@ t'e Mote!s and t'e ;rains segments meet t'e 1- of t'e operating profit test.

E@" 24-=<5Interim reports.

A fe7 years ago@ a pub!is'ing company in t'e fourt' quarter 'ad a net profit figure t'at eceeded sa!es for t'at quarter. Suc' a situation as t'is suggests t'at some difficu!t accounting issues are ino!ed in interim reporting. Inst!uct#ons

Da

'at are t'e ma*or accounting prob!ems re!ated to interim reports

Db

'at prob!em eists 7it' income taes in interim reports and 'o7 does APB Opinion No. 28 recommend t'at taes s'ou!d be reported 'at does FASB Interpretation No. 18 require

Dc

0any academicians 'ae attempted to predict t'e year=s net income after t'e first quarter=s income is reported. T'ese attempts are genera!!y unsuccessfu!@ no matter 'o7 sop'isticated t'e prediction mode!. 'at mig't be t'e reason for t'is inabi!ity to predict

Solut#on 24-=<

Da

T'e ma*or accounting issues re!ated to interim reporting are t'e treatment of D1 etraordinary items@ D2 annua!!y determined items suc' as income taes@ pension costs@ eecutie compensation based on annua! net income@ and D3 t'e prob!em of seasona!ity.

Db

T'e basic question 7it' income taes is 7'et'er in t'e preparation of interim income statements t'e proision for taes s'ou!d ref!ect t'e anticipated effectie ta rate for t'e year or be computed on t'e basis of actua! resu!ts for t'at interim period. APB Opinion No. 28 recommends t'at at t'e end of eac' interim period t'e company s'ou!d ma9e its best estimate of t'e effectie ta rate epected to be app!icab!e for t'e fu!! fisca! year. T'e rate so determined s'ou!d be used in proiding for income taes on a current year&to&date basis. FASB Interpretation No. 18 requires t'at t'e estimated annua! effectie ta rate be app!ied to t'e year&to&date HordinaryH income at t'e end of eac' interim period to compute t'e year& to&date ta. Furt'er@ t'e interim period ta re!ated to ordinary income s'a!! be t'e difference bet7een t'e amount so computed and t'e amounts reported for preious interim periods of t'e fisca! period.

Dc

T'e prediction mode!s are probab!y unsuccessfu! because accountants 'ae not treated t'e prob!em of seasona!ity correct!y in t'eir interim reports. T'e prob!em 7it' t'e conentiona! approac' is t'at fied nonmanufacturing costs are not c'arged in proportion to sa!es. #at'er@ t'ese costs are c'arged as incurred@ or spread een!y oer t'e four quarters. As a resu!t@ it is etreme!y difficu!t to ma9e accurate predictions because some artificia! concepts are used for matc'ing purposes.

24 - 24


E@" 24-==5Inentory and cost of goods so!d at interim dates.

iscuss 'o7 inentory and cost of goods so!d may be afforded specia! accounting treatment at interim dates.

Solut#on 24-==

T'e fo!!o7ing eceptions are appropriate at interim reporting dates> a.

Companies may use t'e gross profit met'od for interim inentory pricing.

b.

'en 6IF/ inentories are !iquidated at an interim date and are epected to be rep!aced by year end@ cost of goods so!d s'ou!d be based on epected rep!acement cost of t'e !iquidated 6IF/ base rat'er t'an 'istorica! cost.

c.

Inentory mar9et dec!ines s'ou!d not be deferred beyond t'e interim period un!ess t'ey are temporary and no !oss is epected for t'e fisca! period. #ecoeries of suc' !osses on t'e same inentory in !ater interim periods s'a!! be recogni
d.

%!anned ariances under a standard cost system 7'ic' are epected to be absorbed by year end may be deferred.

E@" 24-=?5Forecasts.

#ecent proposa!s by inestors and ot'ers 'ae suggested t'at corporations inc!ude financia! forecasts in t'eir annua! reports. It furt'er 'as been suggested t'at t'e C%A attest to t'ose forecasts. Inst!uct#ons

Da Db

'at arguments are adanced to support t'e pub!ication of suc' forecasts 'at arguments are adanced t'at oppose t'e pub!ication of suc' forecasts

Solut#on 24-=?

Da

T'e basic argument for t'e pub!ication of financia! forecasts in corporate annua! reports is to proide t'e inestor 7it' additiona! information about t'e future actiities of t'e company upon 7'ic' to base inestment decisions. A second argument is t'at some inestors 'ae access to t'e forecast data current!yG it 7ou!d be more equitab!e if a!! inestors 'ad access to suc' information. T'e attestation by t'e C%A to suc' forecast data 7ou!d proide t'e forecast data 7it' re!iabi!ity and permit t'e inestor to 'ae confidence in t'e forecast. A third argument is t'at circumstances no7 c'ange so rapid!y t'at 'istorica! information is no !onger adequate for prediction.

Db

One argument raised against t'e pub!ication of suc' forecasts is t'e epectation t'at

management 7ou!d present a conseratie forecast in order to H!oo9 goodH 7'en actua! resu!ts of t'e year are in. A second point often considered is t'e prospect t'at t'e forecast 7ou!d proide competitors 7it' confidentia! information t'us endangering business strategy and t'e performance of t'e firm. A third argument is t'at forecasts are narro7 estimates@ 7'ic' ma9es t'em difficu!t to interpret gien t'at t'e future is not a certainty@ and as a resu!t inestors may be mis!ed by t'em.


24 - 2:

T'e attestation by C%As a!so can be questioned. T'ere may be a conf!ict of interest because t'e forecast in t'e current year report and t'e actua! resu!ts of t'e net year are bot' audited by t'e C%A. T'ere 7ou!d be concern t'at t'e reported resu!ts mig't be ad*usted so t'at t'e forecast appears to be borne out by t'e actua! resu!ts. Additiona!!y@ it can be questioned t'at t'e C%A 'as t'e training and qua!ifications to attest to forecasts. A!so@ t'e profession is 'esitant to attest to forecasts unti! t'e prob!em of additiona! eposure to !iabi!ity is c!arified.

E@" 24-?>5Financia! statement ana!ysis.

T'e condensed financia! statements of Lames Company for t'e years 2--)&2--+ are presented be!o7> Lames Company Comparatie Ba!ance S'eets As of ecember 31@ 2--+ and 2--) Cas' #eceiab!es Dnet Inentories %!ant and equipment Accumu!ated depreciation Accounts payab!e iidends payab!e Bonds payab!e Common stoc9 DK1- par #etained earnings

2--+ K "2-@--"(-@--3+-@--1@)--@--D2(-@--- K2@)--@---

2--) K 12-@--3--@--3"-@--1@112@--D1,2@--- K1@(+-@---

K 2"-@--&-& "--@--1@$2-@--$"-@--K2@)--@---

K 1(-@--"-@--&-& 1@2--@--2+-@--K1@(+-@---

Additiona! data> 0ar9et a!ue of stoc9 at 12N31N-+ is K+- per s'are. Lames so!d 32@--- s'ares of common stoc9 at par on Lu!y 1@ 2--+. Lames Company Condensed Income Statement For t'e ear Ended ecember 31@ 2--+ Sa!es Cost of goods so!d ;ross profit Administratie and se!!ing epense 4et income

K2@"--@--1@(--@--+--@--$--@--K 3--@---

Inst!uct#ons

Compute t'e fo!!o7ing financia! ratios by p!acing t'e proper amounts in t'e parent'eses proided for numerators and denominators.

24 - 2;


E@" 24-?> Dcont.

a.

Current ratio at 12N31N-+

D D

 

b.

Acid test ratio at 12N31N-+

D D

 

c.

#eceiab!es turnoer in 2--+

D D

 

d.

Inentory turnoer in 2--+

D D

 

e.

%rofit margin on sa!es in 2--+

D D

 

f.

Earnings per s'are in 2--+

D D

 

g.

#ate of return on common stoc9 equity in 2--+

D D

 

'.

%rice earnings ratio at 12N31N-+

D D

 

i.

ebt to tota! assets at 12N31N-+

D D

 

*.

Boo9 a!ue per s'are at 12N31N-+

D D

 

Solut#on 24-?>

K1@2(-@--a. 55555 K2"-@---

f.

K3--@--5555 13(@---

K2@"--@--c. 55555 K3+-@---

g.

K3--@--55555 K1@))-@---

K1@(--@--d. 55555 K3(-@---

'.

b.

K++-@--5555 K2"-@---

K3--@--e. 55555 K2@"--@---

K+555 K2.21

i.

K("-@--55555 K2@)--@---

*.

K2@-(-@--55555 1$2@---


24 - 2<

E@" 24-?95Se!ected financia! ratios.

T'e fo!!o7ing information pertains to Tyson Company> Cas' Accounts receiab!e 0erc'andise inentory %!ant assets Dnet Tota! assets

K "-@--12$@--)$@--3(-@--K(--@---

Accounts payab!e Accrued taes and epenses payab!e 6ong&term debt Common stoc9 DK1- par %aid&in capita! in ecess of par #etained earnings Tota! equities

K $$@--2$@--12-@--1(-@--"-@--2--@--K(--@---

4et sa!es Da!! on credit Cost of goods so!d 4et income

K,--@--()$@--)2@---

Inst!uct#ons

Compute t'e fo!!o7ing> DIt is not necessary to use averages for any ba!ance s'eet figures ino!ed. Da Current ratio Db Inentory turnoer Dc #eceiab!es turnoer Dd Boo9 a!ue per s'are De Earnings per s'are Df ebt to tota! assets Dg %rofit margin on sa!es D' #eturn on common stoc9 equity

Solut#on 24-?9

Da

DK"-@--- R K12$@--- R K)$@--- O DK$$@--- R K2$@--- ? K2"-@--- O K+-@--- ? 3.--.

Db

K()$@--- O K)$@--- ? , times.

Dc

DK,--@--- O K12$@--- ? ).2 times.

Dd

DK1(-@--- R K"-@--- R K2--@--- O DK1(-@--- O K1- ? K2$.

De

K)2@--- O DK1(-@--- O K1- ? K".$-.

Df

DK$$@--- R K2$@--- R K12-@--- O K(--@--- ? 33.3.8

Dg

K)2@--- O K,--@--- ? +.

D'

K)2@--- O DK1(-@--- R K"-@--- R K2--@--- ? 1+.-.

8#ounded amounts.

24 - 2=


E@" 24-?25Computation of se!ected ratios.

T'e fo!!o7ing data is gien> Cas' Accounts receiab!e Dnet Inentories %!ant assets Dnet

ecember 31@ 2--+ 2--) K ",@--K $-@--(+@--(-@--,-@--11-@--"--@--32$@---

Accounts payab!e ages payab!e Bonds payab!e 1- %referred stoc9@ K"- par Common stoc9@ K1- par %aid&in capita! #etained earnings

$$@--1-@--)-@--1--@--12-@--+-@--1)2@---

4et credit sa!es Cost of goods so!d 4et income

+--@--$--@--1--@---

Inst!uct#ons

Compute t'e fo!!o7ing ratios> Da Acid&test ratio at 12N31N-+ Db #eceiab!es turnoer in 2--+ Dc Inentory turnoer in 2--+ Dd %rofit margin on sa!es in 2--+ De #ate of return on common stoc9 equity in 2--+ Df Boo9 a!ue per s'are of common stoc9 at 12N31N-+

Solut#on 24-?2

Da

K11)@--- O K($@--- ? 1.+.

Db

K+--@--- O DK(-@--- R K(+@--- O 2U ? 12.$ times.

Dc

K$--@--- O DK11-@--- R K,-@--- O 2U ? $ times.

Dd

K1--@--- O K+--@--- ? 12.$.

De

DK1--@---  K1-@--- O DK33-@--- R K3)2@--- O 2U ? 2$.(.

Df

K3)2@--- O 12@--- ? K31.

"-@--$@--)-@--1--@--,-@--($@--1)$@---


24 - 2?

PRO%LE$S P!" 24-?3 5Segment reporting.

A centra! issue in reporting on operating segments of a business enterprise is t'e determination of 7'ic' segments are reportab!e. Inst!uct#ons

1. 'at are t'e tests to determine 7'et'er or not an operating segment is reportab!e 2. 'at is t'e test to determine if enoug' operating segments 'ae been separate!y reported upon@ and 7'at is t'e guide!ine on t'e maimum number of operating segments to be s'o7n

Solut#on 24-?3

1.

T'ere are t'ree basic tests to be app!ied to segments of a company to see if t'ey are significant enoug' to be separate!y reportab!e. If a segment meets any one of t'e tests@ it is deemed significant and reportab!e. T'e first test is based upon reenue. If a segment=s reenue from sa!es to unaffi!iated customers and intersegment sa!es and transfers is equa! to 1- percent or more of t'e enterprise=s combined reenues@ t'e segment is reportab!e. T'e second test is based upon profits or !osses. A segment is deemed reportab!e if t'e abso!ute amount of its profit or !oss is 1- percent or more of t'e greater@ in abso!ute amount@ of> T'e combined profits of a!! operating segments reporting profits. T'e combined !osses of a!! operating segments reporting !osses. T'ird@ a segment is significant and reportab!e if t'e identifiab!e assets of t'e segment equa! or eceed 1- percent of t'e combined assets of a!! operating segments 7it'in t'e enterprise. Fina!!y@ a!! segments@ 7'et'er deemed reportab!e or not@ must be ie7ed from t'e standpoint of interperiod comparabi!ity because t'e primary purpose of presenting segment information is to aid t'e financia! statement reader.

2.

Statement o Financia! Accounting Standards No. 1"1 states t'at enoug' operating

segments must be separate!y reported so t'at t'e tota! of reenues from sa!es to unaffi!iated customers for t'e reportab!e segments equa!s or eceeds )$ percent of t'e combined sa!es to unaffi!iated customers for t'e entire enterprise. If app!ying t'e prescribed tests does not yie!d t'e required percentage of reenues described aboe@ additiona! segments must be reported on unti! t'e )$ percent test is met. T'e Financia! Accounting Standards Board 'as stated t'at if an enterprise 'as many reportab!e segments@ benefit to t'e reader may be !ost if more t'an 1- segments are reported. In suc' a situation@ t'e board suggests combining re!ated reportab!e segments unti! t'e tota! is ten or fe7er.

24 - 3>


P!" 24-?4 5Interim reporting.

Interim financia! reporting 'as become an important topic in accounting. T'ere 'as been considerab!e discussion as to t'e proper met'od of ref!ecting resu!ts of operations at interim dates. According!y@ t'e Accounting %rincip!es Board issued an opinion c!arifying some aspects of interim financia! reporting. Inst!uct#ons

Da

iscuss genera!!y 'o7 reenue s'ou!d be recogni
Db

iscuss genera!!y 'o7 product and period costs s'ou!d be recogni
Dc

iscuss 'o7 t'e proision for income taes is computed and ref!ected in interim financia! statements.

Solut#on 24-?4

Da

Sa!es and ot'er reenues s'ou!d be recogni
Db

For interim reporting purposes@ product costs Dcosts direct!y attributab!e to t'e production of goods or serices s'ou!d be matc'ed 7it' t'e product and associated reenues in t'e same manner as for annua! reporting purposes. %eriod costs Dcosts not direct!y associated 7it' t'e production of a particu!ar good or serice s'ou!d be c'arged to earnings as incurred or a!!ocated among interim periods based on an estimate of time epired@ benefit receied@ or ot'er actiity associated 7it' t'e particu!ar interim periodDs. A!so@ if a gain or !oss occurs during an interim period and is a type t'at 7ou!d not be deferred at year end@ t'e gain or !oss s'ou!d be recogni

Ch24 Full Disclosure in Financial Reporting

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