ACG 4101 Ch. 3
Define the terms paid-in-capital and retained earnings.
Paid-in capital consists of amounts invested by shareholders in the corporation. Retained earnings equals net income less dividends paid to shareholders from the inception of the corporation.
Explain how each of the following liabilities would be classified in the balance sheet: - A note payable of $100,000 due in five years. - A note payable of $100,000 payable in annual installments of $20,000 each, with the first installment due next year.
A note payable of $100,000 due in five years would be classified as a long-term liability. A $100,000 note due in five annual installments of $20,000 each would be classified as a $20,000 current liability—current maturities of long-term debt—and an $80,000 long-term liability.
What is a proxy statement? What information does is provide?
A proxy statement must be reported each year to all shareholders. It is usually reported at the same time as the annual report. The statement invites shareholders to the shareholders' meeting to elect board members and to vote on issues before the shareholders. It also permits shareholders to vote using an enclosed proxy card. The proxy statement also provides for more disclosures on compensation to directors and executives, and in particular, stock options granted to executives.
Define a subsequent event.
A subsequent event is an event that occurs after the date of the financial statements but prior to the date on which the statements are actually issued or "available to be issued." It may help to clarify a previously existing situation or it may represent a new event not directly affecting financial position at the end of the reporting period.
(Based on Appendix 3) Segment reporting facilitates the financial statement analysis of diversified companies. What determines whether an operating segment is a reportable segment for this purpose?
An operating segment is a component of an enterprise: 1. That engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same enterprise). 2. Whose operating results are regularly reviewed by the enterprise's chief operating decision-maker to make decisions about resources to be allocated to the segment, and to assess its performance. 3. For which discrete financial information is available.
Define current assets and list the typical asset categories included in this classification.
Current assets include cash and other assets that are reasonably expected to be converted to cash or consumed during one year, or within the normal operating cycle of the business if the operating cycle is longer than one year. The typical asset categories classified as current assets include: — Cash and cash equivalents — Short-term investments — Accounts receivable — Inventories — Prepaid expenses
Define current liabilities and list the typical liability categories included in this classification.
Current liabilities are those obligations that are expected to be satisfied through the use of current assets or the creation of other current liabilities. So, this classification will include all liabilities that are scheduled to be liquidated within one year or the operating cycle, whichever is longer, except those that management intends to refinance on a long-term basis. The typical liability categories classified as current liabilities include: — Accounts payable — Short-term notes payable — Accrued liabilities — Current maturities of long-term debt
Show the calculation of the following financing ratios: (1) the debt to equity ratio, and (2) the times interest earned ratio.
Debt to equity ratio= Total liabilities/ Shareholders' equity Times interest earned ratio =Net income + interest + taxes/ Interest
The auditors' report provides the analyst with an independent and professional opinion about the fairness of the representations in the financial statements. What are the four main types of opinion an auditor might issue? Describe each.
Depending on the circumstances, the auditor will issue a (an): 1. Unqualified opinion—The auditors are satisfied that the financial statements "present fairly" the financial position, results of operations, and cash flows and are "prepared in accordance with generally accepted accounting principles." 2. Qualified opinion—This contains an exception to the standard unqualified opinion, but not of sufficient seriousness to invalidate the financial statements as a whole. Examples of exceptions are (a) unconformity with generally accepted accounting principles, (b) inadequate disclosures, and (c) a limitation or restriction of the scope of the examination. 3. Adverse opinion—This is necessary when the exceptions (a) and (b) above are so serious that a qualified opinion is not justified. Adverse opinions are rare because auditors usually are able to persuade management to rectify problems to avoid this undesirable report. 4. Disclaimer—An auditor will disclaim an opinion if item (c) above applies and, therefore, insufficient information has been gathered to express an opinion.
Describe at least two differences between U.S. GAAP and IFRS in balance sheet presentation.
Differences in balance sheet presentation between U.S. GAAP and IFRS include: 1. International standards specify a minimum list of items to be presented in the balance sheet. U.S. GAAP has no minimum requirements. 2. IAS No. 1, revised, changed the title of the balance sheet to statement of financial position, although companies are not required to use that title. Some U.S. companies use the statement of financial position title as well. 3. Under U.S. GAAP, we present current assets and liabilities before noncurrent assets and liabilities. IAS No. 1 doesn't prescribe the format of the balance sheet, but balance sheets prepared using IFRS often report noncurrent items first.
Disclosure notes are an integral part of the information provided in financial statements. In what ways are the notes critical to understanding the financial statements and to evaluating the firm's performance and financial health?
Disclosure notes provide additional detail concerning specific financial statement items. Included are such data as the fair values of financial instruments and off-balance-sheet risk associated with financial instruments and details of pension plans, leases, debt, and assets. Common to all companies' disclosures are certain specific notes such as a summary of significant accounting policies, descriptions of subsequent events, and related third-party transactions. However, many notes are designed to fit the disclosure needs of the particular reporting company. In fact, any explanation that helps investors and creditors make decisions should be included.
(Based on Appendix 3) For segment reporting purposes, what amount are reported by each operating segment?
For areas determined to be reportable operating segments, the following disclosures are required: 1. General information about the operating segment. 2. Information about reported segment profit or loss, including certain revenues and expenses included in reported segment profit or loss, segment assets, and the basis of measurement. 3. Reconciliations of the totals of segment revenues, reported profit or loss, assets, and other significant items to corresponding enterprise amounts. 4. Interim period information.
Where can we find authoritative guidance for balance sheet presentation under IFRS?
IAS No.1, revised, "Presentation of Financial Statements," provides authoritative guidance for balance sheet presentation under IFRS.
Explain the difference(s) between investments in equity securities classified as current assets versus those classified as noncurrent assets.
Investments in equity securities are classified as current if the company's management (1) intends to liquidate the investment in the next year or operating cycle, whichever is longer, and (2) has the ability to do so, that is, the investment is marketable. If either of these criteria does not hold, the investment is classified as noncurrent.
Distinguish between property. plant, and equipment and intangible assets.
Property, plant, and equipment and intangible assets each represent assets that are long-lived and are used in the operations of the business. The difference is that property, plant, and equipment represent physical assets, while intangible assets lack physical substance. Generally, intangible assets represent the ownership of an exclusive right, such as a patent, copyright, or franchise.
Explain why the balance sheet does not portray the market value of the entity.
The balance sheet does not portray the market value of the entity (number of common stock shares outstanding multiplied by price per share) for a number of reasons. Most assets are not reported at fair value, but instead are measured according to historical cost. Also, there are certain resources, such as trained employees, an experienced management team, and a good reputation, that are not recorded as assets at all. Therefore, the assets of a company minus its liabilities, as shown in the balance sheet, will not be representative of the company's market value.
Describe the common characteristics of assets classified as property, plant, and equipment and identify some assets included in this classification.
The common characteristics that these assets have in common are that they are tangible, long-lived assets used in the operations of the business. They usually are the primary revenue-generating assets of the business. These assets include land, buildings, equipment, machinery, furniture, and other assets used in the operations of the business, as well as natural resources, such as mineral mines, timber tracts, and oil wells.
A summary of the company's significant accounting policies is a required disclosure. Why is this disclosure important to external financial statement users?
The disclosure of the company's significant accounting policies is extremely important to external users in terms of their ability to compare financial information across companies. It is critical to a financial analyst involved in assessing future cash flows of two retail companies to know that one company uses FIFO and the other uses LIFO in recognizing inventory and cost of goods sold.
Every annual report of a public company includes an extensive discussion and analysis provided by the company's management. Specifically, which aspects of the company must this discussion address? In't management's perspective too biased to be of use to investors and creditors?
The discussion provides management's views on significant events, trends, and uncertainties pertaining to the company's (a) operations, (b) liquidity, and (c) capital resources. Certainly the Management Discussion and Analysis section may be slanted toward management's biased perspective and therefore can lack objectivity. However, management can offer an informed insight that might not be available elsewhere, so if the reader maintains awareness of the information's source, it can offer a unique view of the situation.
Describe what is meant by an operating cycle for a typical manufacturing company.
The operating cycle for a typical manufacturing company refers to the period of time required to convert cash to raw materials, raw materials to a finished product, finished product to receivables, and then finally receivables back to cash.
Describe the purpose of the balance sheet.
The purpose of the balance sheet, also known as the statement of financial position, is to present the financial position of the company on a particular date. Unlike the income statement, which is a change statement that reports events occurring during a period of time, the balance sheet is a statement that presents an organized array of assets, liabilities, and shareholders' equity at a point in time. It is a freeze-frame or snapshot picture of financial position at the end of a particular day marking the end of an accounting period.
(Based on Appendix 3) Describe any differences in segment disclosure requirements between U.S. GAAP and IFRS.
U.S. GAAP requires companies to report information about reported segment profit or loss, including certain revenues and expenses included in reported segment profit or loss, segment assets, and the basis of measurement. The international standard on segment reporting, IFRS No. 8, requires that companies also disclose the total liabilities of its reportable segments.
Define the terms working capital, current ratio, and acid-test ratio (or quick ratio).
Working capital is the difference between current assets and current liabilities. The current ratio is computed by dividing current assets by current liabilities. The acid-test ratio (or quick ratio) is computed by dividing quick assets (cash and cash equivalents, marketable securities, and accounts receivable) by current liabilities.