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    2 $ha"ter 21 Analysis of Financial Statements

    31 Effect of "re"arin! financial statements a.*uste. for "rice-le%el chan!es32 9aluation of machinery on a "rice-le%el a.*uste. balance sheet33 $om"utation of "urchasin! "ower loss on net monetary items34 $om"utation of realize. hol.in! !ain un.er current cost/nominal .ollar

    accountin!3# etermination of en.in! in%entory on com"arati%e constant "urchasin!

    "ower a.*uste. balance sheet3& $om"utation of unrealize. hol.in! !ain un.er current cost/nominal

    .ollar accountin!3+ $om"utation of unrealize. hol.in! !ain3 $om"utation of net monetary "osition3 $om"utation of translate. net income4 $om"utation of translation a.*ustment amount

    P RO$LEMS

    1 re"are common-size balance sheet com"arin! "ercenta!es2 $om"utation of in%entory turno%er rate an. number of .ays6 sales in

    in%entory3 $om"utation of current ratio: net an. !ross mar!in: .ebt-to-e7uity ratio:

    etc;4 $om"utation of in%entory turno%er: number of .ays6 sales in in%entory:

    !ross mar!in# $om"utation of recei%ables turno%er: number of .ays6 sales in

    recei%ables& $om"utation of earnin!s on e7uity: times bon. interest earne.: E S:

    "rice-earnin!s ratio: boo %alue "er share: .ebt-to-e7uity ratio+ $om"utation of total e7ui"ment "urchases: cash "ai. for ta,es an..i%i.en.s

    $om"utation of en. of year "urchasin! "ower !ains/losses re"are balance sheet restatement

    1 $om"utation of realize. hol.in! !ain or loss an. unrealize. hol.in!!ain or loss

    11 re"are an income statement restate. in terms of en.-of-year constant.ollars;

    12 re"are translate. balance sheet 13 re"are translate. trial balance

    14 re"aration of Form 2 F reconciliation1# $om"rehensi%e statement of cash flows1& Accountin! .ifferences an. ratio analysis1+ Accountin! .ifferences an. ratio analysis1 Accountin! .ifferences an. ratio analysis1 re"aration of Form 2 F reconciliation2 re"aration of Form 2 F reconciliation

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    Test auh $or"oration ha. a current ratio of 2; at the en. of 2 1; $urrentassets

    )(1 an. current liabilities increase. by e7ual amounts .urin! 2 2; The effectson net wor in! ca"ital an. on the current ratio: res"ecti%ely: werea; no effect? increase;b; no effect? .ecrease;c; increase? increase;.; .ecrease? .ecrease;

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    & $ha"ter 21 Analysis of Financial Statements

    a #; 0hich of the followin! ratios measures short-term sol%ency=)(1 a; $urrent ratio

    b; $re.itors6 e7uity to total assetsc; >eturn on in%estment.; Total asset turno%er

    . &; 'f a firm chan!es its in%entory metho. from F'F( to )'F( *ust "rior to a"erio.

    )(2 of risin! "rices: the effect in the ne,t "erio. will be$urrent >atio 'n%entory Turno%er

    a; @o effect 'ncreaseb; @o effect ecreasec; 'ncrease ecrease.; ecrease 'ncrease

    b +; 0hich of the followin! transactions woul. increase a firm6s current ratio=)(1 a; urchase of in%entory on account

    b; ayment of accounts "ayablec; $ollection of accounts recei%able.; urchase of tem"orary in%estments for cash

    c ; ow are tra.e recei%ables use. in the calculation of each of the followin!=)(1 >ecei%able

    $urrent >atio Turno%era; @ot use. @umerator b; @umerator @umerator

    c; @umerator enominator .; enominator @umerator

    b ; 'n com"arin! the current ratios of two com"anies: why is it in%ali. toassume

    )(1 that the com"any with the hi!her current ratio is the better com"any=a; A hi!h current ratio may in.icate ina.e7uate in%entory on han.;b; A hi!h current ratio may in.icate inefficient use of %arious assets an.

    liabilities;c; The two com"anies may .efine wor in! ca"ital in .ifferent terms;.; The two com"anies may be .ifferent sizes;

    c 1 ; A metho. of accountin! base. on measures of historical "rices in .ollars:

    each)(4 of which has the same !eneral "urchasin! "ower: is

    a; current cost/constant .ollar accountin!;b; current cost/nominal .ollar accountin!;c; historical cost/constant .ollar accountin!;

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    Test ecei%ables un.er ca"italize. leasesb; (bli!ations un.er ca"italize. leasesc; oo.will.; Accounts "ayable

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    . 1&; 'n current cost accountin!)(4 a; !eneral "rice le%el !ains or losses are reco!nize. on net monetary

    items;b; amounts are always state. in common "urchasin! "ower units of

    measurement;c; hol.in! !ains are i!nore.;.; current %alues may be measure. in nominal .ollars or constant .ollars;

    . 1+; 0hich of the followin! is the "rimary factor in .eterminin! the functional)(# currency of a forei!n subsi.iary=

    a; ow the costs for the forei!n entity8s "ro.uct are .etermine.b; The .enomination of the forei!n entity8s financin!c; The location of the "rimary sales mar et that influences the "rice of the

    forei!n entity8s "ro.uct.; 5ana!ement8s assessment of all rele%ant factors

    a 1 ; A translation a.*ustment resultin! from the translation "rocess is .isclose.on

    )(# the financial statementsa; as a se"arate com"onent of stoc hol.ers8 e7uity;b; as a below-the-line item on the income statement;c; as an a.*ustment to retaine. earnin!s;.; as a "art of income from o"erations on the income statement;

    . 1 ; 0hich of the followin! is the least li ely means a com"any mi!ht choose to)(3 meet the nee.s of international in%estors=

    a; Translation of financial statements or annual re"orts into the lan!ua!e

    of the user;b; enomination of the financial statements in the currency of the countrywhere the financial statements will be use.;

    c; artial or com"lete restatement of financial statements to the accountin!"rinci"les of the financial statement users8 country;

    .; 5utual reco!nition in which one country acce"ts the financialstatements

    of another country for re!ulatory "ur"oses such as listin! on stoce,chan!es or filin! annual re"orts;

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    . 22; Selecte. information from the accountin! recor.s of Thorne $om"any is as)(1 followsB

    @et sales for 2 2;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C :$ost of !oo.s sol. for 2 2;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; & :'n%entory at ecember 31: 2 1;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1 :'n%entory at ecember 31: 2 2;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1#&:

    Thorne6s in%entory turno%er for 2 2 isa; #;3& times;b; 3; # times;c; 3;&+ times;.; 3;#+ times;

    a 23; Selecte. information from the accountin! recor.s of the 9assar $om"any is)(1 as followsB

    @et accounts recei%able at ecember 31: 2 1;;;;;;;; C :@et accounts recei%able at ecember 31: 2 2;;;;;;;; 1: :

    Accounts recei%able turno%er;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; # to 1'n%entories at ecember 31: 2 1;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C1:1 :'n%entories at ecember 31: 2 2;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1:2 :'n%entory turno%er;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 4 to 1

    0hat was 9assar6s !ross mar!in for 2 2=a; C1# :b; C2 :c; C4 :.; C# :

    c 24; The followin! .ata were abstracte. from the recor.s of Dohnson$or"oration

    )(1 for the yearBSales;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C1: :

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    b 2#; Selecte. information for enry $om"any is as followsB)(1 ecember 31

    2 1 2 2$ommon stoc ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C& : C& :

    A..itional "ai.-in ca"ital;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 2# : 2# :>etaine. earnin!s;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1+ : 3+ :@et income for year;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 12 : 24 :

    enry6s return on common stoc hol.er6s e7uity: roun.e. to the nearest"ercenta!e "oint: for 2 2 isa; 2 "ercent;b; 21 "ercent;c; 2 "ercent;.; 4 "ercent;

    b 2&; Selecte. information from the accountin! recor.s of Ellison 5anufacturin!)(1 $om"any followsB

    @et sales;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C3:& :$ost of !oo.s sol.;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 2:4 :'n%entories at Danuary 1;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; &+2:'n%entories at ecember 31;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; #+&:

    0hat is the number of .ays6 sales in a%era!e in%entories for the year=a; 1 2;2b; 4;c; +;&.; & ;1

    c 2+; (rchar. $or"oration8s ca"ital stoc at ecember 31 consiste. of thefollowin!B

    )(1 a $ommon stoc : C2 "ar %alue? 1 : shares authorize.: issue.: an.outstan.in!;

    b 1 G noncumulati%e: noncon%ertible "referre. stoc : C1 "ar %alue?1:

    shares authorize.: issue.: an. outstan.in!;(rchar.6s common stoc : which is liste. on a ma*or stoc e,chan!e: was7uote. at C4 "er share on ecember 31; (rchar.6s net income for the year en.e. ecember 31 was C# : ; The yearly "referre. .i%i.en. was.eclare.; @o ca"ital stoc transactions occurre.; 0hat was the "rice-earnin!s ratio on (rchar.6s common stoc at ecember 31=a; & to 1b; to 1c; 1 to 1.; 1& to 1

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    . 2 ; Selecte. financial .ata of Ale,an.er $or"oration for the year en.e.ecember

    )(1 31: 2 2: is "resente. belowB("eratin! income;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C :'nterest e,"ense;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1 :'ncome before income ta,;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C :'ncome ta, e,"ense;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 32 :@et income;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C4 :referre. stoc .i%i.en.s;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 2 :@et income a%ailable to common stoc hol.ers; C2 :

    $ommon stoc .i%i.en.s were C12 : ; The times-interest-earne. ratio isa; 2; to 1;b; 4; to 1;c; &; to 1;.; ; to 1;

    c 2 ; urin! the year: The ra" $om"any "urchase. C1: 2 : of in%entory;The

    )(1 cost of !oo.s sol. for the year was C1: : an. the en.in! in%entory atecember 31 was C3& : ; 0hat was the in%entory turno%er for theyear=a; #;b; #;3c; &;.; &;4

    . 3 ; (n ecember 31: 2 1 an. 2 2: Taft $or"oration ha. 1 : shares of)(1 common stoc an. # : shares of noncumulati%e an. noncon%ertible"referre. stoc issue. an. outstan.in!; A..itional informationB

    Stoc hol.ers6 e7uity at 12/31/2 2;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C4:# :@et income year en.e. 12/31/2 2;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1:2 :i%i.en.s on "referre. stoc year en.e. 12/31/2 2;;;;;;;;;; 3 :

    5ar et "rice "er share of common stoc at 12/31/2 2;;;;;;; 144

    The "rice-earnin!s ratio on common stoc at ecember 31: 2 2: wasa; 1 to 1;b; 12 to 1;c; 14 to 1;.; 1& to 1;

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    b 31; $ou!ar $or"oration be!an o"erations on Danuary 1: 2 2: with C12: of)(4 cash an. imme.iately "urchase. for cash C+: of in%entory;

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    . 3 ; The followin! accounts were ta en from the recor.s of i!h TechElectronics

    )(4 'nc;B Accounts ayable;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C #2: Accounts >ecei%able;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; &&: A.%ances to Em"loyees;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 2:E7ui"ment;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; & :i%i.en.s ayable;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 4 :

    'n%entory;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1&4:atents;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 3&:

    Unearne. Ser%ice >e%enue;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; + :

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    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%ante,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 thefinancial statements as the translation a.*ustment=a; C21: .ebit a.*ustmentb; C+&: .ebit a.*ustmentc; C21: cre.it a.*ustment.; C+&: cre.it a.*ustment

    P RO$LEMS

    Problem 1$om"arati%e balance sheet .ata for the A..yson $o; at the en. of 2 1 an. 2 2followsB

    A..yson $om"any$on.ense. $om"arati%e

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    Stockholders' Equity &G "referre. stoc ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C +:# C +:#$ommon stoc ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; # : # :

    A..itional "ai.-in ca"ital;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 4&: 4&:>etaine. earnin!s;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1 3:3 13&:

    Total stoc hol.ers6 e7uity;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C2 &: C24 :4 Total liabilities an. stoc hol.ers6 e7uity;;;;;;;;;;;;;;;;;;;;;;;;;;;; C34+:4 C2 2:3

    re"are a common-size balance sheet com"arin! financial structure "ercenta!esfor the two-year "erio.;

    Solution 1)(1

    A..yson $om"any$on.ense. $ommon-Size etaine. earnin!s;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; #3 4+Total stoc hol.ers6 e7uity;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 2 G 2 G

    Total liabilities an. stoc hol.ers6 e7uity;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1 G 1 G

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    Problem 4'ncome statements for )a>ue $o; show the followin!B

    2 2 2 1 2Sales net ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C# : C4 : C3# :$ost of !oo.s sol.B

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    Problem 5 The followin! are com"arati%e .ata for ates $om"any for the three-year "erio.2 -2 2B

    'ncome Statement ata 2 2 2 1 2

    @et sales G are on cre.it each "erio. ;;;; C : C+2 : C 4 :@et "urchases;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 4 : 3 : 33 :

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    Problem 6 The balance sheet for the etaine. earnin!s;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; +# : #4 :

    @et income;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 3+#: 3 :5ar et "rice "er share: ecember 31;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; &$ommon stoc .i%i.en.s;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; +#: 4#:

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    Problem The followin! "artial balance sheet information is for (llie $om"anyB

    12/31/ 212/31/ 1

    i%i.en.s ayable;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C 3:4 C 2:2eferre. 'ncome Ta,es )iability ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 4&: 41:#E7ui"ment;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 2:# + :

    Accumulate. e"reciation--E7ui"ment;;;;;;;;;;;;;;;;;;;;;;;;;;;; 2 :3 3 :Una""ro"riate. >etaine. Earnin!s;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; +1: # :

    A""ro"riate. >etaine. Earnin!s;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 2:$ash;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; &+ 3#'ncome Ta, >efun. >ecei%able;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1:+# 1:4

    The followin! a..itional information relates to 2 2Ba @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!B1 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

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    efun.

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    Solution ! )(4

    istorical $on%ersion >estate. Amount Factor Amount

    1 5onetary assets at be!innin! of year; ; C 4 : 1 &/1 C &:45onetary assets at en. of year;;;;;;;;;;;; 4 :urchasin! "ower loss;;;;;;;;;;;;;;;;;;;;;;;;; C #&:4

    2 E,cess of monetary liabilities o%er monetary assets at be!innin! of year C : 1 &/1 C 4:

    E,cess of monetary liabilities o%er monetary assets at en. of year;;;;;;; :

    urchasin! "ower !ain;;;;;;;;;;;;;;;;;;;;;;;;; C 4:

    3 E,cess of monetary liabilities o%ermonetary assets at be!innin! of year C4 : 1 &/1 C # :

    E,cess of monetary liabilities o%er monetary assets at en. of year;;;;;;; 4 :

    urchasin! "ower !ain;;;;;;;;;;;;;;;;;;;;;;;;; C 2 :

    4 @et monetary assets at be!innin! of year C& : 1 &/1 C &3&:@et monetary assets at en. of year;;;;; & :urchasin! "ower loss;;;;;;;;;;;;;;;;;;;;;;;;; C 3&:

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    Problem "(n Danuary 1: 2 2: the account balances for the 0estlon $or"; wereB

    $ash;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C 2:#)iability;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C3 :$a"ital Stoc ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 3+:#>etaine. Earnin!s;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1#:

    C 2:#

    The !eneral "rice in.e, for 2 2 is as followsB ate rice 'n.e,

    Danuary 1 1Duly 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 urchase. e7ui"ment with a three-year estimate. useful life an. nosal%a!e %alue for C#2:# cash strai!ht-line .e"reciation use. ;

    5ay 1 ai. C1#: towar. the outstan.in! liability;Duly 1 >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";

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    1 )an. was "urchase. for C1& : ; The current cost on ecember 31 wasC14#: ;

    2 'n%entory was "urchase. for C+#: ; Three-fourths of the in%entory was sol.on ecember 1 when the current cost for the total in%entory was C : ; Thecurrent cost for en.in! in%entory on ecember 31 was C2#: ;

    3 )an. was "urchase. for C1& : ; (ne half of the lan. was sol. onSe"tember 1 for C12 : when the current cost of the entire "ro"erty wasC23 : ; The current cost on ecember 31 was C14 : ;

    4 'n%entory was "urchase. for C+ : an. C &: on A"ril 1 an. @o%ember 1:res"ecti%ely; The A"ril "urchase was sol. on @o%ember 1# for C112: whenthe current cost was C 2: ; The current cost of the @o%ember 1 in%entoryon ecember 31 was C #: ;

    Solution 1# )(41 $urrent cost;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C14#:

    urchase "rice;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1& :Unrealize. hol.in! loss;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C 1#:

    2 $urrent costOOOOOOOOOOOOOOOOOOO; C &+:# C 2#:urchase "rice;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; #&:2# 1 :+#>ealize. hol.in! !ainOOOOOOOOOOOOOOO C 11:2#Unrealize. hol.in! !ain;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C &:2#

    3 $urrent cost;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C11#: C14 :urchase "rice;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; : :

    >ealize. hol.in! !ain;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C 3#:Unrealize. hol.in! !ain;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C & :

    4 $urrent costOOOOOOOOOOOOOOOOOOO; C 2: C #:urchase "rice;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; + : &:>ealize. hol.in! !ainOOOOOOOOOOOOOOO C 12:Unrealize. hol.in! loss;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C 1:

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    Problem 11The income statement "re"are. in con%entional form for the Thon $o; onecember 31: 2 2: is as followsB

    Thon $o;'ncome Statement

    For Hear En.e. ecember 31: 2 2

    Sales;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C :$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:# &4#:

    ross "rofit on sales;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C34#: ("eratin! e,"enses;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 22#:

    'ncome before income ta,es;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C12 :'ncome ta,es;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 4+: #@et income;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C +2:1#

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

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    Solution 11)(4

    Thon $o;'ncome Statement

    For Hear En.e. ecember 31: 2 2istorical $ost/$onstant ollar

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    in thousan.s >ate 'n U;S; C$ash;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 11:2# C ; + C + :+#

    Accounts recei%able;;;;;;;;;;;;;;;;;;;; &2:# ; + 43+:#'n%entory;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; #+:2# ; + 4 :+#lant assets net ;;;;;;;;;;;;;;;;;;;;;;;; 4 : ; + 342:3

    1+ : C1:2# :3

    Accounts "ayable;;;;;;;;;;;;;;;;;;;;;;;; &4: ; + C 44 :@on-current liabilities;;;;;;;;;;;;;;;;;; +4: ; + #24:3$a"ital stoc ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 12:# ; + +:#>etaine. earnin!s;;;;;;;;;;;;;;;;;;;;;;; 2 :# ; + 1 :#

    1+ :C1:2# :3

    Problem 13Financial 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.;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C ;2$urrent e,chan!e rate;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; ;32 A%era!e rate for the year;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; ;2

    'n a..ition: the com"ute. retaine. earnin!s balance from the "rior year8stranslate. financial statements is C2:4 #: ;

    re"are a translate. trial balance for Toro Enter"rises;

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    Solution 13)(#

    'n Francs E,chan!e 'n U;S; C in thousan.s >ate in thousan.s

    $urrent assets;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 14:# ;32 C 4:&4E7ui"ment;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; :+# ;32 3:12E,"enses;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; &:+# ;2 1:

    31: C :

    $urrent liabilities;;;;;;;;;;;;;;;;;;;;;;;;; &:# ;32 C 2:)on!-term .ebt;;;;;;;;;;;;;;;;;;;;;;;;;;;; 3:2 ;32 1: 24$a"ital stoc ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1:& ;2 32>etaine. earnin!s Danuary 1: 1 :2# com"ute. 2:4 #>e%enues;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1 :4# ;2 2: 2&Translation a.*ustment;;;;;;;;;;;;;;;; #

    31: C :

    Problem 14 The followin! financial information is a%ailable for aul $om"any: a hy"otheticalnon- U;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 anasset an. amortize. o%er a "erio. of 4 years; Accor.in! to U;S; AA: the "ossibleobli!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 tothe amounts of these items un.er U;S; AA ;

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    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 amortizationB3:2 : 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;; C : A.*ustments re7uire. to conform to U;S; AA B

    ossible obli!ation for se%erance benefitsOOOOOOO; 3: :oo.will amortization 3:2 : /4 years OOOOOO;; :

    @et income in accor.ance with U;S; AA OOOOOOOO;; C3:+2 :

    Problem 15 The followin! sche.ule shows the net chan!es in the balance sheet accounts atecember 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: hasnot 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 :#

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    %2 $ha"ter 21 Analysis of Financial Statements

    >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%ableof 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 ecreasero"erty: "lant: an. e7ui"ment;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;C#+ :# C#1 : C& :#)essB Accumulate. .e"reciation;;;;;;;;;;;;;;;;;;;;;;;;;;; 22#:# 22 : 2:#

    C34#: C2 2: C&3:

    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;

    e '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"tionshel. 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: therewere 4 : shares of common stoc outstan.in!;

    f The a""ro"riation of retaine. earnin!s was ma.e in antici"ation of theconstruction 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.;

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    Solution 15 )(& 0illiams $om"any

    Statement of $ash FlowsFor the Hear En.e. ecember 31: 2 2

    $ash flows from o"eratin! acti%itiesB@et income;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;C1+2:3

    A.*ustmentsBe"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%itiesBSale 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;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C 22 : Accumulate. .e"reciation--machine sol. C4 : - C4:2 ;;;;;;;; 43:

    Accumulate. .e"reciation--en.in! balance;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 22#:#e"reciation e,"ense for the year 2 2;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C 41:3

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    %& $ha"ter 21 Analysis of Financial Statements

    2eturn on sales I C4 : C3 : I ;1

    The followin! a..itional information has been assemble.Ba Dames uses the )'F( metho. of in%entory %aluation;

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    c For 2 2: Dames .eci.e. to reco!nize a C1#: liability for futureen%ironmental cleanu" costs; 5ost other firms in Dames8 in.ustry ha%e similar en%ironmental cleanu" obli!ations but ha%e .eci.e. that the amounts of theobli!ations are not reasonably estimable at this time? on a%era!e: these firmsreco!nize. only #G of their total en%ironmental cleanu" obli!ation;

    Show how the %alues for the 3 ratios com"ute. abo%e .iffer if Dames ha. use.F'F(:

    .e"reciate. the asset o%er years: an. reco!nize. only #G of its en%ironmentalcleanu" obli!ation; $om"ute how the financial statements woul. .iffer if thealternati%e accountin! metho.s ha. been use.; o not treat the use of thesealternati%e metho.s as accountin! chan!es; '!nore any income ta, effects;

    Solution 16 )(2

    A.*ustmentsBa Usin! F'F(B

    En.in! in%entory increases by C1#: C##: - C4 : ;@et income for 2 2 increases by C#: M C##: - C4 : - C4 : -C3 : N;

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    %( $ha"ter 21 Analysis of Financial Statements

    Problem 1 The followin! 3 ratios ha%e been com"ute. usin! the financial statements for theyear en.e. ecember 31: 2 2: for Arthur $om"anyB $urrent ratio I $urrent assets/$urrent liabilities

    I C #: C##: I 1;##

    ebt-to-e7uity ratio I Total liabilities/ Stoc hol.ers8 e7uity I C1# : C13 : I 1;1# >eturn on sales I C# : C41 : I ;12

    The followin! a..itional information has been assemble.Ba Arthur uses the )'F( metho. of in%entory %aluation;

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    b 1 -year useful lifeB uses the F'F( metho. of in%entory %aluation; 8s sole .e"reciable asset was "urchase. on Danuary 1: 1 ; The assetcost 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: mostfirms in $>8s in.ustry .e"reciate similar assets o%er 12 years;

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    %) $ha"ter 21 Analysis of Financial Statements

    c For 2 2: $> .eci.e. to reco!nize only #G of an C1 : liability for futureen%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 theobli!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 itsen%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 thesealternati%e metho.s as accountin! chan!es; '!nore any income ta, effects;

    Solution 1! )(2

    A.*ustmentsBa 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;

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    Problem 1"The followin! financial information is for $ $om"any: a non-U;S; firm with sharesliste. on a U;S; stoc e,chan!eB

    @et income com"ute. accor.in! to home country AA ;;;;;;;;;;;;;;;;;;;;;; C4 :Stoc hol.ers8 e7uity: com"ute. accor.in! to home country AA ;;;;;;;1+ :5inority interest: recor.e. as an a..ition to stoc hol.ers8 e7uity;;;;;;;;;

    3#:

    5ar et %alue of in%estment securities ac7uire. this year that were re"orte. at cost of C4: ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;C#:'nterest on the financin! of self-constructe. assets;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;&:

    'f $ $om"any were followin! U;S; AA : the minority interest woul. ha%e beenclassifie. as a liability instea. of as "art of stoc hol.ers8 e7uity; 'n a..ition:minority interest income of C4: for the year woul. ha%e been e,clu.e. from thecom"utation of net income; Un.er U;S; AA the in%estment securities woul.ha%e been classifie. as tra.in! securities an. the interest on financin! of self-constructe. assets woul. ha%e been ca"italize. rather than e,"ense.;

    re"are reconciliations of $8s re"orte. stoc hol.ers8 e7uity an. net income toU;S; AA ;

    Solution 1")(3>econciliation of stoc hol.ers8 e7uityBStoc hol.ers8 e7uity com"ute. accor.in! to home country AA ;;;;;;;;C1+ :

    A.*ustments re7uire. to conform to U;S; AA B5inority interest inclu.e. in stoc hol.ers8 e7uity;;;;;;;;;;;;;;;;;;;;;;;;;;;; 3#:Unrealize. !ain on tra.in! securities C#: - C4: ;;;;;;;;;;;;;;;;; 1:'nterest on financin! of self-constructe. assets;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; &:

    Stoc hol.ers8 e7uity accor.in! to U;S; AA ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;C142:

    >econciliation of net incomeB@et income com"ute. accor.in! to home country AA ;;;;;;;;;;;;;;;;;;;;;;C 4 :5inority interest income;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 4:Unrealize. !ain on tra.in! securities C#: - C4: ;;;;;;;;;;;;;;;;;;;;;;;; 1:'nterest on financin! of self-constructe. assets;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; &:@et income in accor.ance with U;S; AA ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;C 43:

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    &* $ha"ter 21 Analysis of Financial Statements

    Problem 2# The followin! financial information is for (laf $om"any: a non-U;S; firm with sharesliste. on a U;S; stoc e,chan!eB

    @et income com"ute. accor.in! to home country AA ;;;;;;;;;;;;;;;;;;;;;;C 3# :Stoc hol.ers8 e7uity: com"ute. accor.in! to home country AA ;;;;;;; 4:1 :ossible obli!ation for se%erance benefits to be "ai. to em"loyeesin future years: reco!nize. this year;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1: :oo.will reco!nize. as a subtraction from e7uity rather than asan asset occurre. 4 years a!o ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1:& :

    5inority interest: recor.e. as an a..ition to stoc hol.ers8 e7uity;;;;;;;;; 3 :5ar et %alue of in%estment securities ac7uire. this year that were re"orte. at cost of C2: ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; C 3:2'nterest on the financin! of self-constructe. assets;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 4:

    'f (laf $om"any were followin! U;S; AA : the minority interest woul. ha%e beenclassifie. as a liability instea. of as "art of stoc hol.ers8 e7uity; 'n a..ition:minority interest income of C3: for the year woul. ha%e been e,clu.e. from thecom"utation of net income; Un.er U;S; AA the in%estment securities woul.ha%e been classifie. as tra.in! securities an. the interest on financin! of self-constructe. assets woul. ha%e been ca"italize. rather than e,"ense.;

    re"are reconciliations of (laf8s re"orte. stoc hol.ers8 e7uity an. net income toU;S; AA ;

    Solution 2# )(3>econciliation of stoc hol.ers8 e7uityBStoc hol.ers8 e7uity com"ute. accor.in! to home country AA ;;;;;;;;C4:1 :

    A.*ustments re7uire. to conform to U;S; AA Boo.will a.*uste. for amortizationC1:& : - C1:& : , 4/2 ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1:2 :ossible obli!ation for se%erance benefits;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1: :5inority interest inclu.e. in stoc hol.ers8 e7uity;;;;;;;;;;;;;;;;;;;;;;;;;;;; 3 :Unrealize. !ain on tra.in! securities C3:2 - C2: ;;;;;;;;;;;;;;;;; 1:2'nterest on financin! of self-constructe. assets;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 4:

    Stoc hol.ers8 e7uity accor.in! to U;S; AA ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;C&:3##:2

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    >econciliation of net incomeB@et income com"ute. accor.in! to home country AA ;;;;;;;;;;;;;;;;;;;;;;C 3# :ossible obli!ation for se%erance benefits;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1: :oo.will amortization C1:& : 2 ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; :

    5inority interest income;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 3:Unrealize. !ain on tra.in! securities C3:2 - C2: ;;;;;;;;;;;;;;;;;;;;;;;; 1:2'nterest on financin! of self-constructe. assets;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 4:@et income in accor.ance with U;S; AA ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;C1:2+ :2

    Problem 21 Assume that you ha%e *ust been hire. as the controller of the Trent 5anufacturin!$om"any; 'n or.er to be fully a""rise. of the financial an. o"eratin! con.ition of thecom"any: you ha%e .eci.e. to analyze se%eral of the ey accounts a""earin! on thecom"any8s financial statements; An account of ob%ious interest to you is thecom"any8s tra.e accounts recei%able; '.entify s"ecific attributes of the accounts recei%able that you woul. e,amine aswell as any ratios that mi!ht be useful to you in your analysis;

    Solution 21)(1

    An analysis of the accounts recei%able of the com"any mi!ht inclu.e the followin!B

    1; '.entify recei%ables with the followin! characteristics an. assess their effect onthe com"any8s financial health !enerallyB

    a; >ecei%ables from customers ha%in! se%ere financial .ifficulties;b; >ecei%ables from customers in economically unstable forei!n countries;

    2; etermine if the recei%ables are concentrate. in *ust a few customers or are.i%ersifie. amon! many customers;

    3; @othin! is sai. in the facts of the "roblem about whether Trent8s tra.erecei%ables are from other business enter"rises or consumers; Tra.erecei%ables from consumers woul. be ris ier than those from other enter"rises;

    4; $alculate the accounts recei%able turno%er; A hi!h turno%er rate usually showsthat the com"any is collectin! 7uic ly from customers; An e,cessi%ely hi!hturno%er mi!ht in.icate a cre.it "olicy that is too strin!ent with the result that

    sales are lost; A low ratio may in.icate that lar!e amounts of recei%ables areuncollectible as a result of wea collection "olicies or cre.it terms that are toolenient; Quarterly or monthly sales fi!ures may be re7uire. for use in theturno%er ratio if sales %ary !reatly .urin! the year;

    #; $alculate the accounts recei%able-to-total-assets an. accounts-recei%able-tosales ratios to .etermine if recei%ables are accumulatin! beyon. what woul.reasonable be e,"ecte.;

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    &2 $ha"ter 21 Analysis of Financial Statements

    &; $alculate the sales-returns-to-sales an. sales-returns-to-accounts recei%ableratios; An u"war. tren. in these ratios may in.icate errors in fillin! or.ers or "roblems with the 7uality of merchan.ise sol.;

    +; $alculate the-ba.-.ebts-to-accounts-recei%able an. ba.-.ebts-to-net-salesratios; These ratios !i%e some in.ication as to the a.e7uacy of the ba. .ebt"ro%ision the com"any is ma in! in its financial statements;

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    CHAPTER 21 ++ QUI, A@ame RRRRRRRRRRRRRRRRRRRRRRRRR Section RRRRRRRRRRRRRRRRRRRRRRRR

    T F 1; )i7ui.ity relates to the ability of an enter"rise to "ay its liabilities as theycome .ue;

    T F 2; A measure of the o%erall efficiency of asset utilization is the ratio of net salesto total assets: often calle. the asset turno%er rate;

    T F 3; 'n .e%elo"in! the asset turno%er rate: lon!-term in%estments shoul. beinclu.e. in total assets e%en thou!h they ma e no contribution to sales;

    T F 4; Financial le%era!e is a measure of an entity6s ability to increase "rofitabilityto sharehol.ers by usin! borrowe. fun.s whose cost is less than the "rofitthat can be earne. with the borrowe. fun.s;

    T F #; The fi,e. asset turno%er ratio is com"ute. as sales .i%i.e. by total assets;

    T F &; The com"arison of current assets with current liabilities is re!ar.e. as afun.amental measurement of a com"any6s li7ui.ity an. is nown as the aci.test ratio;

    T F +; A ratio of current assets to current liabilities of less than 2 to 1 is consi.ere.unsatisfactory for all in.ustries;

    T F ; The number of times interest is earne. is calculate. by .i%i.in! income after char!es for interest an. income ta, by the interest re7uirements for the"erio.;

    T F ; The accounts recei%able turno%er rate is .etermine. by .i%i.in! net cre.itsales by the a%era!e accounts recei%able outstan.in!;

    T F 1 ; 'n%entory turno%er is com"ute. by .i%i.in! cost of !oo.s sol. by a%era!ein%entory;

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    CHAPTER 21 ++ QUI, S OLUTIONS

    Quiz A

    1; T2; T3; F4; T#; F&; F+; F; F; T

    1 ; T

    Quiz