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Chapter 5: Q19Q. (page 238)
Kathleen Battle says, “Retained earnings should be reported as an asset, since it is earnings which are reinvested in the business.” How would you respond to Battle?
Kathleen Battle is incorrect in saying that retained earnings should be reported as assets.
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Each of the following items must be considered in preparing a statement of cash flows. Indicate where each item is to be reported in the statement, if at all. Assume that net income is reported as \(90,000.
(a) Accounts receivable increased from \)34,000 to \(39,000 from the beginning to the end of the year.
(b) During the year, 10,000 shares of preferred stock with a par value of \)100 per share were issued at \(115 per share.
(c) Depreciation expense amounted to \)14,000, and bond premium amortization amounted to \(5,000.
(d) Land increased from \)10,000 to $30,000.
The New York Knicks, Inc. sold 10,000 season tickets at $2,000 each. By December 31, 2017, 16 of the 40 home games had been played. What amount should be reported as a current liability at December 31, 2017?
Case 1: Uniroyal Technology Corporation
Uniroyal Technology Corporation (UTC), with corporate offices in Sarasota, Florida, is organized into three operating segments. The high-performance plastics segment is responsible for research, development, and manufacture of a wide variety of products, including orthopedic braces, graffiti-resistant seats for buses and airplanes, and a static-resistant plastic used in the central processing units of microcomputers. The coated fabrics segment manufactures products such as automobile seating, door and instrument panels, and specialty items such as waterproof seats for personal watercraft and stain-resistant, easy-cleaning upholstery fabrics. The foams and adhesives segment develops and manufactures products used in commercial roofing applications.
The following items relate to operations in a recent year.
1. Serious pressure was placed on profitability by sharply increasing raw material prices. Some raw materials increased in price 50% during the past year. Cost containment programs were instituted and product prices were increased whenever possible, which resulted in profit margins actually improving over the course of the year.
2. The company entered into a revolving credit agreement, under which UTC may borrow the lesser of \(15,000,000 or 80% of eligible accounts receivable. At the end of the year, approximately \)4,000,000 was outstanding under this agreement. The company plans to use this line of credit in the upcoming year to finance operations and expansion.
Instructions
(a) Should investors be informed of raw materials price increase, such as described in item 1? Does the fact that the company successfully met the challenge of higher prices affect the answer? Explain.
(b) How should the information in item 2 be presented in the financial statements of UTC?
IFRS5-2 Briefly describe some of the similarities and differences between GAAP and IFRS with respect to statement of financial position (balance sheet) reporting.
11. Should available-for-sale securities always be reported as a current asset? Explain.
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