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Chapter 5: Q1Q (page 237)
How does information from the balance sheet help users of the financial statements?
Financial capacity and financial flexibility can be determined using the company’s balance sheet.
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Case 2: Sherwin-Williams Company Sherwin-Williams, based in Cleveland, Ohio, manufactures a wide variety of paint and other coatings, which are marketed through its specialty stores and in other retail outlets. The company also manufactures paint for automobiles. The Automotive Division has had financial difficulty. During a recent year, five branch locations of the Automotive Division were closed, and new management was put in place for the remaining branches.
The following titles were shown on Sherwin-Williams’s balance sheet for that year.
Account payable | Machinery and Equipment |
Accounts receivable, less allowance | Other accruals |
Accrued taxes | Other capital |
Building | Other current assets |
Cash and Cash equivalents | Other long term liabilities |
Common stock | Postretirement obligation other than pension |
Employee compensation payable | Retained earnings |
Finished good inventories | Short-term investment |
Intangible and other assets | Taxes payable |
Land | Work in process and raw material inventories. |
Long-term debt |
Instructions
(a) Organize the accounts in the general order in which they would have been presented in a classified balance sheet.
(b) When several of the branch locations of the Automotive Division were closed, what balance sheet accounts were most likely affected? Did the balance in those accounts decrease or increase?
The current assets and current liabilities sections of the balance sheet of Allessandro Scarlatti Company appear as follows.
ALLESSANDRO SCARLATTI COMPANY | ||||
BALANCE SHEET PARTIAL | ||||
December 31, 2017 | ||||
Cash | \(40,000 | Account payable | \)61,000 | |
Accounts receivables | \(89,000 | Note payable | 67,000 | |
Less: Allowance for doubtful accounts | (7,000) | 82,000 | \)128,000 | |
Inventory | 171,000 | |||
Prepaid expenses | 9,000 | |||
\(302,000 |
The following errors in the corporation’s accounting have been discovered:
1. January 2018 cash disbursements entered as of December 2017 included payments of accounts payable in the amount of \)39,000, on which a cash discount of 2% was taken.
2. The inventory included \(27,000 of merchandise that had been received at December 31 but for which no purchase invoices had been received or entered. Of this amount, \)12,000 had been received on consignment; the remainder was purchased f.o.b. destination, terms 2/10, n/30.
3. Sales for the first four days in January 2018 in the amount of \(30,000 were entered in the sales journal as of December 31, 2017. Of these, \)21,500 were sales on account and the remainder were cash sales.
4. Cash, not including cash sales, collected in January 2018 and entered as of December 31, 2017, totaled \(35,324. Of this amount, \)23,324 was received on account after cash discounts of 2% had been deducted; the remainder represented the proceeds of a bank loan.
Instructions
(a) Restate the current assets and current liabilities sections of the balance sheet in accordance with good accounting practice. (Assume that both accounts receivable and accounts payable are recorded gross.)
(b) State the net effect of your adjustments on Allessandro Scarlatti Company’s retained earnings balance.
Included in Outkast Company’s December 31, 2017, trial balance are the following accounts: Prepaid Rent \(5,200, Debt Investments (to be held to maturity until 2020) \)56,000, Unearned Fees \(17,000, Land (held for investment) \)39,000, and Notes Receivable (long-term) $42,000. Prepare the long-term investments section of the balance sheet.
Question: P5-1 (L03) (Preparation of a Classified Balance Sheet, Periodic Inventory) Presented below is a list of accounts in alphabetical order.
Accounts Receivable Inventory—Ending
Accumulated Depreciation—Buildings Land
Accumulated Depreciation—Equipment Land for Future Plant Site
Accumulated Other Comprehensive Income Loss from Flood
Advances to Employees Noncontrolling Interest
Advertising Expense Notes Payable (due next year)
Allowance for Doubtful Accounts Paid-in Capital in Excess of Par— preferred stock
Bond Sinking Fund Patents
Bonds Payable Payroll Taxes Payable
Buildings Pension Liability
Cash (in bank) Petty Cash
Cash (on hand) Preferred Stock
Cash Surrender Value of Life Insurance Premium on Bonds Payable
Commission Expense Prepaid Rent
Common Stock Purchase Returns and Allowances
Copyrights Purchases
Debt Investments (trading) Retained Earnings
Dividends Payable Salaries and Wages Expense (sales)
Equipment Salaries and Wages Payable
Freight-In Sales Discounts
Gain on Disposal of Equipment Sales Revenue
Interest Receivable Treasury Stock (at cost)
Inventory—Beginning Unearned Subscriptions Revenue
Instructions Prepare a classified balance sheet in good form. (No monetary amounts are to be shown.)
A recent financial magazine indicated that the airline industry has poor financial flexibility. What is meant by financial flexibility, and why is it important?
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