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Chapter 5: Q31Q. (page 238)

What types of contractual obligations must be disclosed in great detail in the notes to the balance sheet? Why do you think these detailed provisions should be disclosed?

Short Answer

Expert verified

Four items for which disclosure is mandatory on the financial statement are:

  1. General debt obligation
  2. Stock option
  3. Pension arrangements
  4. Lease contracts

Step by step solution

01

Definition of Pension Plan

A plan in which the employee and employer both contribute a specific amount when the employee is working, and theemployee will benefit from this account after retirementis known as a pension plan.

02

Items mandatory to be disclosed on the financial statements

  1. General debt obligations include the debt securities issued by the business entity with a specified maturity period.
  2. Stock Option: A benefit is given to the team member under which they are allowed to buy shares at a pre-specified or discounted price.
  3. Pension arrangements: It includes the payment made to employees on their retirement.
  4. Lease contract: Any lease agreement with another company.

All these disclosures are necessary because these contracts are long-term, and the company’s well-being depends on this.

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Most popular questions from this chapter

Sergey Co. has net cash provided by operating activities of \(1,200,000. Its average current liabilities for the period are \)1,000,000, and its average total liabilities are $1,500,000. Comment on the company’s liquidity and financial flexibility, given this information.

The comparative balance sheets of Madrasah Corporation at the beginning and end of the year 2017 appear below.

MADRASAH CORPORATION

BALANCE SHEETS

Assets

Dec 31, 2017

Jan 1, 2017

Inc./Dec.

Cash

\(20,000

\)13,000

\(7,000 Inc.

Accounts receivable

106,000

88,000

18,000 Inc.

Equipment

39,000

22,000

17,000 Inc.

Less: Accumulated depreciation – Equipment

17,000

11,000

6,000 Inc.

Total

\)148,000

\(112,000

Liabilities and Stockholder’s equity

Account payable

\)20,000

\(15,000

5,000 Inc.

Common stock

100,000

80,000

20,000 Inc.

Retained earnings

28,000

17,000

11,000 Inc.

Total

\)148,000

\(112,000

Net income of \)44,000 was reported, and dividends of $33,000 were paid in 2017. New equipment was purchased and none was sold.

Instructions

(a) Prepare a statement of cash flows for the year 2017.

(b) Compute the current ratio (current assets ÷ current liabilities) as of January 1, 2017, and December 31, 2017, and compute free cash flow for the year 2017.

(c) In light of the analysis in (b), comment on Madrasah’s liquidity and financial flexibility.

What is working capital? How does working capital relate to the operating cycle?

What is the purpose of a statement of cash flows? How does it differ from a balance sheet and an income statement?

Keyser Beverage Company reported the following items in the most recent year.

Net income $40,000

Dividends paid 5,000

Increase in accounts receivable 10,000

Increase in accounts payable 7,000

Purchase of equipment (capital expenditure) 8,000

Depreciation expense 4,000

Issue of notes payable 20,000

Compute net cash provided by operating activities, the net change in cash during the year, and free cash flow.
See all solutions

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