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Chapter 24: 7IFRS (page 1467)

Dierdorf Inc., a closely held corporation, has decided to go public. The controller, Ed Floyd, is concerned with presenting interim data when an inventory write-down is recorded. What problems are encountered with inventories when quarterly data are presented?

Short Answer

Expert verified

The write-down should be balanced in the subsequent interim period.

Step by step solution

01

Meaning of Interim Reports

Interim reporting is described as statutory compliance imposed on any publicly owned corporationor other similar entity for the purpose of compiling and presenting financial statements for a period less than a year's accounting period.

02

Explaining the problems are encountered with inventories when quarterly data are presented

Inventory write-down losses are recorded differently in interim financial statementsthan they are in annual financial statements. In any case, if an assessment from a previous intermediate period changes in a subsequent interim period of the same year, the write-down is balanced in the subsequent interim period.

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Most popular questions from this chapter

Picasso Company is a wholesale distributor of packaging equipment and supplies. The company’s sales have averaged about \(900,000 annually for the 3-year period 2015–2017. The firm’s total assets at the end of 2017 amounted to \)850,000.

The president of Picasso Company has asked the controller to prepare a report that summarizes the financial aspects of the company’s operations for the past 3 years. This report will be presented to the board of directors at their next meeting.

In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios which can assist in the identification and interpretation of trends. At the request of the controller, the accounting staff has calculated the following ratios for the 3-year period 2015–2017.

2015

2016

2017

Current ratio

1.80

1.89

1.96

Acid-test (quick) ratio

1.04

0.99

0.87

Accounts receivable turnover

8.75

7.71

6.42

Inventory turnover

4.91

4.32

3.42

Debt to assets ratio

51.0%

46.0%

41.0%

Long-term debt to assets ratio

31.0%

27.0%

24.0%

Sales to fixed assets (fixed asset turnover)

1.58

1.69

1.79

Sales as a percent of 2015 sales

1.00

1.03

1.07

Gross margin percentage

36.0%

35.1%

34.6%

Net income to sales

6.9%

7.0%

7.2%

Return on assets

7.7%

7.7%

7.8%

Return on common stockholders’ equity

13.6%

13.1%

12.7%

In preparation of the report, the controller has decided first to examine the financial ratios independent of any other data to determine if the ratios themselves reveal any significant trends over the 3-year period.

Instructions

c) Using the ratios provided, what conclusion(s) can be drawn regarding the company’s net investment in plant and equipment?

Keystone Corporation’s financial statements for the year ended December 31, 2017, were authorized for issue on March 10, 2018. The following events took place early in 2018.

  1. On January 10, 10,000 ordinary shares of \(5 par value were issued at \)66 per share.
  2. On March 1, Keystone determined after negotiations with the taxing authorities that income taxes payable for 2017 should be \(1,320,000. At December 31, 2017, income taxes payable were recorded at \)1,100,000.

Instructions

Discuss how the preceding subsequent events should be reflected in the 2017 financial statements.

What type of disclosure or accounting do you believe is necessary for the following items?

a) Because of a general increase in the number of labor disputes and strikes, both within and outside the industry, there is an increased likelihood that a company will suffer a costly strike in the near future.

b) A company reports a material unusual and infrequent loss on the income statement. No other mention is made of this item in the annual report.

c) A company expects to recover a substantial amount in connection with a pending refund claim for a prior year’s taxes. Although the claim is being contested, counsel for the company has confirmed the client’s expectation of recovery.

Answer each of the questions in the following unrelated situations.

d) A company has current assets of \(600,000 and current liabilities of \)240,000. The board of directors declares a cash dividend of $180,000. What is the current ratio after the declaration but before payment? What is the current ratio after the payment of the dividend?

The following information was described in a note of Canon Packing Co.

“During August, Holland Products Corporation purchased 311,003 shares of the Company’s common stock which constitutes approximately 35% of the stock outstanding. Holland has since obtained representation on the Board of Directors.”

“An affiliate of Holland Products Corporation acts as a food broker for Canon Packing in the greater New York City marketing area. The commissions for such services after August amounted to approximately $20,000.”

Why is this information disclosed?
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