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Chapter 24: 7Q (page 1445)
What are diversified companies? What accounting problems are related to diversified companies?
The diversified company has the characteristics of offering different or mixed trimming structures but has lower than normal returns due to market risks and lots of complexities.
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A close friend of yours, who is a history major and who has not had any college courses or any experience in business, is receiving the financial statements from companies in which he has minor investments (acquired for him by his now-deceased father). He asks you what he needs to know to interpret and evaluate the financial statement data that he is receiving. What would you tell him?
What are interim reports? Why is a complete set of financial statements often not provided with interim data? What are the accounting problems related to the presentation of interim data?
Madrasah Corporation issued its financial statements for the year ended December 31, 2017, on March 10, 2018. The following events took place early in 2018.
Instructions
Discuss how the preceding post-balance-sheet events should be reflected in the 2017 financial statements.
As a loan analyst for Utrillo Bank, you have been presented with the following information.
Toulouse Co. | Lautrec Co. | |
Assets | ||
Cash | \(120,000 | \) 320,000 |
Receivables | 220,000 | 302,000 |
Inventories | 570,000 | 518,000 |
Total current assets | 910,000 | 1,140,000 |
Other assets | 500,000 | 612,000 |
Total assets | \(1,410,000 | \)1,752,000 |
Liabilities and Stockholders’ Equity | ||
Current liabilities | \( 305,000 | \) 350,000 |
Long-term liabilities | 400,000 | 500,000 |
Capital stock and retained earnings | 705,000 | 902,000 |
Total liabilities and stockholders’ equity | \(1,410,000 | \)1,752,000 |
Annual sales | \(930,000 | \)1,500,000 |
Rate of gross profit t on sales | 30% | 40% |
Each of these companies has requested a loan of $50,000 for 6 months with no collateral offered. Because your bank has reached its quota for loans of this type, only one of these requests is to be granted.
Instructions
Which of the two companies, as judged by the information given above, would you recommend as the better risk and why? Assume that the ending account balances are representative of the entire year.
The following statement is an excerpt from the FASB pronouncement related to interim reporting. Interim financial information is essential to provide investors and others with timely information as to the progress of the enterprise. The usefulness of such information rests on the relationship that it has to the annual results of operations. Accordingly, the Board has concluded that each interim period should be viewed primarily as an integral part of an annual period. In general, the results for each interim period should be based on the accounting principles and practices used by an enterprise in the preparation of its latest annual financial statements unless a change in an accounting practice or policy has been adopted in the current year. The Board has concluded, however, that certain accounting principles and practices followed for annual reporting purposes may require modification at interim reporting dates so that the reported results for the interim period may better relate to the results of operations for the annual period.
Instructions
The following six independent cases present how accounting facts might be reported on an individual company’s interim financial reports. For each of these cases, state whether the method proposed to be used for interim reporting would be acceptable under generally accepted accounting principles applicable to interim financial data. Support each answer with a brief explanation.
c) Republic Company wrote inventory down to reflect lower-of-cost-or-market in the first quarter. At year-end, the market exceeds the original acquisition cost of this inventory. Consequently, management plans to write the inventory back up to its original cost as a year-end adjustment.
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