Chapter Two - Wiley

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8956d_ch02_082 8/20/03 12:56 PM Page 82 mac76 mac76:385_reb: 82 CHAPTER 2 A Further Look at Financial Statements 5. Describe the two constraints inherent in the presentation of accounting information. 6. Your roommate believes that international accounting standards are uniform throughout the world. Is your roommate correct? Explain. 7. What is meant by the term operating cycle? 8. Define current assets. What basis is used for ordering individual items within the current assets section? 9. Distinguish between long-term investments and property, plant, and equipment. 10. How do current liabilities differ from long-term liabilities? 11. Identify the two parts of stockholders’ equity in a corporation and indicate the purpose of each. 12. (a) Ruth Weber believes that the analysis of financial statements is directed at two characteristics of a company: liquidity and profitability. Is Ruth correct? Explain. (b) Are short-term creditors, long-term creditors, and stockholders primarily interested in the same characteristics of a company? Explain. 13. Name ratios useful in assessing (a) liquidity, (b) solvency, and (c) profitability. 14. David Rose is puzzled. His company had a price-earnings ratio of 25 in 2005. He feels that this is an indication that the company is doing well. Julie Bast, his accountant, says that more information is needed to determine the firm’s financial well-being. Who is correct? Why? 15. What do these classes of ratios measure? (a) Liquidity ratios. (b) Profitability ratios. (c) Solvency ratios. 16. Holding all other factors constant, indicate whether each of the following signals generally good or bad news about a company. (a) Increase in earnings per share. (b) Increase in the current ratio. (c) Increase in the debt to total assets ratio. (d) Decrease in the cash debt coverage ratio. 17. Which ratio or ratios from this chapter do you think should be of greatest interest to: (a) a pension fund considering investing in a corporation’s 20-year bonds? (b) a bank contemplating a short-term loan? (c) an investor in common stock? Brief Exercises Recognize generally accepted accounting principles. (SO 1) Identify qualitative characteristics. (SO 2) BE2-1 Indicate whether each statement is true or false. (a) GAAP is a set of rules and practices established by accounting standard-setting bodies to serve as a general guide for financial reporting purposes. (b) Substantial authoritative support for GAAP usually comes from two standardssetting bodies: the FASB and the IRS. BE2-2 The accompanying chart shows the qualitative characteristics of accounting information. Fill in the blanks. Usefulness Relevance (a) (b) Timely Reliability (c) Neutral (d) Consistency and (e)
8956d_ch02_083 8/20/03 12:57 PM Page 83 mac76 mac76:385_reb: Brief Exercises 83 BE2-3 Given the qualitative characteristics of accounting established by the FASB’s conceptual framework, complete each of the following statements. (a) For information to be , it should have predictive or feedback value, and it must be presented on a timely basis. (b) is the quality of information that gives assurance that it is free of error and bias; it can be depended on. (c) means using the same accounting principles and methods from year to year within a company. BE2-4 Here are some qualitative characteristics of accounting information: 1. Predictive value 3. Verifiable 2. Neutral 4. Timely Match each qualitative characteristic to one of the following statements. (a) Accounting information should help users make predictions about the outcome of past, present, and future events. (b) Accounting information cannot be selected, prepared, or presented to favor one set of interested users over another. (c) Accounting information must be proved to be free of error. (d) Accounting information must be available to decision makers before it loses its capacity to influence their decisions. BE2-5 Gidget Company uses these accounting practices: (a) Inventory is reported at cost when market value is lower. (b) Small tools are recorded as plant assets and depreciated. (c) The income statement shows paper clips expense of $10. Indicate the accounting constraint, if any, that has been violated by each practice. BE2-6 A list of financial statement items for Bergmann Company includes the following: accounts receivable $14,000; prepaid insurance $3,600; cash $18,400; supplies $3,800, and short-term investments $8,200. Prepare the current assets section of the balance sheet listing the items in the proper sequence. BE2-7 The following information (in millions of dollars) is available for The Limited for 2001: Sales revenue $9,363; net income $519; stock price $18.45 per share; preferred stock dividend $0; average shares outstanding 427.5 million. Compute the earnings per share and price-earnings ratio for The Limited for 2001. BE2-8 For each of the following events affecting the stockholders’ equity of BetterBooks, indicate whether the event would: increase retained earnings (IRE), decrease retained earnings (DRE), increase common stock (ICS), or decrease common stock (DCS). (a) Issued new shares of common stock. (b) Paid a cash dividend. (c) Reported net income of $75,000. (d) Reported a net loss of $20,000. BE2-9 These selected condensed data are taken from a recent balance sheet of Bob Evans Farms (in millions of dollars). Cash $ 1.8 Accounts receivable 13.6 Inventories 17.0 Other current assets 11.3 Total current assets $ 43.7 Total current liabilities $158.1 Additional information: Current liabilities at the beginning of the year were $175.7 million, and cash provided by operations for the current year was $111.4 million. What are (a) the working capital, (b) the current ratio, and (c) the current cash debt coverage ratio? Identify qualitative characteristics. (SO 2) Identify qualitative characteristics. (SO 2) Identify constraints that have been violated. (SO 3) Prepare the current assets section of a balance sheet. (SO 4) Compute return on assets ratio and profit margin ratio. (SO 5) Identify items affecting stockholders’ equity. (SO 6) Calculate liquidity ratios. (SO 7)
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Chapter Two - Wiley

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