Ch24 Full Disclosure in Financial Reporting

CHAPTER 24
FULL DISCLOSURE IN FINANCIAL REPORTING

TRUE-FALSEConceptual
Anse! No" Desc!#pt#on
F 1. Items affected by FASB standards.
T 2. SEC reporting requirements.
T 3. efinition of accounting po!icies.
F ". #e!ated party transactions disc!osure.
F $. %ost&ba!ance&s'eet disc!osures.
T (. FASB 131 requirements
F ). A!!ocation of *oint or common costs.
T +. isc!osure of ma*or customers.
F ,. #eporting under t'e integra! approac'.
T 1-. Accounting princip!es in interim reports.
F 11. #eporting e.traordinary items in interim reports.
T 12. Computing ta.es in an interim period.
F 13. /pinions issued by auditor.
T 1". efinition of qua!ified opinion.
F 1$. 0anagement1s discussion and ana!ysis section.
T 1(. Information pro2ided by 03A section.
F 1). efinition of financia! pro*ection.
T 1+. Financia! forecast 2s. financia! pro*ection.
T 1,. Fraudu!ent financia! reporting.
F 2-. Interna! en2ironment inf!uences.
$ULTIPLE CHOICEConceptual
d 21. isc!osure of significant accounting po!icies.
c 22. isc!osure of in2entory accounting po!icy.
c 23. efinition of errors and irregu!arities.
d
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2". Fu!! disc!osure princip!e description.
b
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2$. A%B /pinion 4o. 22 disc!osure.
b
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2(. #e!ated party transactions.
c
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2). %ost&ba!ance&s'eet e2ents.
d 2+. Subsequent e2ents disc!osure.
d 2,. #ecognition of subsequent e2ents.
b 3-. #e2enue of a segment.
d 31. Segment re2enue test.
b 32. Segment re2enue test.
c 33. isc!osure of operating segment information.
d 3". Bases of reporting disaggregated information.
a
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3$. Items reconci!ed in segment reporting.
d
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3(. Accounting princip!es used in interim reports.
a
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3). %!anned 2o!ume 2ariance in interim period.
d 3+. Interim financia! reporting.
Test %an& 'o! Inte!(e)#ate Account#n*+ Tel't, E)#t#on
$ULTIPLE CHOICEConceptual -cont".
Anse! N/o" Desc!#pt#on
d 3,. App!ication of accounting princip!es on interim reporting.
b "-. 0et'ods of in2entory 2a!uation5year end 2s. interim.
a "1. %artia! 6IF/ !iquidation reported in interim statements.
c "2. isc!osing information in interim statements.
c "3. E.traordinary items in interim reports.
b
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"". Issuing qua!ified opinion.
c
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"$. Items co2ered in 03A section.
c
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"(. ifference bet7een financia! forecast and financia! pro*ection.
a "). isc!osures in financia! forecasts.
a 8"+. Acid&test ratio and current ratio.
b 8",. #ecei2ab!es turno2er ratio.
b 8$-. #ate of return on common stoc9 equity.
d 8$1. %ayout ratio.
c 8$2. 0easure of !ong&term so!2ency.
c 8$3. 4umber of times interest earned.
c 8$". :sing a2erage amounts.
d 8$$. 6imitations of ratio ana!ysis.
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T'ese questions a!so appear in t'e %rob!em&So!2ing Sur2i2a! ;uide.
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T'ese questions a!so appear in t'e Study ;uide.
8 T'is topic is dea!t 7it' in an Appendi. to t'e c'apter.
$ULTIPLE CHOICECo(putat#onal
b $(. etermine reportab!e operating segments.
c $). Bonus e.pense in first quarter interim income statement.
a $+. %roperty ta.es and p!ant repairs recogni<ed in interim period.
c $,. In2entory !oss ref!ected in interim statements.
d 8(-. Ca!cu!ate t'e current ratio.
c 8(1. Ca!cu!ate t'e number of times interest 7as earned.
d 8(2. Ca!cu!ate boo9 2a!ue per s'are of common stoc9.
c 8(3. Ca!cu!ate rate of return on common stoc9 equity.
c 8(". Ca!cu!ate recei2ab!es turno2er.
d 8($. Ca!cu!ate in2entory turno2er.
b 8((. Ca!cu!ate t'e profit margin on sa!es.
c 8(). Ca!cu!ate t'e rate of return on common stoc9 equity.
a 8(+. etermine boo9 2a!ue per s'are.
a 8(,. Ca!cu!ate t'e acid&test ratio.
c 8)-. Ca!cu!ate t'e acid&test ratio.
c 8)1. #ecei2ab!es turno2er.
c 8)2. Ca!cu!ate in2entory turno2er.
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Fu!! isc!osure in Financia! #eporting
$ULTIPLE CHOICECPA A)apte)
c )3. Significant accounting po!icies disc!osed for p!ant assets.
c )". Criteria for reporting disaggregated information.
b )$. Identification of reportab!e segments.
b )(. Identification of a reportab!e segment.
b )). Ad2ertising costs5year end 2s. interim reporting.
c )+. Tota! e.pense to be reported in interim statements.
b ),. E.traordinary !oss reported in interim statements.
c +-. E.traordinary gain reported in interim statements.
c 8+1. Acid&test ratio and in2entory turno2er ratio.
d 8+2. Acid&test ratio and debt to tota! assets ratio.
c 8+3. #ecei2ab!es turno2er and payout ratio.
E0ERCISES
Ite( Desc!#pt#on
E2"&+" 4otes to financia! statements.
E2"&+$ Segment reporting.
E2"&+( Segment reporting.
E2"&+) Interim reports.
E2"&++ In2entory and cost of goods so!d at interim dates.
E2"&+, Forecasts.
8E2"&,- Financia! statement ana!ysis.
8E2"&,1 Se!ected financia! ratios.
8E2"&,2 Computation of se!ected ratios.
PRO%LE$S
Ite( Desc!#pt#on
%2"&,3 Segment #eporting.
%2"&," Interim #eports.
CHAPTER LEARNING O%1ECTI2ES
1. #e2ie7 t'e fu!! disc!osure princip!e and describe imp!ementation prob!ems.
2. E.p!ain t'e use of notes in financia! statement preparation.
3. iscuss t'e disc!osure requirements for ma*or business segments.
". escribe t'e accounting prob!ems associated 7it' interim reporting.
$. Identify t'e ma*or disc!osures in t'e auditor=s report.
(. :nderstand management1s responsibi!ities for financia!s.
). Identify issues re!ated to financia! forecasts and pro*ections.
+. escribe t'e profession=s response to fraudu!ent financia! reporting.
8,. :nderstand t'e approac' to financia! statement ana!ysis.
81-. Identify ma*or ana!ytic ratios and describe t'eir ca!cu!ation.
811. E.p!ain t'e !imitations of ratio ana!ysis.
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SU$$AR4 OF LEARNING O%1ECTI2ES %4 5UESTIONS
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Lea!n#n* O67ect#8e 9
1. TF 2. TF 21. 0C 22. 0C 23. 0C
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2". 0C
3. TF $. TF
S
2(. 0C 2+. 0C )3. 0C
". TF
S
2$. 0C
%
2). 0C 2,. 0C +". E
(. TF 3-. 0C 33. 0C $(. 0C )(. 0C ,3. %
). TF 31. 0C 3". 0C )". 0C +$. E
+. TF 32. 0C
S
3$. 0C )$. 0C +(. E
,. TF
S
3(. 0C "-. 0C $). 0C )+. 0C ++. E
1-. TF
%
3). 0C "1. 0C $+. 0C ),. 0C ,". %
11. TF 3+. 0C "2. 0C $,. 0C +-. 0C
12. TF 3,. 0C "3. 0C )). 0C +). E
Lea!n#n* O67ect#8e :
13. TF 1". TF 1$. TF 1(. TF
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"". 0C
Lea!n#n* O67ect#8e ;
%
"$. 0C
Lea!n#n* O67ect#8e <
1). TF 1+. TF
S
"(. 0C "). 0C +,. E
Lea!n#n* O67ect#8e =
1,. TF 2-. TF
Lea!n#n* O67ect#8e 9>
"+. 0C $2. 0C (1. 0C ($. 0C (,. 0C +1. 0C ,1. E
",. 0C $3. 0C (2. 0C ((. 0C )-. 0C +2. 0C ,2. E
$-. 0C $". 0C (3. 0C (). 0C )1. 0C +3. 0C
$1. 0C (-. 0C (". 0C (+. 0C )2. 0C ,-. E
$$. 0C
4ote> TF ? True&Fa!se
0C ? 0u!tip!e C'oice
E ? E.ercise
% ? %rob!em
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TRUE-FALSEConceptual
1. FASB standards direct!y affect financia! statements@ notes to t'e financia! statements@ and
management1s discussion and ana!ysis.
2. T'e SEC requires t'at companies report to it certain substanti2e information t'at is not
found in t'eir annua! reports.
3. Accounting po!icies are t'e specific accounting princip!es and met'ods a company uses
and considers most appropriate to present fair!y its financia! statements.
". In order to ma9e adequate disc!osure of re!ated party transactions@ companies s'ou!d
report t'e !ega! form@ rat'er t'an t'e economic substance@ of t'ese transactions.
$. If t'e !oss on an account recei2ab!e resu!ts from a customer1s ban9ruptcy after t'e
ba!ance s'eet date@ t'e company on!y disc!oses t'is information in t'e notes to t'e
financia! statements.
(. FASB Statement 131 requires t'at genera! purpose financia! statements inc!ude se!ected
information on a sing!e basis of segmentation.
). T'e FASB requires a!!ocations of *oint@ common@ or company&7ide costs for e.terna!
reporting purposes.
+. If 1- percent or more of company re2enue is deri2ed from a sing!e customer@ t'e company
must disc!ose t'e tota! amount of re2enue from eac' suc' customer by segment.
,. Companies s'ou!d report accounting transactions as t'ey occur@ and e.pense recognition
s'ou!d not c'ange 7it' t'e period of time co2ered under t'e integra! approac'.
1-. Companies s'ou!d genera!!y use t'e same accounting princip!es for interim reports and
for annua! reports.
11. Companies report e.traordinary items in interim reports by prorating t'em o2er t'e four
quarters.
12. To compute t'e year&to&date ta.@ companies app!y t'e estimated annua! effecti2e ta. rate
to t'e year&to&date ordinary income at t'e end of eac' interim period.
13. In most situations@ an auditor issues a qua!ified opinion or disc!aims an opinion.
1". A qua!ified opinion is issued 7'en t'e e.ception to t'e standard opinion is not of sufficient
magnitude to in2a!idate t'e statements as a 7'o!e.
1$. 0anagement1s discussion and ana!ysis section co2ers t'ree financia! aspects of an
enterprise1s business&!iquidity@ profitabi!ity@ and so!2ency.
1(. T'e 03A section must pro2ide information about t'e effects of inf!ation and c'anging
prices@ if t'ey are materia! to financia! statement trends.
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1). A financia! pro*ection is a set of prospecti2e financia! statements t'at present a company1s
e.pected financia! position and resu!ts of operations.
1+. T'e difference bet7een a financia! forecast and a financia! pro*ection is t'at a forecast
pro2ides information on 7'at is e.pected to 'appen@ 7'i!e a pro*ection pro2ides
information on 7'at mig't ta9e p!ace.
1,. Fraudu!ent financia! reporting is intentiona! or rec9!ess conduct@ 7'et'er act or omission@
t'at resu!ts in materia!!y mis!eading financia! statements.
2-. Inf!uences in a company1s interna! en2ironment may re!ate to industry conditions@ poor
interna! contro! systems@ or !ega! and regu!atory considerations.
T!ue-False Anse!sConceptual
Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans"
1. F (. T 11. F 1(. T
2. T ). F 12. T 1). F
3. T +. T 13. F 1+. T
". F ,. F 1". T 1,. T
$. F 1-. T 1$. F 2-. F
$ULTIPLE CHOICEConceptual
21. A'ic' of t'e fo!!o7ing s'ou!d be disc!osed in a Summary of Significant Accounting
%o!iciesB
a. Types of e.ecutory contracts
b. Amount for cumu!ati2e effect of c'ange in accounting princip!e
c. C!aims of equity 'o!ders
d. epreciation met'od fo!!o7ed
22. An e.amp!e of an in2entory accounting po!icy t'at s'ou!d be disc!osed in a Summary of
Significant Accounting %o!icies is t'e
a. amount of income resu!ting from t'e in2o!untary !iquidation of 6IF/.
b. ma*or bac9!ogs of in2entory orders.
c. met'od used for pricing in2entory.
d. composition of in2entory into ra7 materia!s@ 7or9&in&process@ and finis'ed goods.
23. Errors and irregu!arities are defined as intentiona! distortions of facts.
Errors Irregu!arities
a. Ces Ces
b. Ces 4o
c. 4o Ces
d. 4o 4o
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2". T'e fu!! disc!osure princip!e@ as adopted by t'e accounting profession@ is best described
by 7'ic' of t'e fo!!o7ingB
a. A!! information re!ated to an entity=s business and operating ob*ecti2es is required to
be disc!osed in t'e financia! statements.
b. Information about eac' account ba!ance appearing in t'e financia! statements is to be
inc!uded in t'e notes to t'e financia! statements.
c. Enoug' information s'ou!d be disc!osed in t'e financia! statements so a person
7is'ing to in2est in t'e stoc9 of t'e company can ma9e a profitab!e decision.
d. isc!osure of any financia! facts significant enoug' to inf!uence t'e *udgment of an
informed reader.
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2$. T'e focus of APB Opinion No. 22 is on t'e disc!osure of accounting po!icies. T'is
information is important to financia! statement readers in determining
a. net income for t'e year.
b. 7'et'er accounting po!icies are consistent!y app!ied from year to year.
c. t'e 2a!ue of obso!ete items inc!uded in ending in2entory.
d. 7'et'er t'e 7or9ing capita! position is adequate for future operations.
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2(. If a business entity entered into certain re!ated party transactions@ it 7ou!d be required to
disc!ose a!! of t'e fo!!o7ing information except the
a. nature of t'e re!ations'ip bet7een t'e parties to t'e transactions.
b. nature of any future transactions p!anned bet7een t'e parties and t'e terms in2o!2ed.
c. do!!ar amount of t'e transactions for eac' of t'e periods for 7'ic' an income state&
ment is presented.
d. amounts due from or to re!ated parties as of t'e date of eac' ba!ance s'eet presented.
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2). E2ents t'at occur after t'e ecember 31@ 2--+ ba!ance s'eet date Dbut before t'e
ba!ance s'eet is issuedE and pro2ide additiona! e2idence about conditions t'at e.isted at
t'e ba!ance s'eet date and affect t'e rea!i<abi!ity of accounts recei2ab!e s'ou!d be
a. discussed on!y in t'e 03A D0anagement=s iscussion and Ana!ysisE section of t'e
annua! report.
b. disc!osed on!y in t'e 4otes to t'e Financia! Statements.
c. used to record an ad*ustment to Bad ebt E.pense for t'e year ending ecember 31@
2--+.
d. used to record an ad*ustment direct!y to t'e #etained Earnings account
2+. A'ic' of t'e fo!!o7ing post&ba!ance&s'eet e2ents 7ou!d genera!!y require disc!osure@ but
no ad*ustment of t'e financia! statementsB
a. #etirement of t'e company president
b. Sett!ement of !itigation 7'en t'e e2ent t'at ga2e rise to t'e !itigation occurred prior to
t'e ba!ance s'eet date.
c. Emp!oyee stri9es
d. Issue of a !arge amount of capita! stoc9
2,. A'ic' of t'e fo!!o7ing subsequent e2ents Dpost&ba!ance&s'eet e2entsE 7ou!d require
ad*ustment of t'e accounts before issuance of t'e financia! statementsB
a. 6oss of p!ant as a resu!t of fire
b. C'anges in t'e quoted mar9et prices of securities 'e!d as an in2estment
c. 6oss on an unco!!ectib!e account recei2ab!e resu!ting from a customer1s ma*or f!ood
!oss
d. 6oss on a !a7suit@ t'e outcome of 7'ic' 7as deemed uncertain at year end.
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3-. #e2enue of a segment inc!udes
a. on!y sa!es to unaffi!iated customers.
b. sa!es to unaffi!iated customers and intersegment sa!es.
c. sa!es to unaffi!iated customers and interest re2enue.
d. sa!es to unaffi!iated customers and ot'er re2enue and gains.
31. An operating segment is a reportab!e segment if
a. its operating profit is 1-F or more of t'e combined operating profit of profitab!e
segments.
b. its operating !oss is 1-F or more of t'e combined operating !osses of segments t'at
incurred an operating !oss.
c. t'e abso!ute amount of its operating profit or !oss is 1-F or more of t'e company=s
combined operating profit or !oss.
d. none of t'ese.
32. A segment of a business enterprise is to be reported separate!y 7'en t'e re2enues of t'e
segment e.ceed 1- percent of t'e
a. tota! combined re2enues of a!! segments reporting profits.
b. tota! re2enues of a!! t'e enterprise=s industry segments.
c. tota! e.port and foreign sa!es.
d. combined net income of a!! segments reporting profits.
33. A!! of t'e fo!!o7ing information about eac' operating segment must be reported except
a. unusua! items.
b. interest re2enue.
c. cost of goods so!d.
d. depreciation and amorti<ation e.pense.
3". T'e profession requires disaggregated information in t'e fo!!o7ing 7ays>
a. products or ser2ices.
b. geograp'ic areas.
c. ma*or customers.
d. a!! of t'ese.
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3$. In presenting segment information@ 7'ic' of t'e fo!!o7ing items must be reconci!ed to t'e
entity=s conso!idated financia! statementsB
/perating Identifiab!e
#e2enues %rofit D6ossE Assets
a. Ces Ces Ces
b. 4o Ces Ces
c. Ces 4o Ces
d. Ces Ces 4o
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3(. APB Opinion No. 28 indicates t'at
a. a!! companies t'at issue an annua! report s'ou!d issue interim financia! reports.
b. t'e discrete 2ie7 is t'e most appropriate approac' to ta9e in preparing interim
financia! reports.
c. t'e t'ree basic financia! statements s'ou!d be presented eac' time an interim period
is reported upon.
d. t'e same accounting princip!es used for t'e annua! report s'ou!d be emp!oyed for
interim reports.
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3). onnegan 0anufacturing Company emp!oys a standard cost system. A p!anned 2o!ume
2ariance in t'e first quarter of 2--+@ 7'ic' is e.pected to be absorbed by t'e end of t'e
fisca! year@ ordinari!y s'ou!d
a. be deferred at t'e end of t'e first quarter@ regard!ess of 7'et'er it is fa2orab!e or
unfa2orab!e.
b. ne2er be deferred beyond t'e quarter in 7'ic' it occurs.
c. be deferred at t'e end of t'e first quarter if it is fa2orab!eG unfa2orab!e 2ariances are to
be recogni<ed in t'e period incurred.
d. be deferred at t'e end of t'e first quarter if it is unfa2orab!eG fa2orab!e 2ariances are to
be recogni<ed in t'e period incurred.
3+. In considering interim financia! reporting@ 'o7 does t'e profession conc!ude t'at suc'
reporting s'ou!d be 2ie7edB
a. As a Hspecia!H type of reporting t'at need not fo!!o7 genera!!y accepted accounting
princip!es.
b. As usefu! on!y if acti2ity is e2en!y spread t'roug'out t'e year so t'at estimates are
unnecessary.
c. As reporting for a basic accounting period.
d. As reporting for an integra! part of an annua! period.
3,. Accounting princip!es are modified for t'e fo!!o7ing at interim dates.
#e2enue 6osses
a. Ces Ces
b. Ces 4o
c. 4o Ces
d. 4o 4o
"-. T'e fo!!o7ing met'ods of estimating in2entory can be used at interim dates for in2entory
pricing. 0ay t'ey a!so be used at year endB
;ross %rofit 0et'od #etai! In2entory 0et'od
a. 4o 4o
b. 4o Ces
c. Ces 4o
d. Ces Ces
"1. A company t'at uses t'e !ast&in@ first&out D6IF/E met'od of in2entory pricing finds at an
interim reporting date t'at t'ere 'as been a partia! !iquidation of t'e base period in2entory
!e2e!. T'e dec!ine is considered temporary and t'e partia! !iquidation is e.pected to be
rep!aced prior to year end. T'e amount s'o7n as in2entory at t'e interim reporting date
s'ou!d
a. be s'o7n at t'e actua! !e2e!@ and cost of sa!es for t'e interim reporting period s'ou!d
inc!ude t'e e.pected cost of rep!acement of t'e !iquidated 6IF/ base.
b. be s'o7n at t'e actua! !e2e!@ and cost of sa!es for t'e interim reporting period s'ou!d
ref!ect t'e 'istorica! cost of t'e !iquidated 6IF/ base.
c. not gi2e effect to t'e 6IF/ !iquidation@ and cost of sa!es for t'e interim reporting period
s'ou!d ref!ect t'e 'istorica! cost of t'e !iquidated 6IF/ base.
d. be s'o7n at t'e actua! !e2e!@ and t'e decrease in in2entory !e2e! s'ou!d not be
ref!ected in t'e cost of sa!es for t'e interim reporting period.
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"2. Companies s'ou!d disc!ose a!! of t'e fo!!o7ing in interim reports except
a. basic and di!uted earnings per s'are.
b. c'anges in accounting princip!es.
c. post&ba!ance&s'eet e2ents.
d. seasona! re2enue@ cost@ or e.penses.
"3. T'e required approac' for 'and!ing e.traordinary items in interim reports is to
a. prorate t'em o2er a!! four quarters.
b. prorate t'em o2er t'e current and remaining quarters.
c. c'arge or credit t'e !oss or gain in t'e quarter t'at it occurs.
d. disc!ose t'em on!y in t'e notes.
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"". If t'e financia! statements e.amined by an auditor !ead t'e auditor to issue an opinion t'at
contains an e.ception t'at is not of sufficient magnitude to in2a!idate t'e statement as a
7'o!e@ t'e opinion is said to be
a. unqua!ified.
b. qua!ified.
c. ad2erse.
d. e.ceptiona!.
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"$. T'e 03A section of an enterprise=s annua! report is to co2er t'e fo!!o7ing t'ree items>
a. income statement@ ba!ance s'eet@ and statement of o7ners= equity.
b. income statement@ ba!ance s'eet@ and statement of cas' f!o7s.
c. !iquidity@ capita! resources@ and resu!ts of operations.
d. c'anges in t'e stoc9 price@ mergers@ and acquisitions.
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"(. A'ic' of t'e fo!!o7ing best c'aracteri<es t'e difference bet7een a financia! forecast and a
financia! pro*ectionB
a. Forecasts inc!ude a comp!ete set of financia! statements@ 7'i!e pro*ections inc!ude
on!y summary financia! data.
b. A forecast is norma!!y for a fu!! year or more and a pro*ection presents data for !ess
t'an a year.
c. A forecast attempts to pro2ide information on 7'at is e.pected to 'appen@ 7'ereas a
pro*ection may pro2ide information on 7'at is not necessari!y e.pected to 'appen.
d. A forecast inc!udes data 7'ic' can be 2erified about future e.pectations@ 7'i!e t'e
data in a pro*ection is not susceptib!e to 2erification.
"). A financia! forecast per professiona! pronouncements presents to t'e best of t'e
responsib!e party=s 9no7!edge and be!ief@
a. an entity=s e.pected financia! position@ resu!ts of operations@ and cas' f!o7s.
b. an assessment of t'e company=s abi!ity to be successfu! in t'e future.
c. gi2en one or more 'ypot'etica! assumptions@ an entity=s e.pected financia! position@
resu!ts of operations@ and cas' f!o7s.
d. an assessment of t'e company=s abi!ity to be successfu! in t'e future under a number
of different assumptions.
8"+. Cas'@ s'ort&term in2estments@ and net recei2ab!es are t'e numerator for
Acid&Test #atio Current #atio
a. Ces 4o
b. Ces Ces
c. 4o 4o
d 4o Ces
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8",. T'eoretica!!y@ in computing t'e recei2ab!es turno2er@ t'e numerator s'ou!d inc!ude
a. net sa!es.
b. net credit sa!es.
c. sa!es.
d. credit sa!es.
8$-. T'e rate of return on common stoc9 equity is ca!cu!ated by di2iding
a. net income by a2erage common stoc9'o!ders1 equity.
b. net income !ess preferred di2idends by a2erage common stoc9'o!ders1 equity.
c. net income by ending common stoc9'o!ders1 equity.
d. net income !ess preferred di2idends by ending common stoc9'o!ders1 equity.
8$1. T'e payout ratio is ca!cu!ated by di2iding
a. di2idends per s'are by earnings per s'are.
b. cas' di2idends by net income p!us preferred di2idends.
c. cas' di2idends by mar9et price per s'are.
d. cas' di2idends by net income !ess preferred di2idends.
8$2. A'ic' of t'e fo!!o7ing ratios measures !ong&term so!2encyB
a. Acid&test ratio
b. #ecei2ab!es turno2er
c. ebt to tota! assets
d. Current ratio
8$3. T'e ca!cu!ation of t'e number of times interest is earned in2o!2es di2iding
a. net income by annua! interest e.pense.
b. net income p!us income ta.es by annua! interest e.pense.
c. net income p!us income ta.es and interest e.pense by annua! interest e.pense.
d. none of t'ese.
8$". A'en s'ou!d an a2erage amount be used for t'e numerator or denominatorB
a. A'en t'e numerator is a ba!ance s'eet item or items
b. A'en t'e denominator is a ba!ance s'eet item or items
c. A'en a ratio consists of an income statement item and a ba!ance s'eet item
d. A'en t'e numerator is an income statement item or items
8$$. T'e basic !imitations associated 7it' ratio ana!ysis inc!ude
a. t'e !ac9 of comparabi!ity among firms in a gi2en industry.
b. t'e use of estimated items in accounting.
c. t'e use of 'istorica! costs in accounting.
d. a!! of t'ese.
24 - 99
$ult#ple C,o#ce Anse!sConceptual
Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans"
21. d 2(. b 31. d 3(. d "1. a "(. c 8$1. d
22. c 2). c 32. b 3). a "2. c "). a 8$2. c
23. c 2+. d 33. c 3+. d "3. c 8"+. a 8$3. c
2". d 2,. d 3". d 3,. d "". b 8",. b 8$" c
2$. b 3-. b 3$. a "-. b "$. c 8$-. b 8$$. d
So!utions to t'ose mu!tip!e c'oice questions for 7'ic' t'e ans7er is Inone of t'ese>J
31. T'e abso!ute amount of its profit or !oss is 1-F or more of t'e greater@ in abso!ute amount@
of DaE t'e combined profit of a!! operating segments t'at did not incur a !oss@ or DbE t'e
combined !oss of a!! operating segments t'at did incur a !oss.
$ULTIPLE CHOICECo(putat#onal
$(. %resented be!o7 are four segments t'at 'a2e been identified by ;regg %roductions>
Tota! #e2enue /perating
Segments D:naffi!iatedE %rofit D6ossE Identifiab!e Assets
A K2$$@--- K3-@--- K,--@---
B (--@--- D$$@---E +--@---
C 22$@--- "@--- "$-@---
,-@--- (@--- 22$@---
For 7'ic' of t'e segments 7ou!d information 'a2e to be disc!osed in accordance 7it'
professiona! pronouncementsB
a. Segments A@ B@ C@ and
b. Segments A@ B@ and C
c. Segments A and B
d. Segments A and
$). In Lanuary 2--+@ /tto@ Inc. estimated t'at its year&end bonus to e.ecuti2es 7ou!d be
K)2-@--- for 2--+. T'e actua! amount paid for t'e year&end bonus for 2--) 7as
K((-@---. T'e estimate for 2--+ is sub*ect to year&end ad*ustment. A'at amount@ if any@
of e.pense s'ou!d be ref!ected in /tto=s quarter!y income statement for t'e t'ree mont's
ended 0arc' 31@ 2--+B
a. K &-&.
b. K1($@---.
c. K1+-@---.
d. K)2-@---.
$+. /n Lanuary 1$@ 2--+@ See!ey Company paid property ta.es on its factory bui!ding for t'e
ca!endar year 2--+ in t'e amount of K$(-@---. In t'e first 7ee9 of Apri! 2--+@ See!ey
made unanticipated ma*or repairs to its p!ant equipment at a cost of K1@"--@---. T'ese
repairs 7i!! benefit operations for t'e remainder of t'e ca!endar year. Mo7 s'ou!d t'ese
e.penses be ref!ected in See!ey=s quarter!y income statementsB
24 - 92
T'ree 0ont's Ended
3N31N-+ (N3-N-+ ,N3-N-+ 12N31N-+
a. K1"-@--- K(-(@(() K(-(@(() K(-(@(()
b. K1"-@--- K1@$"-@--- K1"-@--- K1"-@---
c. K$(-@--- K1@"--@--- K &-& K &-&
d. K",-@--- K",-@--- K",-@--- K",-@---
$,. An in2entory !oss from mar9et dec!ine of K1@(--@--- occurred in 0ay 2--+@ after its 0arc'
31@ 2--+ quarter!y report 7as issued. 4one of t'is !oss 7as reco2ered by t'e end of t'e
year. Mo7 s'ou!d t'is !oss be ref!ected in t'e company=s quarter!y income statementsB
T'ree 0ont's Ended
3N31N-+ (N3-N-+ ,N3-N-+ 12N31N-+
a. K &-& K &-& K &-& K1@(--@---
b. K &-& K$33@333 K$33@333 K$33@333
c. K &-& K1@(--@--- K &-& K &-&
d. K"--@--- K"--@--- K"--@--- K"--@---
:se t'e fo!!o7ing information for questions (- t'roug' (3.
Information for 0ora!es Corp. is gi2en be!o7>
0ora!es Corp.
Ba!ance S'eet
ecember 31@ 2--+
Assets Equities
Cas' K 1--@--- Accounts payab!e K 21-@---
Accounts recei2ab!e DnetE ($-@--- Federa! income ta. payab!e (3@---
In2entories +13@--- 0isce!!aneous accrued payab!es )$@---
%!ant and equipment@ Bonds payab!e D1-F@ due 2-12E (2$@---
net of depreciation ((1@--- %referred stoc9 DK1-- par@ (F
%atents +)@--- cumu!ati2e nonparticipatingE 2$-@---
/t'er intangib!e assets 2$@--- Common stoc9 Dno par@ 2-@---
Tota! Assets K2@33(@--- s'ares aut'ori<ed@ issued
and outstandingE 3)$@---
#etained earnings +13@---
Treasury stoc95$-- s'ares
of preferred D)$@---E
Tota! Equities K2@33(@---
0ora!es Corp.
Income Statement
Cear Ended ecember 31@ 2--+
4et sa!es K3@---@---
Cost of goods so!d 2@---@---
;ross profit 1@---@---
/perating e.penses Dinc!uding bond interest e.penseE $--@---
Income before income ta.es $--@---
Income ta. 1$-@---
4et income K 3$-@---
24 - 93
Additiona! information>
T'ere are no preferred di2idends in arrears@ t'e ba!ances in t'e Accounts #ecei2ab!e and
In2entory accounts are unc'anged from Lanuary 1@ 2--+@ and t'ere 7ere no c'anges in t'e
Bonds %ayab!e@ %referred Stoc9@ or Common Stoc9 accounts during 2--+. Assume t'at preferred
di2idends for t'e current year 'a2e not been dec!ared.
8(-. At ecember 31@ 2--+@ t'e current ratio 7as
a. )$- O 21-.
b. 2@22$ O 2)3.
c. 1@$(3 O 2)3.
d. 1@$(3 O 3"+.
8(1. T'e number of times interest 7as earned during 2--+ 7as
a. 3$- O (2.$.
b. $-- O (2.$.
c. $(2 O (2.$.
d. "3) O (2.$.
8(2. At ecember 31@ 2--+@ t'e boo9 2a!ue per s'are of common stoc9 7as
a. K$$.((.
b. K$+.1(.
c. K$,."1.
d. K$+.($.
8(3. T'e rate of return for 2--+ based on t'e year&end common stoc9'o!ders= equity 7as
a. 3$- O 1@1)3.
b. 3$- O 1@1++.
c. 33$ O 1@1)3.
d. 33$ O 1@1++.
:se t'e fo!!o7ing information for questions (" t'roug' (,.
T'e fo!!o7ing data are pro2ided>
ecember 31
2--+ 2--)
Cas' K 3)$@--- K 2$-@---
Accounts recei2ab!e DnetE "--@--- 3--@---
In2entories ($-@--- $$-@---
%!ant assets DnetE 2@---@--- 1@(2$@---
Accounts payab!e 2)$@--- 2--@---
Ta.es payab!e $-@--- 2$@---
Bonds payab!e 3$-@--- 3$-@---
1-F %referred stoc9@ K$- par $--@--- $--@---
Common stoc9@ K1- par (--@--- "$-@---
%aid&in capita! "--@--- 32$@---
#etained earnings 1@---@--- +)$@---
4et credit sa!es 3@2--@---
Cost of goods so!d 2@1--@---
/perating e.penses )2$@---
4et income 3)$@---
24 - 94
Additiona! information>
epreciation inc!uded in cost of goods so!d and operating e.penses is K3-$@---. /n 0ay 1@
2--+@ 1$@--- s'ares of common stoc9 7ere issued. T'e preferred stoc9 is cumu!ati2e. T'e
preferred di2idends 7ere not dec!ared during 2--+.
8(". T'e recei2ab!es turno2er for 2--+ is
a. 3@2-- O "--.
b. 2@1-- O "--.
c. 3@2-- O 3$-.
d. 2@1-- O 3$-.
8($. T'e in2entory turno2er for 2--+ is
a. 3@2-- O ($-.
b. 2@1-- O ($-.
c. 3@2-- O (--.
d. 2@1-- O (--.
8((. T'e profit margin on sa!es for 2--+ is
a. 1@1-- O 3@2--.
b. 3)$ O 3@2--.
c. 1@1-- O 2@1--.
d. 3)$ O 2@1--.
8(). T'e rate of return on common stoc9 equity for 2--+ is
a. 3)$ O 1@+--.
b. 3)$ O 2@---.
c. 32$ O 1@+--.
d. 32$ O 2@---.
8(+. T'e boo9 2a!ue per s'are of common stoc9 at 12N31N-+ is
a. 1@,$- O (-.
b. 1@,"- O (-.
c. 1@,$- O $$.
d. 2@--- O $$.
8(,. At ecember 31@ 2--+@ t'e acid&test ratio 7as
a. ))$ O 32$.
b. ))$ O $"-.
c. 1@-$- O "--.
d. 1@"2$ O 32$.
8)-. %resented be!o7 is information re!ated to #amsey Company.
Current Assets
Cas' K +@---
S'ort&term in2estments 1$-@---
Accounts recei2ab!e 122@---
In2entories 22-@---
%repaid e.penses (-@---
Tota! current assets K$(-@---
24 - 9:
Tota! current !iabi!ities are K2--@---. A'at is t'e acid&test ratioB
a. 2.+ to 1.
b. 2.$ to 1.
c. 1." to 1.
d. -.+ to 1.
8)1. 6ope< Company=s net accounts recei2ab!e 7ere K(--@--- at ecember 31@ 2--) and
K((-@--- at ecember 31@ 2--+. 4et cas' sa!es for 2--+ 7ere K3,-@---. T'e accounts
recei2ab!e turno2er for 2--+ 7as ).-. A'at 7ere 6ope<=s tota! net sa!es for 2--+B
a. K2@)3-@---.
b. K"@"1-@---.
c. K"@+--@---.
d. K"@-2-@---.
8)2. uring 2--+@ 4ob!e@ Incorporated purc'ased K3@2--@--- of in2entory. T'e cost of goods
so!d for 2--+ 7as K3@(--@--- and t'e ending in2entory at ecember 31@ 2--+@ 7as
K"--@---. A'at 7as t'e in2entory turno2er for 2--+B
a. $.3.
b. +.-.
c. (.-.
d. ,.-.
$ult#ple C,o#ce Anse!sCo(putat#onal
Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans"
$(. b $,. c 8(2. d 8($. d 8(+. a 8)1. c
$). c 8(-. d 8(3. c 8((. b 8(,. a 8)2. c
$+. a 8(1. c 8(". c 8(). c 8)-. c
$ULTIPLE CHOICECPA A)apte)
)3. A'ic' of t'e fo!!o7ing facts concerning p!ant assets s'ou!d be inc!uded in t'e summary of
significant accounting po!iciesB
epreciation 0et'od Composition
a. 4o Ces
b. Ces Ces
c. Ces 4o
d. 4o 4o
)". %arr@ Inc. is a mu!tidi2isiona! corporation 7'ic' 'as bot' intersegment sa!es and sa!es to
unaffi!iated customers. %arr s'ou!d report segment financia! information for eac' di2ision
meeting 7'ic' of t'e fo!!o7ing criteriaB
a. Segment profit or !oss is 1-F or more of conso!idated profit or !oss.
b. Segment profit or !oss is 1-F or more of combined profit or !oss of a!! company
segments.
c. Segment re2enue is 1-F or more of combined re2enue of a!! t'e company segments.
d. Segment re2enue is 1-F or more of conso!idated re2enue.
24 - 9;
)$. #eese Corp. and its di2isions are engaged so!e!y in manufacturing operations. T'e
fo!!o7ing data Dconsistent 7it' prior years= dataE pertain to t'e industries in 7'ic'
operations 7ere conducted for t'e year ended ecember 31@ 2--+.
Assets
Industry #e2enue %rofit 12N31N-+
A K +@---@--- K1@32-@--- K1(@---@---
B (@"--@--- 1@12-@--- 1"@---@---
C "@+--@--- ,(-@--- 1-@---@---
2@"--@--- ""-@--- $@2--@---
E 3@"--@--- $"-@--- $@(--@---
F 1@2--@--- 1+-@--- 2@"--@---
K2(@2--@--- K"@$(-@--- K$3@2--@---
In its segment information for 2--+@ 'o7 many reportab!e segments does #eese 'a2eB
a. T'ree
b. Four
c. Fi2e
d. Si.
)(. T'e fo!!o7ing information pertains to 0aris Corp. and its di2isions for t'e year ended
ecember 31@ 2--+.
Sa!es to unaffi!iated customers K2@$--@---
Intersegment sa!es of products simi!ar to t'ose so!d to
unaffi!iated customers )$-@---
Interest earned on !oans to ot'er operating segments $-@---
0aris and a!! of its di2isions are engaged so!e!y in manufacturing operations. 0aris 'as a
reportab!e segment if t'at segment=s re2enue e.ceeds
a. K33-@---.
b. K32$@---.
c. K2$$@---.
d. K2$-@---.
)). Ad2ertising costs may be accrued or deferred to pro2ide an appropriate e.pense in eac'
period for
Interim Cear&end
Financia! #eporting Financia! #eporting
a. Ces 4o
b. Ces Ces
c. 4o 4o
d. 4o Ces
)+. 6ane Corp. 'as estimated t'at tota! depreciation e.pense for t'e year ending ecember
31@ 2--+ 7i!! amount to K3--@---@ and t'at 2--+ year&end bonuses to emp!oyees 7i!! tota!
K(--@---. In 6ane=s interim income statement for t'e si. mont's ended Lune 3-@ 2--+@
7'at is t'e tota! amount of e.pense re!ating to t'ese t7o items t'at s'ou!d be reportedB
a. K-.
b. K1$-@---.
c. K"$-@---.
d. K,--@---.
24 - 9<
),. Eddy Corp. 'ad t'e fo!!o7ing transactions during t'e quarter ended 0arc' 31@ 2--+>
6oss from 'urricane damage K3$-@---
%ayment of fire insurance premium for ca!endar year 2--+ $--@---
A'at amount s'ou!d be inc!uded in Eddy=s income statement for t'e quarter ended 0arc'
31@ 2--+B
E.traordinary 6oss Insurance E.pense
a. K3$-@--- K$--@---
b. K3$-@--- K12$@---
c. K+)@$-- K12$@---
d. K- K$--@---
+-. For interim financia! reporting@ an e.traordinary gain occurring in t'e second quarter
s'ou!d be
a. recogni<ed ratab!y o2er t'e !ast t'ree quarters.
b. recogni<ed ratab!y o2er a!! four quarters 7it' t'e first quarter being restated.
c. recogni<ed in t'e second quarter.
d. disc!osed by note on!y in t'e second quarter.
8+1. Mo7 is t'e a2erage in2entory used in t'e ca!cu!ation of eac' of t'e fo!!o7ingB
Acid&Test DPuic9E #atio In2entory Turno2er #atio
a. 4umerator 4umerator
b. 4umerator enominator
c. 4ot :sed enominator
d. 4ot :sed 4umerator
8+2. A'ic' of t'e fo!!o7ing ratios isDareE usefu! in assessing a company=s abi!ity to meet
current maturing or s'ort&term ob!igationsB
Acid&Test #atio ebt to Tota! Assets #atio
a. 4o 4o
b. 4o Ces
c. Ces Ces
d. Ces 4o
8+3. A'ic' of t'e fo!!o7ing ratios s'ou!d be used in e2a!uating t'e effecti2eness 7it' 7'ic' t'e
company uses its assetsB
#ecei2ab!es Turno2er %ayout #atio
a. Ces Ces
b. 4o 4o
c. Ces 4o
d. 4o Ces
$ult#ple C,o#ce Anse!sCPA A)apte)
Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans"
)3. c )$. b )). b ),. b 8+1. c 8+3. c
)". c )(. b )+. c +-. c 8+2. d
24 - 9=
DERI2ATIONS Co(putat#onal
No" Anse! De!#8at#on
$(. b #e2enue test> Tota! re2enue ? K1@1)-@--- Q 1-F ? K11)@---.
/perating profit test> K$$@--- Q 1-F ? K$@$--.
Asset test> Tota! assets ? K2@3)$@--- Q 1-F ? K23)@$--.
$). c K)2-@--- O " ? K1+-@---.
$+. a K$(-@--- O " ? K1"-@---.
K1@"--@--- O 3 ? K2((@(() R K1"-@--- ? K(-(@(().
$,. c Conceptua!.
DK1--@--- R K($-@--- R K+13@---E 1@$(3
8(-. d 5555555555555555 ? 555
DK21-@--- R K(3@--- R K)$@---E 3"+
K$--@--- R DK(2$@--- .1-E $(2.$
8(1. c 5555555555555 ? 555
K(2$@--- .1- (2.$
K3)$@--- R SK+13@--- T D.-( Q K2$-@---EU
8(2. d 5555555555555555555 ? K$+.($.
2-@---
K3$-@--- T D.-( Q K2$-@---E
8(3. c 5555555555555555555 ? 33$ O 1@1)3.
K3)$@--- R SK+13@--- T D.-( K2$-@---EU
K3@2--@---
8(". c 555555555555 ? 3@2-- O 3$-.
DK3--@--- R K"--@---E O 2
K2@1--@---
8($. d 555555555555 ? 2@1-- O (--.
DK($-@--- R K$$-@---E O 2
8(( b K3)$@--- O K3@2--@--- ? 3)$ O 3@2--.
K3)$@--- T DK$--@--- Q.1-E
8(). c 55555555555555555555555555555555555
SDK(--@--- R K"--@--- R K1@---@--- T K$-@---E R DK"$-@--- R K32$@--- R K+)$@---EU O 2
? 32$ O 1@+--.
K(--@--- R K"--@--- R DK1@---@--- T K$-@---E
8(+. a 555555555555555555555 ? 1@,$- O (-
(-@---
K3)$@--- R K"--@---
8(,. a 5555555555 ? ))$ O 32$.
K2)$@--- R K$-@---
K+@--- R K1$-@--- R K122@---
8)-. c 55555555555555 ? 1."- to 1.
K2--@---
24 - 9?
DERI2ATIONS Co(putat#onal -cont".
DV T K3,-@---E
8)1. c 555555555555 ? ).-@ V ? K"@+--@---.
DK(--@--- R K((-@---E 2
8)2. c K3@(--@--- R K"--@--- T K3@2--@--- ? K+--@---.
K3@(--@---
555555555555 ? (.
DK+--@--- R K"--@---E O 2
DERI2ATIONS CPA A)apte)
)3. c Conceptua!.
)". c Conceptua!.
)$. b #e2enue test> K2(@2--@--- Q 1-F ? K2@(2-@---
%rofit test> K"@$(-@--- Q 1-F ? K"$(@---
Asset test> K$3@2--@--- Q 1-F ? K$@32-@---
A@ B@ C@ E.
)(. b DK2@$--@--- R K)$-@---E Q 1-F ? K32$@---.
)). b Conceptua!.
)+. c DK3--@--- R K(--@---E O 2 ? K"$-@---.
),. b E.traordinary !oss ? K3$-@---
Insurance e.pense ? K$--@--- O " ? K12$@---.
+-. c Conceptua!.
8+1. c Conceptua!.
8+2. d Conceptua!.
8+3. c Conceptua!.
24 - 2>
E0ERCISES
E@" 24-=454otes to financia! statements.
An artic!e in un=s #e2ie7 made t'e fo!!o7ing comments>
HE2ery ot'er year@ say@ companies s'ou!d print t'e notes in big type
and t'e base figures in sma!!er ones.H
Inst!uct#ons
DaE Are notes considered as part of t'e financia! statements and 7'at basic purpose do t'ey
ser2eB
DbE A'at are t'e genera! types of notesB
Solut#on 24-=4
DaE 4otes are an integra! part of t'e financia! statements of a business enterprise. 4otes are t'e
accountant=s means of more fu!!y disc!osing data re!e2ant to t'e interpretation of t'e
statements. Information pertinent to specific financia! statement items can be e.p!ained in
qua!itati2e terms@ and supp!ementary data of a quantitati2e nature can be pro2ided to
e.pand on t'e information in t'e financia! statements. #estrictions imposed by financia!
arrangements or basic contractua! agreements can be e.p!ained in notes.
DbE T'e more common types of notes disc!ose suc' items as t'e fo!!o7ing> D1E accounting
met'ods used@ D2E contingent assets or !iabi!ities@ D3E e.amination of creditor c!aims@ D"E
c!aims of equity 'o!ders@ and D$E e.ecutory commitments.
E@" 24-=:5Segment reporting.
FASB Statement 4o. 131@ I#eporting isaggregated Information about a Business EnterpriseJ
requires t'e reporting of disaggregated financia! data about t'e different types of business
acti2ities in 7'ic' an enterprise engages.
Inst!uct#ons
Identify " of t'e ( items of disaggregated information t'e FASB requires t'at an enterprise report.
Solut#on 24-=:
T'e FASB requires t'at an enterprise report t'e fo!!o7ing disaggregated information>
1. ;enera! information about its operating segments.
2. Segment profit and !oss and re!ated information.
3. Segment1s tota! assets.
". #econci!iation of t'e tota! of operating segments1 profits and !osses to its income before
income ta.es.
$. Information about products and ser2ices and geograp'ic areas.
(. Tota! amount of re2enues deri2ed from ma*or customers.
24 - 29
E@" 24-=;5Segment reporting.
Me!ton Company=s condensed income statement is presented be!o7>
#e2enues K1@---@---
E.penses
Cost of goods so!d K"--@---
/perating and administrati2e e.penses 2--@---
epreciation e.pense "-@--- ("-@---
Income before ta.es 3(-@---
Income ta. e.penses 1-+@---
4et income K 2$2@---
Earnings per s'are D1--@--- s'aresE K2.$2
T'e fo!!o7ing data is compi!ed re!ati2e to Me!ton=s operating segments>
%ercent Identified 7it' Segment
Mote!s ;rains Candy
#e2enues "2F $-F +F
Cost of goods so!d "+ ", 3
/perating and administrati2e e.pense 3$ $- 1$
epreciation e.pense "( "2 12
Inc!uded in t'e amounts a!!ocated to eac' segment on t'e abo2e percentages are t'e fo!!o7ing
e.penses 7'ic' re!ate to genera! corporate acti2ities>
/perating Segment
Mote!s ;rains Candy Tota!s
/perating and administrati2e e.pense K12@--- K,@--- K3@--- K2"@---
epreciation e.pense 3@$-- "@--- 2@$-- 1-@---
Inst!uct#ons
DaE %repare a sc'edu!e s'o7ing t'e amounts distributed to eac' segment.
DbE Based on!y on t'e abo2e information@ 7'ic' segments must be reported and 7'yB
Solut#on 24-=;
DaE /perating Segment
Mote!s ;rains Candy Tota!s
#e2enues D1E K"2-@--- K$--@--- K+-@--- K1@---@---
E.penses5
Cost of goods so!d D1E 1,2@--- 1,(@--- 12@--- "--@---
/perating and admin. e.pense D2E $+@--- ,1@--- 2)@--- 1)(@---
epreciation e.pense D3E 1"@,-- 12@+-- 2@3-- 3-@---
Tota! e.penses 2("@,-- 2,,@+-- "1@3-- (-(@---
/perating profit K1$$@1-- K2--@2-- K3+@)-- K 3,"@---
D1E Tota! times segment percentage.
D2E Mote!s ? DK2--@--- Q 3$FE T K12@--- ? K$+@---
;rains ? DK2--@--- Q $-FE T K,@--- ? K,1@---
Candy ? DK2--@--- Q 1$FE T K3@--- ? K2)@---
24 - 22
Solut#on 24-=; Dcont.E
D3E Mote!s ? DK"-@--- Q "(FE T K3@$-- ? K1"@,--
;rains ? DK"-@--- Q "2FE T K"@--- ? K12@+--
Candy ? DK"-@--- Q 12FE T K2@$-- ? K2@3--
DbE T7o segments@ Mote!s and ;rains@ must be reported because t'ey satisfy t'e re2enue testG
t'at is@ t'e segment=s re2enues are 1-F or more of t'e combined re2enues of a!! operating
segments. In addition@ t'e Mote!s and t'e ;rains segments meet t'e 1-F of t'e operating
profit test.
E@" 24-=<5Interim reports.
A fe7 years ago@ a pub!is'ing company in t'e fourt' quarter 'ad a net profit figure t'at e.ceeded
sa!es for t'at quarter. Suc' a situation as t'is suggests t'at some difficu!t accounting issues are
in2o!2ed in interim reporting.
Inst!uct#ons
DaE A'at are t'e ma*or accounting prob!ems re!ated to interim reportsB
DbE A'at prob!em e.ists 7it' income ta.es in interim reports and 'o7 does APB Opinion No. 28
recommend t'at ta.es s'ou!d be reportedB A'at does FASB Interpretation No. 18 requireB
DcE 0any academicians 'a2e attempted to predict t'e year=s net income after t'e first quarter=s
income is reported. T'ese attempts are genera!!y unsuccessfu!@ no matter 'o7 sop'isticated
t'e prediction mode!. A'at mig't be t'e reason for t'is inabi!ity to predictB
Solut#on 24-=<
DaE T'e ma*or accounting issues re!ated to interim reporting are t'e treatment of D1E
e.traordinary items@ D2E annua!!y determined items suc' as income ta.es@ pension costs@
e.ecuti2e compensation based on annua! net income@ and D3E t'e prob!em of seasona!ity.
DbE T'e basic question 7it' income ta.es is 7'et'er in t'e preparation of interim income
statements t'e pro2ision for ta.es s'ou!d ref!ect t'e anticipated effecti2e ta. rate for t'e year
or be computed on t'e basis of actua! resu!ts for t'at interim period. APB Opinion No. 28
recommends t'at at t'e end of eac' interim period t'e company s'ou!d ma9e its best
estimate of t'e effecti2e ta. rate e.pected to be app!icab!e for t'e fu!! fisca! year. T'e rate
so determined s'ou!d be used in pro2iding for income ta.es on a current year&to&date basis.
FASB Interpretation No. 18 requires t'at t'e estimated annua! effecti2e ta. rate be app!ied
to t'e year&to&date HordinaryH income at t'e end of eac' interim period to compute t'e year&
to&date ta.. Furt'er@ t'e interim period ta. re!ated to ordinary income s'a!! be t'e difference
bet7een t'e amount so computed and t'e amounts reported for pre2ious interim periods of
t'e fisca! period.
DcE T'e prediction mode!s are probab!y unsuccessfu! because accountants 'a2e not treated t'e
prob!em of seasona!ity correct!y in t'eir interim reports. T'e prob!em 7it' t'e con2entiona!
approac' is t'at fi.ed nonmanufacturing costs are not c'arged in proportion to sa!es.
#at'er@ t'ese costs are c'arged as incurred@ or spread e2en!y o2er t'e four quarters. As a
resu!t@ it is e.treme!y difficu!t to ma9e accurate predictions because some artificia! concepts
are used for matc'ing purposes.
24 - 23
E@" 24-==5In2entory and cost of goods so!d at interim dates.
iscuss 'o7 in2entory and cost of goods so!d may be afforded specia! accounting treatment at
interim dates.
Solut#on 24-==
T'e fo!!o7ing e.ceptions are appropriate at interim reporting dates>
a. Companies may use t'e gross profit met'od for interim in2entory pricing.
b. A'en 6IF/ in2entories are !iquidated at an interim date and are e.pected to be rep!aced by
year end@ cost of goods so!d s'ou!d be based on e.pected rep!acement cost of t'e
!iquidated 6IF/ base rat'er t'an 'istorica! cost.
c. In2entory mar9et dec!ines s'ou!d not be deferred beyond t'e interim period un!ess t'ey are
temporary and no !oss is e.pected for t'e fisca! period. #eco2eries of suc' !osses on t'e
same in2entory in !ater interim periods s'a!! be recogni<ed as gains.
d. %!anned 2ariances under a standard cost system 7'ic' are e.pected to be absorbed by
year end may be deferred.
E@" 24-=?5Forecasts.
#ecent proposa!s by in2estors and ot'ers 'a2e suggested t'at corporations inc!ude financia!
forecasts in t'eir annua! reports. It furt'er 'as been suggested t'at t'e C%A attest to t'ose
forecasts.
Inst!uct#ons
DaE A'at arguments are ad2anced to support t'e pub!ication of suc' forecastsB
DbE A'at arguments are ad2anced t'at oppose t'e pub!ication of suc' forecastsB
Solut#on 24-=?
DaE T'e basic argument for t'e pub!ication of financia! forecasts in corporate annua! reports is to
pro2ide t'e in2estor 7it' additiona! information about t'e future acti2ities of t'e company
upon 7'ic' to base in2estment decisions. A second argument is t'at some in2estors 'a2e
access to t'e forecast data current!yG it 7ou!d be more equitab!e if a!! in2estors 'ad access
to suc' information. T'e attestation by t'e C%A to suc' forecast data 7ou!d pro2ide t'e
forecast data 7it' re!iabi!ity and permit t'e in2estor to 'a2e confidence in t'e forecast. A
third argument is t'at circumstances no7 c'ange so rapid!y t'at 'istorica! information is no
!onger adequate for prediction.
DbE One argument raised against t'e pub!ication of suc' forecasts is t'e e.pectation t'at
management 7ou!d present a conser2ati2e forecast in order to H!oo9 goodH 7'en actua!
resu!ts of t'e year are in. A second point often considered is t'e prospect t'at t'e forecast
7ou!d pro2ide competitors 7it' confidentia! information t'us endangering business strategy
and t'e performance of t'e firm.
A third argument is t'at forecasts are narro7 estimates@ 7'ic' ma9es t'em difficu!t to
interpret gi2en t'at t'e future is not a certainty@ and as a resu!t in2estors may be mis!ed by
t'em.
24 - 24
T'e attestation by C%As a!so can be questioned. T'ere may be a conf!ict of interest
because t'e forecast in t'e current year report and t'e actua! resu!ts of t'e ne.t year are
bot' audited by t'e C%A. T'ere 7ou!d be concern t'at t'e reported resu!ts mig't be
ad*usted so t'at t'e forecast appears to be borne out by t'e actua! resu!ts. Additiona!!y@ it
can be questioned t'at t'e C%A 'as t'e training and qua!ifications to attest to forecasts.
A!so@ t'e profession is 'esitant to attest to forecasts unti! t'e prob!em of additiona! e.posure
to !iabi!ity is c!arified.
AE@" 24-?>5Financia! statement ana!ysis.
T'e condensed financia! statements of Lames Company for t'e years 2--)&2--+ are presented
be!o7>
Lames Company
Comparati2e Ba!ance S'eets
As of ecember 31@ 2--+ and 2--)
2--+ 2--)
Cas' K "2-@--- K 12-@---
#ecei2ab!es DnetE "(-@--- 3--@---
In2entories 3+-@--- 3"-@---
%!ant and equipment 1@)--@--- 1@112@---
Accumu!ated depreciation D2(-@---E D1,2@---E
K2@)--@--- K1@(+-@---
Accounts payab!e K 2"-@--- K 1(-@---
i2idends payab!e &-& "-@---
Bonds payab!e "--@--- &-&
Common stoc9 DK1- parE 1@$2-@--- 1@2--@---
#etained earnings $"-@--- 2+-@---
K2@)--@--- K1@(+-@---
Additiona! data>
0ar9et 2a!ue of stoc9 at 12N31N-+ is K+- per s'are.
Lames so!d 32@--- s'ares of common stoc9 at par on Lu!y 1@ 2--+.
Lames Company
Condensed Income Statement
For t'e Cear Ended ecember 31@ 2--+
Sa!es K2@"--@---
Cost of goods so!d 1@(--@---
;ross profit +--@---
Administrati2e and se!!ing e.pense $--@---
4et income K 3--@---
Inst!uct#ons
Compute t'e fo!!o7ing financia! ratios by p!acing t'e proper amounts in t'e parent'eses pro2ided
for numerators and denominators.
24 - 2:
AE@" 24-?> Dcont.E
a. Current ratio at 12N31N-+ D E
D E
b. Acid test ratio at 12N31N-+ D E
D E
c. #ecei2ab!es turno2er in 2--+ D E
D E
d. In2entory turno2er in 2--+ D E
D E
e. %rofit margin on sa!es in 2--+ D E
D E
f. Earnings per s'are in 2--+ D E
D E
g. #ate of return on common stoc9 equity in 2--+ D E
D E
'. %rice earnings ratio at 12N31N-+ D E
D E
i. ebt to tota! assets at 12N31N-+ D E
D E
*. Boo9 2a!ue per s'are at 12N31N-+ D E
D E
ASolut#on 24-?>
K1@2(-@--- K3--@--- K("-@---
a. 55555 e. 55555 i. 55555
K2"-@--- K2@"--@--- K2@)--@---
K++-@--- K3--@--- K2@-(-@---
b. 5555 f. 5555 *. 55555
K2"-@--- 13(@--- 1$2@---
K2@"--@--- K3--@---
c. 55555 g. 55555
K3+-@--- K1@))-@---
K1@(--@--- K+-
d. 55555 '. 555
K3(-@--- K2.21
24 - 2;
AE@" 24-?95Se!ected financia! ratios.
T'e fo!!o7ing information pertains to Tyson Company>
Cas' K "-@---
Accounts recei2ab!e 12$@---
0erc'andise in2entory )$@---
%!ant assets DnetE 3(-@---
Tota! assets K(--@---
Accounts payab!e K $$@---
Accrued ta.es and e.penses payab!e 2$@---
6ong&term debt 12-@---
Common stoc9 DK1- parE 1(-@---
%aid&in capita! in e.cess of par "-@---
#etained earnings 2--@---
Tota! equities K(--@---
4et sa!es Da!! on creditE K,--@---
Cost of goods so!d ()$@---
4et income )2@---
Inst!uct#ons
Compute t'e fo!!o7ing> DIt is not necessary to use averages for any ba!ance s'eet figures
in2o!2ed.E
DaE Current ratio
DbE In2entory turno2er
DcE #ecei2ab!es turno2er
DdE Boo9 2a!ue per s'are
DeE Earnings per s'are
DfE ebt to tota! assets
DgE %rofit margin on sa!es
D'E #eturn on common stoc9 equity
ASolut#on 24-?9
DaE DK"-@--- R K12$@--- R K)$@---E O DK$$@--- R K2$@---E ? K2"-@--- O K+-@--- ? 3.--.
DbE K()$@--- O K)$@--- ? , times.
DcE DK,--@--- O K12$@---E ? ).2 times.
DdE DK1(-@--- R K"-@--- R K2--@---E O DK1(-@--- O K1-E ? K2$.
DeE K)2@--- O DK1(-@--- O K1-E ? K".$-.
DfE DK$$@--- R K2$@--- R K12-@---E O K(--@--- ? 33.3F.8
DgE K)2@--- O K,--@--- ? +F.
D'E K)2@--- O DK1(-@--- R K"-@--- R K2--@---E ? 1+.-F.
8#ounded amounts.
24 - 2<
AE@" 24-?25Computation of se!ected ratios.
T'e fo!!o7ing data is gi2en>
ecember 31@
2--+ 2--)
Cas' K ",@--- K $-@---
Accounts recei2ab!e DnetE (+@--- (-@---
In2entories ,-@--- 11-@---
%!ant assets DnetE "--@--- 32$@---
Accounts payab!e $$@--- "-@---
Aages payab!e 1-@--- $@---
Bonds payab!e )-@--- )-@---
1-F %referred stoc9@ K"- par 1--@--- 1--@---
Common stoc9@ K1- par 12-@--- ,-@---
%aid&in capita! +-@--- ($@---
#etained earnings 1)2@--- 1)$@---
4et credit sa!es +--@---
Cost of goods so!d $--@---
4et income 1--@---
Inst!uct#ons
Compute t'e fo!!o7ing ratios>
DaE Acid&test ratio at 12N31N-+
DbE #ecei2ab!es turno2er in 2--+
DcE In2entory turno2er in 2--+
DdE %rofit margin on sa!es in 2--+
DeE #ate of return on common stoc9 equity in 2--+
DfE Boo9 2a!ue per s'are of common stoc9 at 12N31N-+
ASolut#on 24-?2
DaE K11)@--- O K($@--- ? 1.+.
DbE K+--@--- O SDK(-@--- R K(+@---E O 2U ? 12.$ times.
DcE K$--@--- O SDK11-@--- R K,-@---E O 2U ? $ times.
DdE K1--@--- O K+--@--- ? 12.$F.
DeE DK1--@--- T K1-@---E O SDK33-@--- R K3)2@---E O 2U ? 2$.(F.
DfE K3)2@--- O 12@--- ? K31.
24 - 2=
PRO%LE$S
P!" 24-?35Segment reporting.
A centra! issue in reporting on operating segments of a business enterprise is t'e determination
of 7'ic' segments are reportab!e.
Inst!uct#ons
1. A'at are t'e tests to determine 7'et'er or not an operating segment is reportab!eB
2. A'at is t'e test to determine if enoug' operating segments 'a2e been separate!y reported
upon@ and 7'at is t'e guide!ine on t'e ma.imum number of operating segments to be s'o7nB
Solut#on 24-?3
1. T'ere are t'ree basic tests to be app!ied to segments of a company to see if t'ey are
significant enoug' to be separate!y reportab!e. If a segment meets any one of t'e tests@ it is
deemed significant and reportab!e.
T'e first test is based upon re2enue. If a segment=s re2enue from sa!es to unaffi!iated
customers and intersegment sa!es and transfers is equa! to 1- percent or more of t'e
enterprise=s combined re2enues@ t'e segment is reportab!e.
T'e second test is based upon profits or !osses. A segment is deemed reportab!e if t'e
abso!ute amount of its profit or !oss is 1- percent or more of t'e greater@ in abso!ute amount@
of>
T'e combined profits of a!! operating segments reporting profits.
T'e combined !osses of a!! operating segments reporting !osses.
T'ird@ a segment is significant and reportab!e if t'e identifiab!e assets of t'e segment equa!
or e.ceed 1- percent of t'e combined assets of a!! operating segments 7it'in t'e
enterprise.
Fina!!y@ a!! segments@ 7'et'er deemed reportab!e or not@ must be 2ie7ed from t'e
standpoint of interperiod comparabi!ity because t'e primary purpose of presenting segment
information is to aid t'e financia! statement reader.
2. Statement o Financia! Accounting Standards No. 1"1 states t'at enoug' operating
segments must be separate!y reported so t'at t'e tota! of re2enues from sa!es to unaffi!iated
customers for t'e reportab!e segments equa!s or e.ceeds )$ percent of t'e combined sa!es
to unaffi!iated customers for t'e entire enterprise. If app!ying t'e prescribed tests does not
yie!d t'e required percentage of re2enues described abo2e@ additiona! segments must be
reported on unti! t'e )$ percent test is met.
T'e Financia! Accounting Standards Board 'as stated t'at if an enterprise 'as many
reportab!e segments@ benefit to t'e reader may be !ost if more t'an 1- segments are
reported. In suc' a situation@ t'e board suggests combining re!ated reportab!e segments
unti! t'e tota! is ten or fe7er.
24 - 2?
P!" 24-?45Interim reporting.
Interim financia! reporting 'as become an important topic in accounting. T'ere 'as been
considerab!e discussion as to t'e proper met'od of ref!ecting resu!ts of operations at interim
dates. According!y@ t'e Accounting %rincip!es Board issued an opinion c!arifying some aspects of
interim financia! reporting.
Inst!uct#ons
DaE iscuss genera!!y 'o7 re2enue s'ou!d be recogni<ed at interim dates and specifica!!y 'o7
re2enue s'ou!d be recogni<ed for industries sub*ect to !arge seasona! f!uctuations in
re2enue and for !ong&term contracts using t'e percentage&of&comp!etion met'od at annua!
reporting dates.
DbE iscuss genera!!y 'o7 product and period costs s'ou!d be recogni<ed at interim dates. A!so
discuss 'o7 in2entory and cost of goods so!d may be afforded specia! accounting treatment
at interim dates.
DcE iscuss 'o7 t'e pro2ision for income ta.es is computed and ref!ected in interim financia!
statements.
Solut#on 24-?4
DaE Sa!es and ot'er re2enues s'ou!d be recogni<ed for interim financia! statement purposes in
t'e same manner as re2enues are recogni<ed for annua! reporting purposes. T'is means
norma!!y at t'e point of sa!e or@ in t'e case of ser2ices@ at comp!etion of t'e earnings
process.
In t'e case of industries 7'ose sa!es 2ary great!y due to t'e seasona! nature of business@
re2enues s'ou!d sti!! be recogni<ed as earned@ but a disc!osure s'ou!d be made of t'e
seasona! nature of t'e business in t'e notes.
In t'e case of !ong&term contracts recogni<ing earnings on t'e percentage&of&comp!etion
basis@ t'e current state of comp!etion of t'e contract s'ou!d be estimated and re2enue
recogni<ed at interim dates in t'e same manner as at t'e norma! year end.
DbE For interim reporting purposes@ product costs Dcosts direct!y attributab!e to t'e production of
goods or ser2icesE s'ou!d be matc'ed 7it' t'e product and associated re2enues in t'e
same manner as for annua! reporting purposes.
%eriod costs Dcosts not direct!y associated 7it' t'e production of a particu!ar good or
ser2iceE s'ou!d be c'arged to earnings as incurred or a!!ocated among interim periods
based on an estimate of time e.pired@ benefit recei2ed@ or ot'er acti2ity associated 7it' t'e
particu!ar interim periodDsE. A!so@ if a gain or !oss occurs during an interim period and is a
type t'at 7ou!d not be deferred at year end@ t'e gain or !oss s'ou!d be recogni<ed in fu!! in
t'e interim period in 7'ic' it occurs. Fina!!y@ in a!!ocating period costs among interim
periods@ t'e basis for a!!ocation must be supportab!e and may not be based on mere!y an
arbitrary assignment of costs bet7een interim periods.
24 - 3>
Solut#on 24-?4 Dcont.E
T'e profession a!!o7ed for some 2ariances from t'e norma! met'od of determining cost of
goods so!d and 2a!uation of in2entories at interim dates in A%B /pinion 4o. 2+@ but t'ese
met'ods are a!!o7ab!e on!y at interim dates and must be fu!!y disc!osed in a note to t'e
financia! statements. Some companies use t'e gross profit met'od of estimating cost of
goods so!d and ending in2entory at interim dates instead of ta9ing a comp!ete p'ysica!
in2entory. T'is is an a!!o7ab!e procedure at interim dates@ but t'e company must disc!ose
t'e met'od used and any significant 2ariances t'at subsequent!y resu!t from reconci!iation
of t'e resu!ts obtained using t'e gross profit met'od and t'e resu!ts obtained after ta9ing
t'e annua! p'ysica! in2entory.
At interim dates@ companies using t'e 6IF/ cost&f!o7 assumption may temporari!y 'a2e a
reduction in in2entory !e2e! t'at resu!ts in a !iquidation of base period !ayers of in2entory. If
t'is !iquidation is considered temporary and is e.pected to be rep!aced prior to year end@ t'e
company s'ou!d c'arge cost of goods so!d at current prices. T'e difference bet7een t'e
carrying 2a!ue of t'e in2entory and t'e current rep!acement cost of t'e in2entory is a current
!iabi!ity for rep!acement of 6IF/ base in2entory temporari!y dep!eted. A'en t'e temporary
!iquidation is rep!aced@ in2entory is debited for t'e origina! 6IF/ 2a!ue and t'e !iabi!ity is
remo2ed.
In2entory !osses from a dec!ine in mar9et 2a!ue at interim dates s'ou!d not be deferred but
s'ou!d be recogni<ed in t'e period in 7'ic' t'ey occur. Mo7e2er@ if in a subsequent interim
period t'e mar9et price of t'e 7ritten&do7n in2entory increases@ a gain s'ou!d be
recogni<ed for t'e reco2ery up to t'e amount of t'e !oss pre2ious!y recogni<ed. If a
temporary dec!ine in mar9et 2a!ue be!o7 cost can reasonab!y be e.pected to be reco2ered
prior to year end@ no !oss s'ou!d be recogni<ed.
Fina!!y@ if a company uses a standard cost system to compute cost of goods so!d and to
2a!ue in2entories@ 2ariances from t'e standard s'ou!d be deferred instead of being
immediate!y recogni<ed.
DcE T'e Board states t'at t'e pro2ision for income ta.es s'o7n in interim financia! statements
must be based upon t'e effecti2e ta. rate e.pected for t'e entire annua! period for ordinary
earnings. T'e effecti2e ta. rate is@ in accordance 7it' pre2ious A%B opinions@ based on
earnings for financia! statement purposes as opposed to ta.ab!e income 7'ic' may
consider temporary differences. T'is effecti2e ta. rate is t'e combined federa! and stateDsE
income ta. rate app!ied to e.pected annua! earnings@ ta9ing into consideration a!!
anticipated in2estment ta. credits@ foreign ta. rates@ percentage dep!etion@ capita! gains
rates@ and ot'er a2ai!ab!e ta. p!anning a!ternati2es. /rdinary earnings do not inc!ude
unusua! or e.traordinary items@ discontinued operations@ or cumu!ati2e effects of c'anges in
accounting princip!es@ a!! of 7'ic' 7i!! be separate!y reported or reported net of t'eir re!ated
ta. effect in reports for t'e interim period or for t'e fisca! year. T'e amount s'o7n as t'e
pro2ision for income ta.es at interim dates s'ou!d be computed on a year&to&date basis. For
e.amp!e@ t'e pro2ision for income ta.es for t'e second quarter of a company=s fisca! year is
t'e resu!t of app!ying t'e e.pected rate to year&to&date earnings and subtracting t'e
pro2ision recorded for t'e first quarter. T'ere are se2era! 2ariab!es in t'is computation
De.pected earnings may c'angeG ta. rates may c'angeE@ and t'e year&to&date met'od of
computation pro2ides t'e on!y continuous met'od of appro.imating t'e pro2ision for income
ta.es at interim dates. Mo7e2er@ if t'e effecti2e rate or e.pected annua! earnings c'ange
bet7een interim periods@ t'e c'ange is not ref!ected retroacti2e!y but t'e effect of t'e
c'ange is absorbed in t'e current interim period.
24 - 39

Ch24 Full Disclosure in Financial Reporting

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Ch24 Full Disclosure in Financial Reporting

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CHAPTER 24

FULL DISCLOSURE IN FINANCIAL REPORTING

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