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146) Long-term assets
147) Long-term liabilities
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Use this information to answer the following questions:
Spartan Sportswear’s current assets consist of cash, marketable securities, accounts receivable,
and inventories. The following data were abstracted from a recent financial statement:
Inventories $180,000
Total assets $720,000
Current ratio 2.75
Acid-test ratio 1.5
Debt to equity ratio 1.4
Required: Compute the following for Spartan:
148) Current assets
149) Shareholders’ equity
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150) Long-term assets
151) Long-term liabilities
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152) The following balance sheet information (in $ millions) comes from the Annual Report to
Shareholders of Merry International Inc. for the 2018 fiscal year. Certain amounts have been
replaced with question marks to test your understanding of balance sheets. In addition, you are
provided with the following information from an analysis of Merry’s financial position at the
same date:
Current ratio = 1.352259; Acid-test ratio = 0.5769692; Debt to equity ratio = 4.6675078.
Required: Compute the missing amounts (rounded to the nearest $ in millions) in the balance
sheet.
Assets
Current assets
Cash and equivalents $505
Accounts and notes receivable ?
Inventory ?
Other 450
Total current assets ?
Property and equipment, net $1,307
Intangible assets, net ?
Investments 250
Notes and other receivables, net 1,264
Other 1,137
Total long-term assets ________?
Total assets ?
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable $ 634
Accrued salaries and wages 692
Other payables and accruals 1,175
Total current liabilities 2,501
Long-term debt ?
Other long-term liabilities 2,206
Total long-term liabilities ________?
Total liabilities ?
Shareholders’ equity
Class A common stock 5
Additional paid-in capital 3,644
Retained earnings 3,286
Treasury stock and other (5,350)
Total shareholders’ equity 1,585
Total liabilities and shareholders’ equity $8,983
63
64
Use this information to answer the following questions:
Indicate whether each of the actions listed below will immediately increase (I), decrease (D), or have no
effect (N) on the ratios shown. Assume each ratio is greater than 1.0 before the action is taken.
153)
Current ratio
Acid-test ratio
Total debt to equity ratio
Prepay rent for 3 months
Current ratio
Acid-test ratio
Prepay rent for 3 months
154)
Current ratio
Acid-test ratio
Total debt to equity ratio
Cash sale of land for a gain
Current ratio
Acid-test ratio
Cash sale of land for a gain
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155)
Current ratio
Acid-test ratio
Total debt to equity ratio
Purchase of inventory on
account
Acid-test ratio
Purchase of inventory on
account
156)
Current ratio
Acid-test ratio
Total debt to equity ratio
Collection of an Account
Receivable
Current ratio
Acid-test ratio
Receivable
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157)
Current ratio
Acid-test ratio
Total debt to equity ratio
Refinancing currently
maturing debt for five more
years
Current ratio
Acid-test ratio
Refinancing currently
maturing debt for five more
years
158)
Current ratio
Acid-test ratio
Total debt to equity ratio
Purchasing advertising on
30-day credit
Current ratio
Acid-test ratio
Purchasing advertising on
30-day credit
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159)
Current ratio
Acid-test ratio
Total debt to equity ratio
Payment of recently accrued
income taxes
Current ratio
Acid-test ratio
Payment of recently accrued
income taxes
160)
Current ratio
Acid-test ratio
Total debt to equity ratio
Cash sale of inventory for a
profit
Current ratio
Acid-test ratio
profit
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161)
Current ratio
Acid-test ratio
Total debt to equity ratio
Purchase of a warehouse
with a -month note
Current ratio
Acid-test ratio
Purchase of a warehouse
with a 6-month note
162)
Current ratio
Acid-test ratio
Total debt to equity ratio
Issuance of long-term debt
for cash
Current ratio
Acid-test ratio
for cash
163)
Current ratio
Acid-test ratio
Total debt to equity ratio
Record annual depreciation
on office equipment
Current ratio
Acid-test ratio
Record annual depreciation
on office equipment
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164) You are reviewing the December 31, 2018, financial statements of Ellie’s Antiques. Ellie’s
management is considering an initial public offering of their shares. The following items come to
your attention:
a. Included in long-term investments are 10-year U.S. Treasury bonds that mature March 31,
2019. The bonds were purchased November 20, 2018.
b. The property, plant, and equipment account is stated at cost, except that it includes a parcel of
land purchased for investment purposes at a cost of $40,000. Because of rising land prices, the
value of the land has been written up to $60,000. The company has an independent appraisal that
attests to this amount.
c. The accounts receivable account includes $20,000 due in three years from officers and
employees and a two-year, 8% note for $25,000 due from a customer. The loan enabled the
customer to buy equipment needed to process materials purchased from Ellie’s Antiques.
Required: Determine the proper balance sheet presentation and amounts for the above items.
165) List the circumstances under which land would be classified under the following balance
sheet classifications:
1. Current assets.
2. Investments (long-term).
3. Property, plant, and equipment.
4. Other long-term assets.
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166) You are the independent accountant assigned to the audit of Neophyte Company. The
company’s accountant, a graduate of Rival State University, has prepared financial statements
that contained the following questionable items:
a. The balance sheet reports land at $100,000. Included in this amount is a property held for
speculation at a cost of $30,000.
b. Current liabilities include $50,000 for long-term debt that is due in three months. The
company has received a suitable firm commitment to refinance the debt for five years and
intends to do so.
c. Investments in marketable securities include $20,000 in short-term, high-grade commercial
paper, which is a cash equivalent.
Required. Describe the appropriate balance sheet presentation for the above items.
167) Provide an example of a liability that would not require the payment of cash.
168) Briefly explain the purpose of the disclosure note on significant accounting policies.
Provide two examples of what might be found in this note.
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169) Briefly explain what is meant by a subsequent event. Give two examples of subsequent
events.
170) Explain how management’s discussion and analysis of its operations and liquidity may be
helpful to investors.
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171) The following is the 2018 report of the independent registered public accounting firm that
audited The Great Food Company, Inc., a large supermarket chain:
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, stockholders’ deficit and comprehensive loss, and cash flows present
fairly, in all material respects, the financial position of The Great Food Company, Inc. and its
subsidiaries (debtor-in-possession) at December 31, 2018, and December 31, 2017, and the
results of their operations and their cash flows for each of the three years in the period ended
December 31, 2018, in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule listed in Item
15(a)(2) presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company’s management is responsible for these financial statements and financial statement
schedule, for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in
Management’s Annual Report on Internal Control over Financial Reporting appearing under Item
9A. Our responsibility is to express opinions on these financial statements, on the financial
statement schedule, and on the Company’s internal control over financial reporting based on our
integrated audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free
of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements included examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
The accompanying financial statements have been prepared assuming that the Company will
continue as a going concern. However, the Company is currently operating pursuant to a Chapter
11 bankruptcy filing which, together with the uncertain outcomes of the matters discussed in
Note 1 to the consolidated financial statements, raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
As discussed in Note 1 to the consolidated financial statements, the Company changed the
manner in which it accounts for share lending arrangements during fiscal 2017.
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A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Required. Interpret the main points indicated in this report by Great Food’s auditors.
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172) Using an example, discuss the techniques that analysts use to transform accounting numbers
into more useful forms.
173) The current asset section of Seifert & Seifert, CPAs’ balance sheet consists of cash,
accounts receivable, investments, and prepaid expenses. The 2018 balance sheet reported the
following: cash, $110,000; investments, $22,000; prepaid expenses, $18,000; long-term assets,
$422,000; and shareholders’ equity, $350,000. The current ratio at the end of the year was 1.6
and the debt to equity ratio was .8.
Required:
Determine the following 2018 amounts and ratios:
1. Current liabilities.
2. Long-term liabilities.
3. Accounts receivable.
4. The acid-test ratio.
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174) The balance sheets of Callaway Foods list current assets followed by long-term assets and
current liabilities before long-term liabilities. If Callaway Foods prepared its financial statements
according to International Financial Reporting Standards, what other approach might it take in
preparing its balance sheet?