Chapter 3 The Balance Sheet and Financial Disclosures
87. Compute the debt to equity ratio for Marjoram Company. Round your answer to two decimal
places.
88. Compute the times interest earned ratio for Marjoram Company. Round your answer to two
decimal places.
89. Compute the return on shareholders’ equity ratio for Marjoram Company. Round your answer
to two decimal places.
Chapter 3 The Balance Sheet and Financial Disclosures
Use the following to answer questions 90–94:
The balance sheet for Altoid Co. is shown below.
Altoid Co.
Balance Sheet
At December 31, 2016
Assets:
Cash
$ 150
Short-term investments
200
Accounts receivable (net)
300
Inventories
450
Property, plant, and equipment (net)
1,100
Total assets
$2,200
Liabilities and shareholders’ equity:
Current liabilities
$ 450
Long-term liabilities
600
Paid-in capital
150
Retained earnings
1,000
Total liabilities and shareholders’ equity
$2,200
Selected 2016 income statement information for Altoid Co. includes:
Net sales
$7,700
Operating expenses
Income before interest and taxes
7,110
590
Interest expense
90
Income tax expense
150
Net income
350
Required: Compute the following financial statement ratios for 2016:
90. Altoid Co.’s current ratio. Round your answer to two decimal places.
91. Altoid Co.’s acid-test ratio. Round your answer to two decimal places.
Chapter 3 The Balance Sheet and Financial Disclosures
92. Altoid Co.’s debt to equity ratio. Round your answer to two decimal places.
93. Altoid Co.’s times interest earned ratio. Round your answer to two decimal places.
94. Altoid Co.’s long term debt to equity ratio. Round your answer to two decimal places.
Use the following to answer questions 95–98:
Bronco Electronics’ current assets consist of cash, marketable securities, accounts receivable, and
inventories. The following data were abstracted from a recent financial statement:
Inventories
$150,000
Total assets
$1,400,000
Current ratio
3
Acid-test ratio
2.25
Debt to equity ratio
1.5
Required: Compute the following for Bronco:
95. Current assets
Answer:
Chapter 3 The Balance Sheet and Financial Disclosures
96. Shareholders’ equity
97. Noncurrent assets
Chapter 3 The Balance Sheet and Financial Disclosures
98. Long-term liabilities
Total debt and equity
$1,400,000
Total equity
Total debt
Current liabilities
Long-term liabilities
Use the following to answer questions 99–102:
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:
99. Current assets
100. Shareholders’ equity
101. Noncurrent assets
102. Long-term liabilities
Chapter 3 The Balance Sheet and Financial Disclosures
103. The following balance sheet information (in $ millions) comes from the Annual Report to
Shareholders of Merry International Inc. for the 2016 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 noncurrent assets
?
Total assets
?
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable
$ 634
Accrued payroll and benefits
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
?
Chapter 3 The Balance Sheet and Financial Disclosures
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
Current assets
Cash and equivalents
Accounts and notes receivable
Inventory
1,489
Other
Total current assets
3,382
Property and equipment, net
$1,307
Intangible assets, net
1,643
Investments
Notes and other receivables, net
1,264
Other
1,137
Total noncurrent assets
5,601
Total assets
$8,983
Current liabilities
Accounts payable
Accrued payroll and benefits
Other payables and accruals
1,175
Total current liabilities
2,501
Long-term debt
$2,691
Other long-term liabilities
2,206
Total long-term liabilities
4,897
Total liabilities
7,398
Shareholders’ equity
Additional paid-in capital
3,644
Retained earnings
3,286
Treasury stock and other
(5,350)
Chapter 3 The Balance Sheet and Financial Disclosures
Use the following to answer questions 104–114:
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.
104.
Current ratio
Acid-test ratio
Total debt to equity ratio
Prepay rent for 3 months
Current ratio
Total debt to equity ratio
Prepay rent for 3 months
105.
Current ratio
Acid-test ratio
Total debt to equity ratio
Cash sale of land for a gain
Current ratio
Acid-test ratio
Total debt to equity ratio
Cash sale of land for a gain
106.
Current ratio
Acid-test ratio
Total debt to equity ratio
Purchase of inventory on account
Current ratio
Acid-test ratio
Total debt to equity ratio
Purchase of inventory on account
107.
Current ratio
Acid-test ratio
Total debt to equity ratio
Collection of an Account Receivable
Current ratio
Acid-test ratio
Total debt to equity ratio
Collection of an Account Receivable
108.
Current ratio
Acid-test ratio
Total debt to equity ratio
Refinancing currently maturing debt
for five more years
Chapter 3 The Balance Sheet and Financial Disclosures
Current ratio
Total debt to equity ratio
Refinancing currently maturing debt
for five more years
109.
Current ratio
Acid-test ratio
Total debt to equity ratio
Purchase advertising on 30-day
credit
Current ratio
Acid-test ratio
Total debt to equity ratio
Purchase advertising on 30-day
credit
110.
Current ratio
Acid-test ratio
Total debt to equity ratio
Payment of recently accrued income
taxes
Current ratio
Total debt to equity ratio
Payment of recently accrued income
taxes
Chapter 3 The Balance Sheet and Financial Disclosures
111.
Current ratio
Acid-test ratio
Total debt to equity ratio
Cash sale of inventory for a profit
Current ratio
Total debt to equity ratio
Cash sale of inventory for a profit
112.
Current ratio
Acid-test ratio
Total debt to equity ratio
Purchase of a warehouse with a 6–
month note
Current ratio
Total debt to equity ratio
Purchase of warehouse with a 6–
month note
113.
Current ratio
Acid-test ratio
Total debt to equity ratio
Issuance of long-term debt for cash
Current ratio
Total debt to equity ratio
Issuance of long-term debt for cash
Chapter 3 The Balance Sheet and Financial Disclosures
114.
Current ratio
Acid-test ratio
Total debt to equity ratio
Record annual depreciation on office
equipment
Answer:
Current ratio
Total debt to equity ratio
Record annual depreciation on office
equipment
Chapter 3 The Balance Sheet and Financial Disclosures
Essay
The following answers suggest the key phrases that should appear in students’ answers. They are not
intended to be examples of complete student responses. It might be helpful to provide detailed
instructions to students on how brief or in-depth you want their answers to be.
115. You are reviewing the December 31, 2016, 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,
2017. The bonds were purchased November 20, 2016.
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.
116. List the circumstances under which land would be classified under the following balance sheet
classifications:
1. Current assets.
2. Investments (noncurrent).
3. Property, plant, and equipment.
4. Other noncurrent assets.
Chapter 3 The Balance Sheet and Financial Disclosures
117. 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.
118. Provide an example of a liability that would not require the payment of cash.
Chapter 3 The Balance Sheet and Financial Disclosures
119. Briefly explain the purpose of the disclosure note on significant accounting policies. Provide
two examples of what might be found in this note.
120. Briefly explain what is meant by a subsequent event. Give two examples of subsequent events.
121. Explain how management’s discussion and analysis of its operations and liquidity may be
helpful to investors.
Chapter 3 The Balance Sheet and Financial Disclosures
122. The following is the 2016 report of the independent registered public accounting firm for 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, 2016, and December 31, 2015, and the
results of their operations and their cash flows for each of the three years in the period ended
December 31, 2016, 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, 2016, 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 2015.
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
Chapter 3 The Balance Sheet and Financial Disclosures
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.
123. Using an example, discuss the techniques that analysts use to transform accounting numbers
into more useful forms.
Chapter 3 The Balance Sheet and Financial Disclosures
124. The current asset section of Seifert & Seifert, CPAs’ balance sheet consists of cash, accounts
receivable, investments, and prepaid expenses. The 2016 balance sheet reported the following:
cash, $110,000; investments, $22,000; prepaid expenses, $18,000; noncurrent 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 2016 amounts and ratios:
1. Current liabilities.
2. Long-term liabilities.
3. Accounts receivable.
4. The acid-test ratio.
Answers:
Chapter 3 The Balance Sheet and Financial Disclosures
125. The balance sheets of Callaway Foods list current assets followed by noncurrent 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?
Answer: