168
CONSERVATISM
a.
1.
Current balance
$2,000
Needed to adjust
4,050
Adjusted balance
$6,050
2.
Current balance
$ 2,000
Needed to adjust
10,000
Adjusted balance
$12,000
This will add $10,000 to expense
b. Unethical
The accountant cannot use the conservatism concept to justify arbitrarily low
numbers, such as lower income. What is proposed would be unethical.
PROBLEM 6-27 ACCOUNTS RECEIVABLE – NOTE RECEOVABLE – ETHICS
169
CASES
CASE 6-1 STEEL MAN
(This case provides an opportunity to compare LIFO and FIFO.)
a.
Total current assets
$1,404,100,000
Total current liabilities
844,500,000
Working Capital
$559,600,000
The LIFO reserve reduces the inventory balance to an approximate current cost.
c.
costs.
(3) Constant cost:
If prices remain constant, then the same profit will result with LIFO and FIFO.
e. (1) Price increases:
(b) After-tax cash flows:
Because of the lower income under LIFO, there will be less tax. This
will result in higher cash flow.
(2) Price decreases:
(b) After-tax cash flows:
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(3) Constant cost:
f. Using LIFO, the purchase on the last day of the year would be included in cost of
sales. This distorts profits on the high side.
CASE 6-2 RISING PRICES, A TIME TO SWITCH OFF LIFO?
(This case helps demonstrate that the individual investor must read comments from the
company in a critical manner. The reasons given for a change in accounting principle
may not appear to be the reasons stated when the data are analyzed critically.)
a. Matching current costs against current revenue is usually considered to result in
b. Taxes on past earnings of $6,150,000 will need to be paid if the company switches
Taxes in the future will be higher because of the increased profits resulting from
revenue.
LIFO.
The results will probably not be worth the price of higher taxes and, therefore,
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CASE 6-3 IMAGING
(This case provides an opportunity to review the liquidity of the Eastman Kodak
Company.)
a. 1. Days’ sales in receivables (use trade receivables)
Gross Trade
Receivables
Net Sales/365
2010
2009
$1,137,000,000 + $77,000,000*
$1,238,000,000 + $98,000,000*
$7,187,000,000/365
$7,606,000,000/365
61.65 days
64.11 days
2. Accounts receivable turnover
Net Sales
Gross Receivables
2010
2009
$7,187,000,000
$7,606,000,000
$1,214,000,000
$1,336,000,000
5.92 times
5.69 times
3. Days’ Sales in Inventory
Ending Inventory
Cost of Goods Sold/365
2010
2009
$696,000,000
$679,000,000
$5,236,000,000/365
$5,838,000,000/365
48.52 days
42.45 days
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4. Inventory turnover
Cost of Goods Sold
Average Inventory
2010
2009
$5,236,000,000
$5,838,000,000
$696,000,000
$679,000,000
7.52 times
8.60 times
5. Working capital
Current Assets – Current Liabilities
2010
2009
Current assets
$3,799,000,000
$4,303,000,000
Current liabilities
(2,833,000,000)
(2,896,000,000)
$966,000,000
$1,407,000,000
6. Current ratio
Current Assets
Current Liabilities
2010
2009
$3,799,000,000
$4,303,000,000
$2,833,000,000
$2,896,000,000
1.34
1.49
7. Acid-test ratio
Cash Equivalents + Marketable Securities + Net Receivables
Current Liabilities
2010
2009
$1,624,000,000 + $1,259,000,000
$2,024,000,000 + $1,395,000,000
$2,833,000,000
$2,896,000,000
1.02
1.18
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b. 1. Days’ sales in receivables
Material positive trend between 2009 and 2010
2. Accounts receivable turnover
Material positive trend between 2009 and 2010
3. Days’ sales in inventory
Material negative trend between 2009 and 2010
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d.
Eastman Kodak Company
Vertical Common-Size
Consolidated Statement of Financial Position
At December 31
2010
2009
Assets
Current Assets
Cash and cash equivalents
26.0
26.3
Receivables, net
20.2
18.1
Inventories, net
11.2
8.8
Deferred income taxes
1.9
1.6
Other current assets
1.6
1.0
Total current assets
60.9
55.9
Property, plant and equipment, net
16.6
16.3
Goodwill
4.7
11.8
Other long-term assets
17.8
16.0
Total assets
100.0
100.0
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable trade
15.4
11.9
Short-term borrowings and current portion of long-term debt
.8
.8
Accrued income taxes
5.5
.3
Other current liabilities
23.7
24.6
Total current liabilities
45.4
37.7
Long-term debt, net of current portion
19.2
14.7
Pension and other postretirement liabilities
42.7
35.0
Other long-term liabilities
10.0
13.1
Total liabilities
117.2
100.4
Shareholders’ Equity
Common stock
15.7
12.7
Additional paid in capital
17.7
14.2
Retained earnings
79.6
73.8
Accumulated other comprehensive loss
(34.2)
(22.9)
78.8
77.8
Treasury stock, at cost
(96.1)
(78.3)
Total Eastman Kodak Company shareholders’ (deficit) equity
(17.3)
(0.5)
Noncontrolling interests
0.0
0.0
Total (deficit) equity
(17.2)
(0.4)
Total liabilities and equity (deficit)
100.0
100.0
* There are some rounding differences
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Material decrease in goodwill.
accounts payable and accrued income taxes.
Material increase in total liabilities.
shareholders’ equity.
CASE 6-4 TECHNOLOGY
a. 1. Days’ Sales in Receivables (In millions)
Gross Receivables
Net Sales/365
2010
2009
$3,615,000,000 + $98,000,000
$3,250,000,000 + $109,000,000
$26,662,000,000
$23,123,000,000
50.83 days
53.02 days
2. Accounts Receivable Turnover
Net Sales
Gross Receivables at Year-End
2010
2009
$26,662,000,000
$23,123,000,0000
$3,615,000,000 + $98,000,000
$3,250,000,000 + $109,000,000
7.18 times
6.88 times