Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Financial Reporting and Analysis (7th Ed.)
Chapter 4 Solutions
Structure of the Balance Sheet and Cash Flow Statement
Cases
Cases
C4-1. Subsequent events
Event 1:
The loan, and the nature of the collateral, should be disclosed in the
notes to the financial statements. The loan would not be reflected in
Event 2:
The existence of the lawsuit should be disclosed in the notes to the
Event 3:
Disclosure of the bond issuance would be provided in the notes to the
Event 4:
Disclosure of the loss of inventory would be required in the notes to
the financial statements because this loss has a significant effect on
Event 5:
C4-2. Related party matters
Requirement 1: Review FASB ASC Topic 850: Related Party Disclosures
Requirement 2: Note to the instructor: Students were directed to the
4-1
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
13. Related Party Transactions
Adelphia currently manages cable television systems which are principally
owned by limited partnerships in which certain of Adelphia's principal
shareholders who are executive officers have equity interests.
Adelphia has agreements with Olympus and the Managed Entities which
provide for the payment of fees to Adelphia. The aggregate fee revenues
from Olympus and the Managed Entities amounted to $2,022, $5,033 and
$34,905 for the nine months ended December 31, 1998 and the years ended
December 31, 1999 and 2000, respectively. In addition, Adelphia was
Interest expense - net includes interest income from affiliates for borrowings
At March 31, 1998, Adelphia had interest rate swaps with affiliates for a
notional amount of $175,000, which expired during the nine months ended
During the nine months ended December 31, 1998 and the years ended
December 31, 1999 and 2000, Adelphia paid $3,422, $11,227 and $15,864,
respectively, to entities owned by certain shareholders of Adelphia primarily
for property, plant and equipment.
Adelphia’s related party note does not adequately explain the extent of the
company’s related party payables and receivables. As the SEC notes,
Adelphia should have ensured – in accordance with FASB ASC Topic 850
(pre-Codification SFAS 57) – that the specifics of individual material related
Requirement 3:
4-2
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adelphia’s practice of offsetting related party payables and receivables—
besides being a GAAP violation—was significant in that it obscured the
extent and magnitude of self-dealing and assisted Adelphia in creating the
Note to the Instructor: Adelphia and the Rigases used the CMS as a
central “treasury function” for Adelphia, its subsidiaries, and the affiliated
Rigas Entities. Thousands of related party transactions went through the
CMS—a fact that was known to Adelphia’s auditor. The general ledger
system shared with Adelphia and its subsidiaries was structured into cost
Requirement 4:
There is a general presumption that transactions reflected in financial
statements were negotiated on an arm’s-length basis between
independent parties, both of whom are looking out for their own interests.
However, that presumption is not justified when related party transactions
C4-3. Analyzing international reporting
Requirement 1:
Some of the differences between Pittards’ balance sheet and those prepared
in accordance with U.S. GAAP are:
1. Pittards reports all amounts in pounds sterling.
4-3
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
2. Pittards uses a modified report form with liabilities deducted from assets
3. Fixed assets are presented before current assets. Accounts in both
4. Tangible fixed assets (which include land, buildings, plant machinery,
5. “Stocks” and “debtors” would be labeled as “inventory” and “accounts
8. “Profit and loss account” and what Pittard’s refers to as “own shares”
9. “Pension scheme” would be referred to as a “pension benefit obligation”
in the U.S. Note: Pittards operated two pension schemes until closing
10. Pittards presents a subtotal for “net current assets (liabilities)” and lists
11. The phrase noting approval by the board of directors that appears at the
12. Pittards presents both company and group balance sheets in
4-4
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Requirement 2:
Note to the instructor: This balance sheet comparison exercise
As illustrated in the following table, both companies frequently use different
item.
Burberry Pittards
Typical U.S.
Balance Sheet
terminology
amounts falling
due within one
year
Bank overdrafts &
borrowings
Banks loans &
overdrafts
Notes payable
Trade & other
payables
Trade creditors Accounts payable
Non-current
liabilities
Creditors—
amounts falling
Long-term debt
Several other differences in presentation/format also exist between these
two balance sheets:
1. Unlike, Burberry, Pittards presents no “total assets” subtotal.
4-5
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Requirement 3:
British balance sheets group assets and liabilities with similar characteristics
(e.g., Fixed assets, Capital and reserves) together. Netting liabilities against
C4-4. Bertha’s Bridal Boutique: Determining cash flow amounts from
comparative balance sheets and income statements
Requirement 1:
Cash collected during 2017 from accounts receivable is calculated
below.
Requirement 2:
To find cash payments during 2017 on accounts payable to suppliers,
we first must compute purchases.
We then use the purchases amount to compute cash payments made
to suppliers.
Requirements 3, 4, and 5:
4-6
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Bertha’s Bridal Boutique
Statement of Cash Flows
Net cash flows for 2017 $86 ,000
**The amount listed for payment of cash dividends can be computed using
T-account analysis as follows:
Retained Earnings
Using the dividends declared amount we found above, we can find the
actual cash paid out for dividends by looking at the dividends payable
account.
Dividends payable
– Beginning balance
4-7
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
C4-5. Crash Zone Corp.: Understanding the relation between
successive balance sheets and cash flow statement
Amounts in the change column were obtained from the following cash
flow statement items:
(1) Net income
(2) Depreciation expense
4-8
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
(7) Decrease in accounts payable
(8) Purchase of equipment
(9) Proceeds from sale of land
(10) Issuance of long-term debt
4-9
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
