Communication Case
3–1
IBM manufactures and sells personal and mainframe computers. The
computers included as current assets in the balance sheet for the company
represent the cost of inventory available for sale. In addition, IBM uses computers
in its operations. The cost of these computers is included in the property, plant,
and equipment category in the balance sheet.
Marketable securities could be classified as either current or long-term assets
depending on the intent of management. If management intends to sell the
securities in the next year or operating cycle, they are classified as current assets.
If management intends to hold the securities beyond the coming year or operating
cycle, they are classified as long-term assets.
Analysis Case 3–2
Requirement 1
Current assets include cash and other assets that are reasonably expected to be
converted to cash or consumed during one year, or within the normal operating
liability, management’s intent, and the length of the operating cycle.
Requirement 2
Assets:
Cash Normally classified as current, however, if restriction
prohibits use of the cash, could be classified as
long-term.
CASES
Prepaid expenses Depends on the period of time prepaid.
Liabilities:
Notes payable Depends on scheduled payment date and management’s
intent to pay or refinance.
Communication Case 3–3
The critical question that student groups should address is whether the cost of
the egg-producing flock should be classified as inventory or as property, plant, and
equipment. There is no right or wrong answer. The process of developing the
proposed solutions will likely be more beneficial than the solutions themselves.
Students should benefit from participating in the process, interacting first with
other group members, then with the class as a whole.
Solutions should address the following issues:
1. The definitions of inventory and property, plant, and equipment.
The definition of inventory according to GAAP [FASB ASC Master Glossary]
is “goods awaiting sale, goods in the course of production, and goods to be
consumed directly in production.” The chickens certainly represent goods
2. The definition of a current asset.
GAAP [FASB ASC Master Glossary and FASB ASC 210–10–45–1 through 4:
“Balance Sheet–Overall–Other Presentation Matters–General–Classification of
Current Assets”] provides the following definition of a current asset:
“Current assets is used to designate cash and
other assets or resources commonly identified as those
GAAP [FASB ASC 210–10–45–3] also states that a one-year time period is to
be used where there are several operating cycles occurring within a year. In this
case, it could be argued that the operating cycle is two years, since the chickens are
not sold until after the laying life and, therefore, the cost of the flock should be
Case 3–3 (concluded)
3. Regardless of the classification of the cost of the chickens, the cost
capitalized when the chickens begin to lay eggs must be depreciated down to an
estimated salvage value at the end of the egg-laying life. This is necessary to
properly match expenses with revenues.
(Industry practice is to classify the costs of the egg-producing flock as
It is important that each student actively participate in the process.
Domination by one or two individuals should be discouraged. Students should be
IFRS Case 3–4
Requirement 1
A major difference is the format of Vodafone’s balance sheets (statements of
financial position). Under U.S. GAAP, we present current assets and liabilities
Another difference is the order of the individual line items within categories.
For example, in the United States, current assets generally are listed in order of
There also are differences in terminology. The term “equity” in Vodafone’s
Requirement 2
The dictionary defines the term provision as “a measure taken beforehand to
deal with a need or contingency.” This indicates that Vodafone’s “provisions”
liabilities are contingent. A loss contingency is defined in Chapter 13 as an
Judgment Case 3–5
DEFICIENCIES:
1. Accounts receivable—if material, the allowance for uncollectible accounts
should be disclosed.
2. Note receivable—only the interest receivable of $3,000 should be
3. Inventories—the method used to cost inventory should be disclosed in a
note.
4. Investments—should be classified in the long-term investments category.
5. Prepaid expenses—should be classified as a current asset.
6. Land—should be classified in the long-term investments category.
7. Equipment, net—should be classified in the property, plant, and equipment
category. Original cost should be disclosed along with the accumulated
8. Patent—should be classified in the intangible assets category of long-term
assets.
9. Note payable—$20,000, the next installment, should be classified as a
current liability as current maturities of long-term debt. Also, note
10. Interest payable—should be classified as a current liability.
Judgment Case 3–6
Accounts receivable, net—disclosure on the face of the statement of the
allowance for uncollectible accounts, if material.
Inventories—disclosure in Accounting Policies note of the cost method used.
Investments—information about the types of investments and the accounting
method used to value the investments.
Property, plant, and equipment—original cost by major category should be
Long-term liabilities—disclosure in a note of the various debt instruments
Real World Case 3–7
Requirement 1
The asset classifications are (1) Current assets, (2) Property and equipment,
Requirement 2
a. Total assets = $ 199,581 million
b. Current assets = $ 60,239 million
Requirement 3
Walmart’s largest current asset is inventories. Walmart’s largest current
liability is accounts payable.
Requirement 4
Requirement 5
a. The company values inventories at the lower of cost or market
b. All highly liquid investments with a maturity of three months or
less when purchased are considered to be cash equivalents.
Judgment Case 3–8
1. This is a significant event occurring after the end of the fiscal year but prior to
2. This is a significant event occurring after the end of the fiscal year but prior to
3. This is a significant event occurring after the end of the fiscal year but prior to
Research Case 3–9
Requirement 1
Generally accepted accounting principles require the disclosure of
Requirement 2
When related-party transactions occur, companies must disclose the nature of
Requirement 3
The related-party transactions disclosure note describes transactions with
limited partnerships whose general partner’s managing member is a senior officer
Requirement 4
The potential problem with related-party transactions is that their economic
substance may differ from their legal form. One of Enron’s disclosed transactions
involved the sale of dark fiber inventory to the related party in exchange for $30