Requirement 5
The current ratios of the two firms are comparable and within the range of the
Current ratio = Current assets
Current liabilities
Acid-test ratio = Quick assets
Current liabilities
Problem 4–15 (concluded)
Requirement 6
Republic’s receivables turnover is more rapid than Metropolitan’s, perhaps
suggesting that its relative liquidity is not as bad as its acid-test ratio indicated.
Receivables turnover ratio = Sales
Accounts receivable
Inventory turnover ratio = Cost of goods sold
Inventory
Requirement 7
Both firms provide an adequate margin of safety.
Times interest =Net income plus interest plus taxes
earned ratio Interest
Problem 4–16
Branson Electronics Company
Income Statement
Revenues $180,000
Cost of goods sold 35 ,000
1$50,000 ÷ 4 = $12,500
Judgment Case 4–1
Requirement 1
The term earnings quality refers to the ability of reported earnings (income) to
Requirement 2
To enhance predictive value, analysts try to separate a company’s transitory
earnings effects from its permanent earnings. Transitory earnings effects result
Requirement 3
An often-debated contention is that, within GAAP, managers have the power,
Requirement 4
You would consider the size of the gain in relation to net income, the size of
CASES
Judgment Case 4–2
Requirement 1
Restructuring costs include costs associated with shutdown or relocation of
Requirement 2
Prior to 2003, restructuring costs were recognized (expensed) in the period the
Requirement 3
Requirement 4
An analyst must interpret restructuring charges in light of a company’s past
Real World Case 4–4
Requirement 1
Companies often voluntarily provide a non-GAAP earnings number when they
announce annual or quarterly earnings calculated according to GAAP. These
Requirement 2
The term earnings quality refers to the ability of reported earnings (income) to
Research Case 4–5
Requirement 1
Requirement 2
The specific citation that addresses the initial measurement of these obligations
Requirement 3
Requirement 4
The specific citation that describes the disclosure requirements for exit or
Case 4–5 (concluded)
Requirement 5
All of the following information is disclosed in notes to financial statements
that include the period in which an exit or disposal activity is initiated and any
subsequent period until the activity is completed:
a. A description of the exit or disposal activity, including the facts and
b. For each major type of cost associated with the activity (for example,
one-time employee termination benefits, contract termination costs, and
other associated costs), both of the following are disclosed:
1. The total amount expected to be incurred in connection with the
2. A reconciliation of the beginning and ending liability balances
d. For each reportable segment, as defined in Subtopic 280-10, the total amount
of costs expected to be incurred in connection with the activity, the amount