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CT 10-4 INTERPRETING FINANCIAL STATEMENTS
(a)
Hechinger
Home Depot
Working capital
$1,153 – $938 = $215
$4,933 – $2,857 = $2,076
(b)
Debt to assets
ratio
$1,339
$1,577
= 85%
$4,716
$13,465
= 35%
(c)
Return on
assets
–$93
($1,577 +$1,668)2
= –5.7%
$1,614
($13,465 + $11,229)2
= 13.1%
CT 10-4 (Continued)
(d)
Original
Restated
Debt to assets
$4,716
$13,465
= 35%
$4,716 +$2,347
$13,465 +$2,347
= 45%
CT 10-5 INTERPRETING FINANCIAL STATEMENTS
Borders Barnes and Noble
(a) Current ratio
$978.7 ÷ $918.1= 1.07 : 1
$1,719.5÷ $1,724.4 = 1.00 : 1
(c) Neither Borders nor Barnes and Noble were very liquid since their
respective current ratio were only 1.07:1 and 1.0:1. Both companies
CT 10-6 REAL-WORLD FOCUS
(a) An ‘A’ rating means that the company has a strong capacity to meet
financial commitments, but is somewhat susceptible to adverse
economic conditions and changes in circumstances. A ‘C’ rating means
(b) Some factors that can change a company’s credit rating are new
competition, changes in technology, increases or decreases in debt
(c) To determine whether an investment has merit really depends on
particular issues of importance to an individual. For example, a risky
investment might have merit to a wealthy investor that can afford to
CT 10-7 REAL-WORLD FOCUS
(a) If a company can determine a reasonable estimate of the expected loss
and if it is probable it will lose the suit, then the company should
accrue for the loss. It should debit a loss account and credit a liability
(b) The article suggests that many of these companies are paying out
amounts each year, but that their liability account remains roughly the
same. This would suggest that rather than accruing for the full amount of
(c) The article suggests that if a company cannot come up with a reason-
able estimate of costs, but instead can only estimate a range of possible
costs, then financial reporting rules say that they should accrue for the
low end of the range. For example, if you thought you would lose
(d) International accounting rules differ from U.S. rules with regard to
dealing with estimated ranges. They require in a situation where a
CT 10-8 DECISION MAKING ACROSS THE ORGANIZATION
(a) 1. Bonds Payable ............................................ 3,000,000
Cash ..................................................... 2,500,000
Discount on Bonds Payable .............. 54,000*
2. Cash ............................................................ 2,500,000
(b) Dear President Marquis:
The early redemption of the 8%, 5-year bonds results in recognizing a
gain of $446,000 that increases current year net income by the after-tax
effect of the gain. The amount of the liabilities on the balance sheet will
be lowered by the issuance of the new bonds and redemption of the
5-year bonds.
1. The cash flow of the company as it relates to bonds payable will be
adversely affected as follows:
CT 10-8 (Continued)
2. The amount of interest expense shown on the income statement
will be higher as a result of the decision to issue new bonds:
Annual interest expense on new bonds .......... $300,000
Annual interest expense on 8% bonds:
CT 10-9 COMMUNICATION ACTIVITY
To: Jerry Hogan
From: I. M. Student
Subject: Bond Financing
The advantages of bond financing over common stock financing include:
1. Stockholder control is not affected.
3. Income to common stockholders may increase.
1. Secured or unsecured bonds. Secured bonds have specific assets of
the issuer pledged as collateral while unsecured bonds do not.
3. Callable bonds, which are subject to early redemption by the issuer at a
stated amount.
CT 10-10 ETHICS CASE
(a) The stakeholders in this situation include:
Stockholders
Creditors
(b) The possible courses of action and their consequences include:
1. The CEO could inform the auditors. The auditors would then re-
quire that this information be disclosed in the annual report. When
the lenders learn about this potential problem, they may decide to
2. The CEO could conceal the information from the auditors. If the
company is not ultimately found at fault, then the company will not
have sustained any financial hardship. However, if the company is
found to be at fault for the engine failures, then not only is it likely
CT 10-11 ETHICS CASE
(a) The stakeholders include:
1. Enron management
3. Enron investors
4. Enron creditors
(b) Yes. Although the primary responsibility for proper accounting rests
with company management, other knowledgable parties have secon-
dary responsibilities. Auditors are expected to attest to full disclosure.
(c) The auditor may have been unable to detect the inappropriate account-
ing treatment because “secret” agreements between Enron and Citigroup
were not made available for review.
(d) A company may wish to conceal financing arrangements in order to
appear more solvent to investors and creditors. GAAP requires full
(e) The Citigroup deal was more harmful than other off-balance-sheet trans-
actions because it was not fully explained in the financial statement
CT 10-12 ALL ABOUT YOU
The answer to these questions depends on the state in which the student
resides. It also will be depend on the year chosen, although we expect that
(a) Wisconsin state income tax for a single person with a taxable income of
$60,000 is $3,710.80. The tax rate between $17,680 and $132,580 is
$950.30 plus 6.5 percent over $17,680. Therefore the computation is as
follows:
(b) The property tax on a $200,000 home at 2.1% is $4,200.
(c) The state gasoline tax in Wisconsin is 32.9 cents per gallon and the federal
gasoline tax is 18.4 cents per gallon. Your total taxes on gasoline are
computed as follows:
(f) Federal income tax for a single person with a taxable income of $60,000 is
$11,538. The tax rate between $30,650 and $74,200 is $4,220 plus 25%
over $30,650. Therefore the computation is as follows:
CT 10-12 (Continued)
The total taxes paid therefore are computed as follows, based on a $60,000
income amount:
State income tax ................................................................... $ 3,701
Property tax on home ........................................................... 4,200
CT 10-13 FASB CODIFICATION ACTIVITY
(a) Current liabilities is used principally to designate obligations whose
liquidation is reasonably expected to require the use of existing re-
(b) Long-term obligations are those scheduled to mature beyond one year
(or the operating cycle, if applicable) from the date of an entity’s balance
sheet.
(c) The Codification provides the following guidance for disclosure of long-
term obligations:
Bonds, mortgages and other long-term debt, including capitalized
leases.
(1) State separately, in the balance sheet or in a note thereto, each
issue or type of obligation and such information as will indicate
(see §210.4–06):
(2) The amount and terms (including commitment fees and the condi-
tions under which commitments may be withdrawn) of unused
CT 10-14 CONSIDERING PEOPLE, PLANET AND PROFIT
(a) The monthly rates paid by borrowers on loans from these microfinance
(b) These rates are incredibly high. Under most circumstances they would
be considered usurious. However, the borrowers benefit because they
(c) The organizations are structured as savings and loans. (Savings and
loans used to be quite common in the U.S. until a financial crisis in the
1980s caused many of them to go bankrupt.) The organizations in the
article typically only involve a small group of people (15 to 30) who pool
IFRS EXERCISES
IFRS 10-1
The similarities between GAAP and IFRS include: (1) the basic definition of
a liability and (2) liabilities are normally reported in the order of their
liquidity.
Differences between GAAP and IFRS include: (1) GAAP allows straight line
amortization of bond discounts and premiums, but IFRS requires the
IFRS 10-2
(a) Jan. 1 Cash (€2,000,000 X .97) ........................ 1,940,000
Bonds Payable .............................. 1,940,000
IFRS 10-3
Cash (£4,000,000 X .99) .................................................. 3,960,000
Bonds Payable ........................................................ 3,800,000
IFRS10-4 INTERNATIONAL FINANCIAL REPORTING PROBLEM
(a) Total current liabilities for the Louis Vuitton at December 31, 2014 were
€12,175 million, including provisions of €332 million.
(b) Gross long-term borrowings total €5,054 million, consisting of bonds
