PROBLEM 2-8B
(a) The primary objective of financial reporting is to provide information
useful for decision making. Since Yocum’s shares appear to be ac-
tively traded, investors must be capable of using the information made
available by Yocum to make decisions about the company.
CCC 2-1 CONTINUING COOKIE CHRONICLE
(a) The balance sheet reports the assets, liabilities, and stockholders’
equity of a company at a specific date. The income statement presents
the revenues and expenses and resulting net income or net loss of a
(b) By looking at the balance sheet and the cash flow statement and
calculating liquidity ratios, we can measure a company’s short term
(c) By looking at the balance sheet and the cash flow statement and
calculating solvency ratios we are able to measure a company’s ability
(d) By looking at the income statement we can determine if Biscuits is
profitable. If revenues earned by Biscuits exceed expenses incurred,
(e) By looking at the balance sheet we can determine if Biscuits has any
debt. By looking at the balance sheet and cash flow statement and
calculating solvency ratios we are able to determine whether a company
CONTINUING COOKIE CHRONICLE (Continued)
(f) By looking at the statement of cash flows we can determine whether
Biscuits has paid any dividends to its shareholders.
(g) Be aware that financial statements of Biscuits provide a historical
perspective of what has already taken place. The financial statements
may prove to be a good indicator of what will happen in the future but
BYP 2-1 FINANCIAL REPORTING PROBLEM
(a) Total current assets were $212,201,000 at December 31, 2011, and
$235,167,000 at December 31, 2010.
(b) Current assets are properly listed in the order of liquidity. As you will
learn in a later chapter, inventories are considered to be less liquid than
BYP 2-2 COMPARATIVE ANALYSIS PROBLEM
(
a
)
($ in thousands) Hershey Company Tootsie Roll
1. Working capital $2,046,558 – $1,173,775 = $872,783 $212,201 – $58,355 = $153,846
2. Current ratio $2,046,558 ÷ $1,173,775 = 1.7:1 $212,201 ÷ $58,355 = 3.6:1
(b) Liquidity
Hershey Company appears much more liquid since it has about $719
million more working capital than Tootsie Roll. But, looking at the current
ratios, we see that Tootsie Roll’s ratio is more than two times as large as
Hershey’s.
Solvency
Based on the debt to assets ratio, Tootsie Roll is more solvent.
Tootsie Roll’s debt to assets ratio is significantly lower than Hershey’s
BYP 2-3 RESEARCH CASE
(a) Many large companies, big accounting firms, and accounting standard
setters tend to favor a switch to IFRS because they believe that global
accounting standards would save companies money by consolidating
(b Many small companies are opposed to switching to IFRS because (1)
(c) It has been suggested that IFRS lacks standards that are specific to
utility companies that U.S. GAAP contains.
(d) Condorsement (a word invented by the SEC) represents a
combination of convergence and endorsement. Under condorsement,
U.S. standard setters would continue to work with international
BYP 2-4 INTERPRETING FINANCIAL STATEMENTS
(a) The percentage decrease in Gap’s total assets during this period is
calculated as:
The average decrease per year can be approximated as:
(b) Gap’s working capital and current ratio decreased (2007), increased
(2008 and 2009) and then decreased (2010) during this period,
indicating a decline, an improvement and then another decline in liquidity.
(c) The debt to assets ratio suggests that Gap’s solvency didn’t change
(d) The earnings per share suggests that Gap’s profitability improved signifi-
cantly from 2006 to 2010, increasing from $0.94 to $1.89. However, based
REAL-WORLD FOCUS
BYP 2-5
BYP 2-6
BYP 2-7 DECISION MAKING ACROSS THE ORGANIZATION
The current ratio increase is a favorable indication as to liquidity, but alone
tells little about the prospects of the client. From this ratio change alone,
it is impossible to know the amount and direction of the changes in individual
accounts, total current assets, and total current liabilities. Also unknown
are the reasons for the changes.
The working capital increase is also a favorable indication as to liquidity,
but again the amount and direction of the changes in individual current
assets and current liabilities cannot be determined from this measure.
as they come due. A decline in the debt to assets ratio is also a positive
sign regarding going-concern potential.
The increase in net income is a favorable indicator for both solvency and
profitability prospects although much depends on the quality of receivables
BYP 2-8 COMMUNICATION ACTIVITY
To: F. P. Fernetti
From: Accounting Major
Subject: Financial Statement Analysis
(a) Ratios can be classified into three types, which measure three different
aspects of a company’s financial health:
1. Liquidity ratios—These measure a company’s ability to pay its
current obligations.
(b) 1. Examples of liquidity measures are:
2. Examples of solvency measures are:
BYP 2-8 (Continued)
3. Example of profitability measure:
(c) There are three bases for comparing a company’s results:
The bases of comparison are:
1. Intracompany—This basis compares an item or financial relation-
ship within a company in the current year with the same item or
relationship in one or more prior years.
BYP 2-9 ETHICS CASE
(a) The stakeholders in this case are: Boeing’s management; CEO, public
relations manager, Boeing’s stockholders, McDonnell Douglas stock-
(c) The periodicity assumption requires that financial results be reported
on specific, pre-determined dates.
(e) Answers will vary. One possibility: Release the information regarding
(f) Investors and analysts should be aware that Boeing’s management will
BYP 2-10 ALL ABOUT YOU
Answers will vary.
BYP 2-11 FASB CODIFICATION ACTIVITY
(a) 1. Current assets is used to designate cash and other assets or
resources commonly identified as those that are reasonably
expected to be realized in cash or sold or consumed during the
normal operating cycle of the business.
(b) Access FASB Codification 210-20-45
A right of set off exists when all of the following conditions are met:
1. Each of two parties owes the other determinable amounts.
BYP 2-12 PEOPLE, PLANET AND PROFIT
(a) The existence of three different forms of certification would most
likely create confusion for coffee purchasers. It would difficult to
(b) The Starbucks certification appears to be the most common in that
area. It has the advantage of having a direct link to the Starbucks
coffee market. Although it does not guarantee that Starbucks will buy
(c) The certifications have multiple objectives including organic farming
as a means to protect bird species, biodiversity and wildlife habitat.
Some included requirements are to improve workers’ living
conditions, such as providing running water in worker housing, child
IFRS CONCEPTS AND APPLICATION
IFRS 2-1
The statement of financial position required under IFRS and the balance
sheet prepared under GAAP usually present the same information regarding
a company’s assets, liabilities, and stockholders’ equity at a point in time.
IFRS does not dictate a specific order but most companies list noncurrent
items before current. Differences in ordering are
Statement of Financial
Position presentation
Balance Sheet
presentation
Noncurrent assets Current assets
IFRS 2-2
IFRS 2-3
IFRS 2-4
RUIZ COMPANY
Partial Statement of Financial Position
Current assets
Prepaid insurance ………………………………………………………….. £ 3,600
Supplies ………………………………………………………………………… 5,200
IFRS 2-5
WIDMER COMPANY
Partial Statement of Financial Position
December 31, 2014
Property, plant and equipment
Equipment …………………………………………… CHF21,700
Less: Accumulated depreciation …………. 5,700 CHF16,000
Long-term investments
Share investments ……………………………….. 6,500
Current assets
IFRS 2-6
COLE BOWLING ALLEY
Statement of Financial Position
December 31, 2014
Assets
Property, plant, and equipment
Land ………………………………………… $64,000
Buildings …………………………………. $128,800
Less: Acc. depr.—buildings ……… 42,600 86,200
Equity and Liabilities
Equity
Share capital—ordinary ………………………… $100,000
Retained earnings ($15,000 + $3,440*) …… 18,440 $118,440
Non-current liabilities
IFRS 2-7
It is possible to compare liquidity and solvency for companies using
different currencies. The ratios that are used to do so, such as the current
ratio and debt to total assets, indicate relative amounts of assets and
liabilities rather than absolute monetary values.
IFRS 2-8 INTERNATIONAL COMPARATIVE ANALYSIS PROBLEM
Differences in the format of the statement of financial position (balance
sheet) used by Zetar and Tootsie Roll include the following:
Zetar Tootsie Roll
1. Non-current assets listed first Current assets listed first
2. Goodwill listed before property,
plant and equipment
Property, plant, and equipment
listed before goodwill
3. Current assets are shown in
reverse order of liquidity with
Current assets are shown in
order of liquidity with cash being