Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
CT 2-4 INTERPRETING FINANCIAL STATEMENTS
(a) The percentage decrease in Gap’s total assets during this period is
calculated as:
$7,065 – $8,544
(b) Gap’s working capital and current ratio decreased (2014), increased
(2015 and 2016) and then decreased (2017) 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 2013 to 2017, increasing from $0.94 to $1.89. However, based
REAL-WORLD FOCUS
CT 2-5
CT 2-6
CT 2-7 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)
they say that the switch would be very costly, and (2) because they
(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,
CT 2-8 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 decrease in the debt to assets ratio is a favorable indicator for
solvency and going-concern prospects. The lower the percentage of debt
to assets, the lower the risk that a company may be unable to pay its debts
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
generated from sales and how quickly they can be converted into cash. A
CT 2-9 COMMUNICATION ACTIVITY
To: B. P. Palmer
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:
2. Solvency ratios—These measure a company’s ability to pay its
long-term obligations and survive over the long-term.
(b) 1. Examples of liquidity measures are:
Working capital = Current assets – Current liabilities
2. Examples of solvency measures are:
CT 2-9 (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-
2. Industry averages—This basis compares an item or financial relation-
ship of a company with industry averages (or norms).
CT 2-10 ETHICS CASE
(a) The stakeholders in this case are: Boeing’s management; CEO, public
relations manager, Boeing’s stockholders, McDonnell Douglas stock-
holders, other users of the financial statements; especially potential
investors of the new combined company.
(d) It is not ethical to “time” the release of bad news. GAAP requires that
all significant financial information be released to allow users to make
informed decisions.
CT 2-11 ALL ABOUT YOU
Answers will vary.
LO - BT: S Difficulty: Hard TOT: 30 min. AACSB: Communication and Reflective Thinking AICPA CC:
Critical Thinking AICPA PC: Communication
CT 2-12 FASB CODIFICATION ACTIVITY
(a) 1. Current assets is used to designate cash and other assets or
2. Current liabilities is used principally to designate obligations whose
liquidation is reasonably expected to require the use of existing
(b) Access FASB Codification 210-20-45
A right of set off exists when all of the following conditions are met:
2. The reporting party has the right to set off the amount owed with the
amount owed by the other party.
4. The right of set off is enforceable at law. As a result, a company may
CT 2-13 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
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 uses statement of financial position rather than balance sheet.
IFRS 2-3
SUNDELL COMPANY
Partial Statement of Financial Position
Current assets
Prepaid insurance .................................................................... £ 3,600
Supplies .................................................................................... 5,200
IFRS 2-4
LESSILA BOWLING ALLEY
Statement of Financial Position
December 31, 2017
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 2-5 INTERNATIONAL COMPARATIVE ANALYSIS PROBLEM
Differences in the format of the statement of financial position (balance
sheet) used by Vuitton and Apple include the following:
Vuitton
Apple
1.
Non-current assets listed first
Current assets listed first
3.
Current assets are shown in
Current assets are shown in
4.
The equity section is shown
before liabilities
Liabilities are shown before the
equity section
6.
The equity section uses Share
The equity section uses Common
7.
Reporting currency is € (euros)
Reporting currency is $ (dollars)
