Chapter 05 – Communicating and Interpreting Accounting Information
Chapter 05
Communicating and Interpreting
Accounting Information
ANSWERS TO QUESTIONS
1. The primary responsibility for the accuracy of the financial records and conformance
with Generally Accepted Accounting Principles (GAAP) of the information in the
financial statements rests with management, normally the CEO and CFO.
2. Financial analysts, who normally work for brokerage and investment banking
houses, mutual funds, and investment advisory services, gather extensive financial
3. Information services provide a wide variety of financial and nonfinancial information
4. To be useful, information must be relevant; that is, it must be timely and have
5. a. Income statement—Accrual basis required by GAAP.
Chapter 05 – Communicating and Interpreting Accounting Information
5-2
6. Private companies normally issue quarterly and annual reports, both of which are
7. Public companies issue quarterly press releases, quarterly reports, and annual
reports to shareholders and Forms 10-Q (quarterly reports), 10-K (annual reports),
and 8-K (special events) reports to the SEC. Press releases include a summary of
the quarterly report information and are the first announcement of quarterly financial
9. Extraordinary items are reported on the income statement separately. They are
items that are both unusual and infrequent. They are set out separately to aid the
10. The six major classifications on the balance sheet are: (a) current assets, (b)
Chapter 05 – Communicating and Interpreting Accounting Information
5-3
11. Property, plant, and equipment are reported on the balance sheet. Property, plant,
and equipment are those assets held by the business not for resale but for use in
operating the business, such as a delivery truck. (a) Property, plant, and equipment
are reported at their acquisition cost which represents the amount of resources
12. The major classifications of stockholders’ equity are: (1) contributed capital, which
represents the stockholders’ investments and (2) retained earnings, which represent
13. The three major classifications on the Statement of Cash Flows are (a) cash from
14. The three major categories of footnotes are: (1) descriptions of accounting rules
applied to the company’s statements, often called significant accounting policies
15. Return on assets (ROA) is a ratio measure defined as net income divided by
average assets. It measures how much the firm earned for each dollar of assets
ANSWERS TO MULTIPLE CHOICE
Chapter 05 – Communicating and Interpreting Accounting Information
5-4
Authors’ Recommended Solution Time
(Time in minutes)
Mini-exercises
Exercises
Problems
Alternate
Problems
Cases and
Projects
No.
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Chapter 05 – Communicating and Interpreting Accounting Information
MINI-EXERCISES
M5-1.
Definitions
A. Adviser who analyzes financial and other economic
M5-2.
No.
Title
M5–3.
Elements of
Financial Statements Financial Statements
A (1) Expenses A. Income statement
Chapter 05 – Communicating and Interpreting Accounting Information
5-6
M5–4.
Transaction
Current
Assets
Gross Profit
Current
Liabilities
a.
+
+
NE
a. Accounts receivable (+CA) …………………………………. 120
Sales revenue (+R) ……………………………………. 120
Cost of goods sold (+E) ……………………………………….. 80
Inventory (–CA) ……………………………………….. 80
Note that Gross Profit increases (by $40) since it is defined as Sales (increased
by $120) less Cost of Goods Sold (increased by only $80).
b. Advertising expense (+E) …………………………………… 10
M5–5.
Assets
Liabilities
Stockholders’ Equity
a.) Accounts Receivable +800
Sales Revenue +800
b.
NE
NE
+
Chapter 05 – Communicating and Interpreting Accounting Information
5-7
M5–6.
a. Accounts receivable (+A) ……………………………………………….. 800
Sales revenue (+R, +SE) ……………………………………… 800
M5–7.
Return on assets (ROA)
=
Net income
=
$80
=
$80
=
0.084 (8.4%)
Chapter 05 – Communicating and Interpreting Accounting Information
EXERCISES
E5-1.
Players Definitions
F (1) Financial
analyst
A (2) Creditor
A. Financial institution or supplier that lends money to the
company.
B. Chief Executive Officer and Chief Financial Officer who
E5–2.
Information Release Definitions
C (1) Form 10-Q
B (2) Quarterly report
A. Report of special events (e.g., auditor changes,
mergers) filed by public companies with the
Chapter 05 – Communicating and Interpreting Accounting Information
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E5–3.
Information Item Report
B,F (1) Summarized financial data for 5- or 10-year period.
B,F (2) Notes to financial statements.
A. Form 10-Q
B. Annual report
E5–4.
No. Title
7 Long-term liabilities
Chapter 05 – Communicating and Interpreting Accounting Information
E5–5.
Campbell Soup Company
Consolidated Balance Sheet
August 2, Current Year
(in millions)
Assets
Current Assets
Cash and cash equivalents
$ 51
Accounts receivable
528
Inventories
824
Other current assets
148
Total current assets
Noncurrent Assets
Property, plant, and equipment, net
Intangible assets
Other assets
105
Total assets
$6,056
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable
$ 569
Accrued expenses
579
Other current debt
480
Total current liabilities
Long-term liabilities
Other noncurrent liabilities
Total liabilities
Stockholders’ Equity
Common stock, $0.0375 par value
352
Retained earnings
376
Total stockholders’ equity
728
Total liabilities and stockholders’ equity
$6,056
E5–6.
Req. 1.
Lance, Inc.
Consolidated Balance Sheet
December 31, Current Year
(in millions)
Assets
CURRENT ASSETS
Cash and cash equivalents
$ 807
Accounts receivable, net
74,406
Prepaid expenses and other
12,933
Other current assets
9,778
Total current assets
Property, plant and equipment, net
Goodwill
80,110
Other intangible assets, net
23,966
Other assets
4,949
TOTAL ASSETS
$466,146
Liabilities and Stockholders’ Equity
CURRENT LIABILITIES
Accounts payable
$ 25,939
Accrued compensation
26,312
Other payables and accrued liabilities
32,318
Short-term debt
7,000
Total current liabilities
91,569
NONCURRENT LIABILITIES
Long-term debt
91,000
Other long-term liabilities
48,070
Total noncurrent liabilities
STOCKHOLDERS’ EQUITY
Common stock, 28,947,222 shares outstanding
26,268
Additional paid-in capital
49,138
Retained earnings
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$466,146
Chapter 05 – Communicating and Interpreting Accounting Information
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E5–6. (continued)
Req. 2.
In each case, the term “net” means that the account is reported after the balance in the
E5–7.
Cash (+A) …………………………………………………………. 43,000
E5–8.
Req. 1.
Beginning RE + Net income – Dividends = Ending RE
Req. 2.
Chapter 05 – Communicating and Interpreting Accounting Information
E5–9.
Terms Definitions
E5–10.
Case A Case B Case C Case D Case E
Sales revenue $900 $750 $420 $1,200* $750*
Cost of goods sold 525* 300 190* 500 320
A (1) Net income
B (2) Income tax expense
on operations
A. Revenues + Gains – Expenses – Losses
including effects of discontinued operations and
extraordinary items (if any).
Chapter 05 – Communicating and Interpreting Accounting Information
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E5–11.
Case A Case B Case C Case D Case E
Sales revenue $770 $1,200* $400* $600 $1,050
Cost of goods sold 300* 320 125 250 420*
E5-12.
TOWNSHIP CORPORATION
Income Statement
For the Year Ended December 31, 2012
Computations in Order
Sales revenue ………………………….. Given $79,000
Cost of goods sold…………………….. (a) $79,000 – $28,000 51,000
Chapter 05 – Communicating and Interpreting Accounting Information
E5-13.
COFELT APPLIANCES, INCORPORATED
Income Statement
For the Year Ended December 31, 2011
Computations in Order
Sales revenue ………………………….. Given $130,000
Cost of goods sold…………………….. (a) $130,000 – $60,000 (given) 70,000
Chapter 05 – Communicating and Interpreting Accounting Information
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E5-14.
Transaction
Current
Assets
Gross Profit
Current
Liabilities
a.
+$472.7
+$472.7
NE
a. Accounts receivable (+CA) …………………………………. 792.2
Sales revenue (+R) ……………………………………. 792.2
Cost of goods sold (+E) ……………………………………….. 319.5
Inventory (–CA) ……………………………………….. 319.5
Note that Gross Profit increases (by $472.7) since it is defined as Sales
(increased by $792.2) less Cost of Goods Sold (increased by only $319.5).
E5-15.
Transaction
Current
Assets
Gross Profit
Current
Liabilities
Cash Flow from
Operating Activities
a.
NE
NE
NE
+ 35.2
b.
NE
b.
+$425.0
NE
+$425.0
NE
NE
Chapter 05 – Communicating and Interpreting Accounting Information
E5-16.
AVALOS CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2011
From Operating Activities
Net income ……………………………………………………….. $25,000
Increase in accounts receivable …………………………... (9,000)
Decrease in inventory ………………………………………… 1,000
Decrease in accounts payable …………………………….. (3,000)
Cash flows from operating activities ………………….. $ 14,000
Chapter 05 – Communicating and Interpreting Accounting Information
E5-17.
Req. 1.
Current
Year
Prior
Year
Req. 2.
ROA Analysis
Current
Year
Prior
Year
Net Income
Net Sales
$220,022 = 0.077
$2,859,997
$323,478 = 0.110
$2,938,771
Average Total Assets
$2,859,997 = 0.937
$3,051,594
$2,883,833
Return on Assets
Chapter 05 – Communicating and Interpreting Accounting Information
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E5-18.
Req. 1.
Current
Year
Prior
Year
Req. 2.
Security analysts would be more likely to increase their estimates of share value on the
Chapter 05 – Communicating and Interpreting Accounting Information
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PROBLEMS
P5–1.
P5–2.
P (1) Capital in excess of par B (11) Current liabilities
E (2) Assets C (12) Long-term liabilities