CP8–2. (dollar amounts in thousands)
1. The company uses the straight-line method of depreciation. This is disclosed in
Note 2 Summary of Significant Accounting Policies under the heading Property and
Equipment, Net.
4. The original cost of the leasehold improvements was $437,323. This is disclosed in
Note 3.
5. Depreciation expense was $898,000. This is disclosed in Note 3.
CP8–3.
1.
American Eagle
Outfitters
Express,
Inc.
($724,239 / $1,816,313)
($405,013 / $1,187,607)
American Eagle Outfitters has a higher fixed assets-to-total assets percentage
than Express, Inc., which may be due to a variety of differences. For example, each
Financial Accounting, 10/e 8-73
CP8–3. (continued)
2.
American Eagle
Outfitters
Express,
Inc.
64.22%
61.33%
3.
American Eagle
Outfitters
Express,
Inc.
Fixed Asset
5.30
4.99
4.
Industry
Average
American Eagle
Outfitters
Express,
Inc.
Fixed Asset
FINANCIAL REPORTING AND ANALYSIS CASES
CP8–4. (dollar amounts in thousands)
Req. 1
Depreciable assets (in thousands):
Buildings and improvements ….
$ 3,816,387
Computer hardware and software
Req. 2
Accumulated depreciation ……..
$ 4,098,257
Average age
Financial Accounting, 10/e 8-75
CP8–5.
Req. 1
The cost of the property, plant, and equipment at the end of the current year is $3,911
million computed as follows:
Req. 2
The approximate age of the property, plant, and equipment at the end of the current
Req. 3
Current year fixed asset turnover ratio:
Req. 4
“Excess of cost over fair value of assets acquired” is goodwill. Karl reported $3,076
million of goodwill at the end of the current year, which represents the amount Karl paid
above fair market value for the net assets of other companies Karl purchased.
Req. 5
The amortization and depreciation amounts, totaling $497 million for the current year,
based income.
CP8–6.
Consider the kinds of transactions that make Property, Plant, and Equipment and
Accumulated Depreciation change during a period:
(in millions)
Property, Plant, and Equipment
Accumulated Depreciation
Property, Plant, and Equipment (at cost):
Accumulated Depreciation (used cost):
Financial Accounting, 10/e 8-77
CRITICAL THINKING CASES
CP8–7.
Req. 1
Amounts in millions of
US dollars
Q1 Year 1
(March 31)
Q2 Year 1
(June 30)
Q3 Year 1
(September 30)
Q4 Year 1
(December 31)
Q1 Year 2
(March 31)
With
the
entries
Without
the
entries
With
the
entries
Without
the
entries
With
the
entries
Without
the
entries
With
the
entries
Without
the
entries
With
the
entries
Without
the
entries
The above table shows that the “special journal entries” had the effect of reducing
operating expenses and increasing property and equipment in each quarter. The
reduction in operating expenses directly increased income from operations, and in some
instances, allowed the company to report positive earnings rather than losses (see Q2
and Q4).
Note: Because Property and Equipment is a balance sheet account that carries its
balance forward from one period to the next, the computation of its book value
CP8–7. (continued)
Req. 2
Q2 Yr 1
Q3 Yr 1
Q4 Yr 1
Q1 Yr 2
=
Fixed Asset
Net Sales
$8,910
$8,966
$8,478
$8,120
38,480^ = (38,151 + 38,809)/2
38,982† = (38,809 + 39,155)/2
The trend across the four quarters shows a gradual and steady decline, suggesting the
company is becoming less efficient in the use of its assets. This decline is somewhat
Financial Accounting, 10/e 8-79
CP8–7. (continued)
Req. 3
Looking back, there are a number of questions that might have been raised:
• Why you? It’s unusual that the CFO chose someone who doesn’t have
experience with transactions of that magnitude.
• Why a new account? It’s unusual that a new account has been created for these
special advance payments, when an “equipment deposit” account already
existed for transactions supposedly of a similar nature.
Req. 4
As a staff person, you can’t doubt or mistrust every assignment you are given. If you
did, you’d likely find yourself out of a job. So, instead, you need to be able to tell the
difference between routine/ordinary requests and unusual requests. When you are
CP8-7. (continued)
Req. 5
Clearly, the investors in WorldCom (or World-Con, as it was being called) were
devastated by the news. In the days following the announcement that the company
WorldCom’s creditors also were severely harmed. Soon after the company’s true
financial condition became known, WorldCom filed for bankruptcy protection. This legal
maneuver gave the company time to restructure its operations and propose new
financing arrangements that would keep the company alive. Existing creditors
eventually resigned themselves to the fact that they would have to forgive $36 billion of
the company’s debt if the company was to survive. This meant that the average creditor
was repaid only 42% of what was owed by WorldCom.
Financial Accounting, 10/e 8-81
CP8–8.
Req. 1
a. Cash flows: Because cash was paid for interest, cash decreases (-). However, the
interest capitalization.
Req. 2
Because the fixed asset turnover ratio has decreased due to the additional interest
Req. 3
Although the fixed asset turnover ratio decreased due to the interest capitalization, this
FINANCIAL REPORTING AND ANALYSIS TEAM PROJECT
CP8–9. Due to the nature of this project, responses will vary.