5-61
CA 5-5 (Continued)
Because of the significant impact on the financial statements of the depreciation method(s) used,
the following disclosures should be made.
CA 5-6
Date
President Kappeler, CEO
Kappeler Corporation
125 Wall Street
your cash balance by $116,000.
The corporation made significant investments in equipment and land. These were paid from cash
reserves. These purchases used 75% of the company’s cash. In addition, the redemption of the bonds
improved the equity of the corporation and reduced interest expense. However, it also used 25% of the
corporation’s cash. It is normal to use cash for investing and financing activities. But when cash is used,
for a low interest loan to finance the acquisition for a few years and return the cash balance to a more
normal level.
If you have additional questions or need one of our staff to address this problem, please contact me at
your convenience.
Sincerely yours,
Partner in Charge
5-62
FINANCIAL REPORTING PROBLEM
(a) P&G could use the account form or report form. P&G uses the account
form.
(c) While there are no Investments reported on P&G’s balance sheet, Note 1
(Significant Accounting Policies) states that Investments are readily
marketable debt and equity securities. These securities are reported at
fair value. Unrealized gains and losses on trading securities are
2009
2008
2007
Net cash provided by operating activities
$ 14,919
$15,008
$13,410
Net cash used in investing activities
(2,353)
(2,549)
(2,483)
Net cash used in financing activities
(10,814)
(14,844)
(12,453)
5-63
FINANCIAL REPORTING PROBLEM (Continued)
P&G’s net cash provided by operating activities decreased slightly
from 2008 to 2009, and increased by 12% from 2007 to 2009. When
must be added to net income.
(e) 1. Net Cash Provided by Operating Activities ÷ Average Current
Liabilities = Current Cash Debt Ratio
$14,919 ÷
($30,901 + $30,958)
= 0.48:1
2
2
3. Net cash provided by operating activities less capital expenditures
and dividends
Net cash provided by operating activities …….
$14,919
Less: Capital expenditures …………………………
$3,238
Free cash flow ……………………………………………
$ 6,637
5-64
COMPARATIVE ANALYSIS CASE
(a) Both the Coca-Cola Company and PepsiCo, Inc. use the report form.
(c) The most significant difference relates to intangible assets. The Coca–
Cola Company has Trademarks, Goodwill, and Other Intangible Assets
of $12,828 million (26% of assets); PepsiCo, Inc. has Intangible Assets,
net of amortization of $8,316 million (or 21% of assets). PepsiCo carries
higher levels of property, plant, and equipment (31.7% of assets), while
Coca–Cola’s property, plant, and equipment is just 19.6% of assets.
Coca-Cola has higher investments in unconsolidated subsidiaries
(13.9% > 11.2% of assets).
5-65
COMPARATIVE ANALYSIS CASE (Continued)
(f) The Coca-Cola Company
Current Cash Debt Ratio
($ millions)
Free cash flow
Net cash provided by operating activities ……………..
$8,186
Less: Capital expenditures ………………………………….
1,993
Dividends………………………………………………….
3,800
Free cash flow …………………………………………………….
$2,393
5-66
COMPARATIVE ANALYSIS CASE (Continued)
Free cash flow
Net cash provided by operating activities ……………….
$6,796
Less: Capital spending …………………………………………
FINANCIAL STATEMENT ANALYSIS CASE 1
(a) The raw materials price increase is not a required disclosure. However,
the company might well want to inform shareholders in the management
discussion and analysis section, especially as a means for company
5-68
FINANCIAL STATEMENT ANALYSIS CASE 2
(a) These accounts are shown in the order in which Sherwin-Williams
actually presented the accounts. The order shown may be modified
somewhat; however, cash should certainly be listed first and other
CURRENT ASSETS
Cash and cash equivalents
Short-term investments
Accounts receivable, less allowance
Finished goods inventories
Work in process and raw materials inventories
Other current assets
CURRENT LIABILITIES
Accounts payable
Employee compensation payable
Taxes payable
Other accruals
Accrued taxes
5-69
FINANCIAL STATEMENT ANALYSIS CASE 2 (Continued)
(b) There is some latitude for judgment in this question. The general
answer is that the assets and liabilities specific to the automotive
division will decrease and that cash will increase. Some students may
be aware that retained earnings will increase or decrease, depending
upon whether the assets were sold above or below historical cost.
Work in process and raw materials inventories—decrease
Land—decrease
FINANCIAL STATEMENT ANALYSIS CASE 3
(a) Working Capital, Current Ratio
Without Contractual Obligations
Working Capital Current Ratio
Without information on contractual obligations, an analyst would
overstate Deere’s liquidity, as measured by working capital and the
current ratio.
(b) 1. Based on the analysis in Part (a), Deere has a pretty good liquid–
ity cushion. It would be able to pay a loan of up $8,011 billion, if
due in one year.
5-71
FINANCIAL STATEMENT ANALYSIS CASE 4
(a) ($ in millions) Current Prior
Year Year
Current assets ……………………………… $3,373 $2,929
Total assets …………………………………. 4,363 3,696
Free Cash Flow …………………………….. 486 529
(1) – (2) – (3)
As indicated above, Amazon’s free cash flow in current and prior year
was $486 million and $529 million respectively. Amazon shows a
5-72
ACCOUNTING, ANALYSIS, AND PRINCIPLES
Accounting
Hopkins Company
Balance Sheet
December 31, 2012
Long-term investments
Bond sinking fund
15,000
Property, plant, and equipment
Equipment
112,000
Less: Accumulated depreciation—equipment
28,000
84,000
Intangible assets
Patents
15,000
Total assets
$277,800
Current liabilities
Notes and accounts payable
Long-term liabilities
Notes payable (due 2014)
75,000
Total liabilities
Common stock
$100,000
Retained earnings
50,800
$277,800
Current assets
Cash ($75,000 – $15,000)
Inventory
65,300
Total current assets