6-41
P6-5 (continued)
2. (continued)
The major weakness in the first quarter report is that it is misleading because the
company is expecting a profit for the year, not a loss as normally would be
3. (1) The treatment of underapplied fixed factory overhead as an asset in this
situation is the preferred method of accounting. The expected year-end
(2) The manner in which the selling, general, and administrative expenses
were handled in the report is the preferred method. These costs are not
(3) The warehouse fire loss is an extraordinary item that should be
appropriately disclosed in the interim financial report, net of income tax
(4) A negative income tax expense (an income tax benefit) should have
been included in the interim report. The $35,000 loss from regular
6-42
P6-5 (continued)
3. (continued)
(4) doubt. An established seasonal pattern of losses in early interim periods,
offset by income in later interim periods, should constitute sufficient
the extraordinary item, and for the sum of the two.
P6-6 (AICPA adapted solution)
1. A usual but infrequently occurring charge does not meet the unusual-in-nature
criterion, and, thus, it is not an extraordinary item. Therefore, it is presented
An extraordinary item should not be presented in the ordinary operations
Company statements of income and retained earnings should be revised as
follows:
(a) “Other, net” and “total costs and expenses” should be decreased by
$10,000 to exclude the extraordinary item (charge).
6-43
P6-6 (continued)
1. (continued)
(e) A new caption “extraordinary item (charge)” should be added showing
the extraordinary item (charge) of $10,000, applicable income taxes of
$3,000, and the net extraordinary item (charge) of $7,000.
2. (a) The quick (acid-test) ratio tests the ability to meet sudden demands upon
liquid current assets.
3. The quick (acid-test) ratio for 2010 is determined by dividing the sum of “cash”
($3,500), “marketable securities” ($13,000), and “accounts receivable” ($105,000)
on the Horizon Company balance sheet by the “total current liabilities” ($75,000)
on the Horizon Company balance sheet.
P6-7 (AICPA adapted solution)
1. PITT CORP.
Income Statement
For the Year Ended December 31, 2010
Net sales $6,250,000
Cost of sales (3,750,000)
Gross profit $2,500,000
Selling and administrative expenses (1,212,500)
Operating income $1,287,500
P6-7 (continued)
2. PITT CORP.
Reconciliation of Net Income to
Taxable Income per Tax Return
For the Year Ended December 31, 2010
Net income $ 368,500
Add: Income tax on continuing operations 369,000
Explanation of amounts
[1] Total income tax excluding extraordinary item for 2010:
Income before income tax and extraordinary item $1,070,000
[2] Deferred income tax for 2010:
Excess of book basis over tax basis in depreciable assets
[3] Extraordinary item–Loss from earthquake damage
(net of income tax) for 2010:
Loss from earthquake damage $ 475,000
Income tax benefit (30% x $475,000) (142,500)
Net of income tax effect $332,500
[4] Earnings per share on income before extraordinary item for 2010:
P6-8
1. Gross profit, 2007: $18,451 million. Operating income, 2007: $7,252 million (p.
66).
5. Total shareowners’ equity, December 31, 2007: $21,744 million; Treasury stock:
$23,375 million; the company uses the cost method to account for treasury
stock (p. 67).
8. At December 31, 2007, the company had $4,963 million in lines of credit and
other short-term credit facilities available, of which approximately $499 million
was outstanding (p. 87).
9. Net cash provided by financing activities in 2007: $973 million; Net cash used in
investing activities in 2007: $(6,719 million) (p. 68).
P6-8 (continued)
15. The company’s internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of its consolidated financial statements. Its internal control over
P6-9
1. COHEN COMPANY
Comparative Income Statements
(Horizontal Analysis)
Year-to-Year
Increase (Decrease)
For Years Ended December 31 2010 to 2011 2009 to 2010
2011 2010 2009 Amount
% Amount
%
Sales (net)
$102,200
$ 91,500
$ 81,700
$10,700
11.7
$9,800
12.0
COHEN COMPANY
Comparative Retained Earnings Statements
(Horizontal Analysis)
Year-to-Year
Increase (Decrease)
For Years Ended December 31 2010 to 2011 2009 to 2010
2011 2010 2009 Amount
% Amount %
6-49
P6-9 (continued)
1. (continued)
COHEN COMPANY
Comparative Balance Sheets
(Horizontal Analysis)
December 31, 2009, 2010, and 2011
Year-to-Year
Increase (Decrease)
December 31 2010 to 2011 2009 to 2010
2011 2010 2009 Amount
% Amount
%
Cash
Receivables (net)
$ 4,200
7,600
$ 4,000
7,000
$ 4,100
6,200
$ 200
600
5.0
8.6
$ (100)
800
(2.4)
12.9
2. (On the following page)
3. The current ratio, acid-test ratio, receivables turnover, return on total assets,
return on stockholders’ equity, and earnings per share for 2011 are less than the
related results in 2010. These results suggest that the financial condition of this
company is not as strong as it was in all of 2010, a likely reason for the decrease
2010 2011
a. Current times2
$10,000
$9,000$7,000$4,000 =
++ times1.8
$12,000
$9,800$7,600$4,200 =
++
e. Earnings per share $3.11
$7,600/$2
$11,800 = $3.00
$8,400/$2
$12,600 =
f. Dividend yield 4.5%0.045
$22
00$3,800/3,8 == 5%0.05
$21
00$4,410/4,2 ==
P6-9 (continued)
2.
6-50
P6-10
1. PIERCE COMPANY
Comparative Income Statements
(Vertical Analysis)
For Years Ended December 31
2011 2010
Amount % Amount %
Sales (net)
Cost of goods sold
$180,000
(108,000)
100.0
(60.0)
$150,000
(85,500)
100.0
(57.0)
*Rounded down to balance
PIERCE COMPANY
Comparative Balance Sheets
(Vertical Analysis)
December 31
2011 2010
Amount % Amount %
Cash
Investments (short-term)
Receivables (net)
$ 4,200
2,000
8,600
2.7
1.3
5.5
$ 3,000
2,100
6,400
2.1
1.5
4.6
*Rounded to balance
6-52
2010 2011
a. Current times1.71
$2,400$10,000
$9,700$6,400$2,100$3,000 =
+
+++ times2.01
$1,000$12,000
$11,300$8,600$2,000$4,200 =
+
+++
e. Payables turnover times$9.83
$10,000)/2$(7,400
$85,500 =
+ times$9.81
12,000)/2$(10,000
$108,000 =
+
f. Return on total assets 13.5%
140,000)/285,400$(44,600
7*)($2,800×0.$16,300 =
++
+ 12.6%
156,000)/2$(140,000
7*)($3,200×0.$16,400 =
+
+
6-52
P6-10 (continued)
2.
P6-10 (continued)
3. Management should be informed that “tightening up” the operating cycle has
a relatively direct impact on the company’s liquidity position but only an
indirect impact on its profitability and common stock market price. A review of
P6-11
1. PEREZ COMPANY
Comparative Income Statements
(Horizontal Analysis)
Base Year-to-Date
Increase (Decrease)
For Years Ended December 31 2009 to 2010 2009 to 2011
2011 2010 2009 Amount % Amount
%
Sales
Sales returns
Net sales
$ 407,000
(7,000)
$ 400,000
$361,500
(11,500)
$350,000
$332,000
(12,000)
$320,000
$29,500
(500)
$30,000
8.9
(4.2)
9.4
$75,000
(5,000)
$80,000
22.6
(41.7)
25.0