Question & Answer

Briefly describe the convergence efforts related to financial statement presentation.

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to statement of financial position (balance sheet) reporting.

Where can authoritative IFRS guidance be found related to the statement of financial position (balance sheet) and the statement of cash flows?

In light of the full disclosure principle, investors and creditors need to know the balances for assets, liabilities, and equity as well as the accounting policies adopted by management to measure the items reported in the balance sheet.

Instructions

If your school has a subscription to the FASB Codification, go to http://aaahq.org/asclogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.

(a) Identify the literature that addresses the disclosure of accounting policies.

(b) How are accounting policies defined in the literature?

(c) What are the three scenarios that would result in detailed disclosure of the accounting methods used?

(d) What are some examples of common disclosures that are required under this statement?

The financial statements of P&G are presented in Appendix 5B. The company’s complete annual report, including the notes to the financial statments, can be accessed at the book’s companion website,

www.wiley.com/college/kieso.

Instructions

Refer to P&G’s financial statements and the related information in the annual report to answer the following questions.

(a) What alternative formats could P&G have adopted for its balance sheet? Which format did it adopt?

(b) Identify the various techniques of disclosure P&G might have used to disclose additional pertinent financial information. Which technique does it use in its financials?

(c) In what classifications are P&G’s investments reported? What valuation basis does P&G use to report its investments? How much working capital did P&G have on June 30, 2011? On June 30, 2010?

(d) What were P&G’s cash flows from its operating, investing, and financing activities for 2011? What were its trends in net cash provided by operating activities over the period 2009 to 2011? Explain why the change in accounts payable and in accrued and other liabilities is added to net income to arrive at net cash provided by operating activities.

(e) Compute P&G’s (1) current cash debt coverage, (2) cash debt coverage, and (3) free cash flow for 2011. What do these ratios indicate about P&G’s financial condition?

The partner in charge of the Kappeler Corporation audit comes by your desk and leaves a letter he has started to the CEO and a copy of the cash flow statement for the year ended December 31, 2014. Because he must leave on an emergency, he asks you to finish the letter by explaining: (1) the disparity between net income and cash flow, (2) the importance of operating cash flow, (3) the renewable source(s) of cash flow, and (4) possible suggestions to improve the cash position.

Date

President Kappeler, CEO

Kappeler Corporation

125 Wall Street

Middleton, Kansas 67458

Dear Mr. Kappeler:

I have good news and bad news about the financial statements for the year ended December 31, 2014.

The good news is that net income of $100,000 is close to what we predicted in the strategic plan last year, indicating strong performance this year. The bad news is that the cash balance is seriously low.

Enclosed is the Statement of Cash Flows, which best illustrates how both of these situations occurred simultaneously . . .

Instructions

Complete the letter to the CEO, including the four components requested by your boss.

Carol Keene, corporate comptroller for Dumaine Industries, is trying to decide how to present “Property, plant, and equipment” in the balance sheet. She realizes that the statement of cash flows will show that the company made a significant investment in purchasing new equipment this year, but overall she knows the company’s plant assets are rather old. She feels that she can disclose one figure titled “Property, plant, and equipment, net of depreciation,” and the result will be a low figure. However, it will not disclose the age of the assets. If she chooses to show the cost less accumulated depreciation, the age of the assets will be apparent. She proposes the following.

Property, plant, and equipment, net of depreciation $10,000,000

rather than Property, plant, and equipment $50,000,000

Less: Accumulated depreciation 40,000,000

Net book value $10,000,000

Instructions

Answer the following questions.

(a) What are the ethical issues involved?

(b) What should Keene do?

Presented below is the balance sheet of Sameed Brothers Corporation (000s omitted).

Instructions

Evaluate the balance sheet presented. State briefly the proper treatment of any item criticized.

The assets of Fonzarelli Corporation are presented below (000s omitted).

Instructions

Indicate the deficiencies, if any, in the foregoing presentation of Fonzarelli Corporation’s assets.

In an examination of Arenes Corporation as of December 31, 2014, you have learned that the following situations exist. No entries have been made in the accounting records for these items.

1. The corporation erected its present factory building in 1999. Depreciation was calculated by the straight-line method, using an estimated life of 35 years. Early in 2014, the board of directors conducted a careful survey and estimated that the factory building had a remaining useful life of 25 years as of January 1, 2014.

2. An additional assessment of 2013 income taxes was levied and paid in 2014.

3. When calculating the accrual for officers’ salaries at December 31, 2014, it was discovered that the accrual for officers’ salaries for December 31, 2013, had been overstated.

4. On December 15, 2014, Arenes Corporation declared a cash dividend on its common stock outstanding, payable February 1, 2015, to the common stockholders of record December 31, 2014.

Instructions

Describe fully how each of the items above should be reported in the financial statements of Arenes Corporation for the year 2014.

Aero Inc. had the following balance sheet at December 31, 2013.

During 2014, the following occurred.

1. Aero liquidated its available-for-sale investment portfolio at a loss of $5,000.

2. A tract of land was purchased for $38,000.

3. An additional $30,000 in common stock was issued at par.

4. Dividends totaling $10,000 were declared and paid to stockholders.

5. Net income for 2014 was $35,000, including $12,000 in depreciation expense.

6. Land was purchased through the issuance of $30,000 in additional bonds.

7. At December 31, 2014, Cash was $70,200, Accounts Receivable was $42,000, and Accounts Payable was $40,000.

Instructions

(a) Prepare a statement of cash flows for the year 2014 for Aero.

(b) Prepare the unclassified balance sheet as it would appear at December 31, 2014.

(c) Compute Aero’s free cash flow and current cash debt coverage for 2014.

(d) Use the analysis of Aero to illustrate how information in the balance sheet and statement of cash flows helps the user of the financial statements.

Lansbury Inc. had the following balance sheet at December 31, 2013.

During 2014, the following occurred.

1. Lansbury Inc. sold part of its investment portfolio for $15,000. This transaction resulted in a gain of $3,400 for the firm. The company classifies its investments as available-for-sale.

2. A tract of land was purchased for $18,000 cash.

3. Long-term notes payable in the amount of $16,000 were retired before maturity by paying $16,000 cash.

4. An additional $20,000 in common stock was issued at par.

5. Dividends of $8,200 were declared and paid to stockholders.

6. Net income for 2014 was $32,000 after allowing for depreciation of $11,000.

7. Land was purchased through the issuance of $30,000 in bonds.

8. At December 31, 2014, Cash was $32,000, Accounts Receivable was $41,600, and Accounts Payable remained at $30,000.

Instructions

(a) Prepare a statement of cash flows for 2014.

(b) Prepare an unclassified balance sheet as it would appear at December 31, 2014.

(c) How might the statement of cash flows help the user of the financial statements? Compute two cash flow ratios.

Presented below is the balance sheet of Sargent Corporation for the current year, 2014.

The following information is presented.

1. The current assets section includes cash $150,000, accounts receivable $170,000 less $10,000 for allowance for doubtful accounts, inventories $180,000, and unearned rent revenue $5,000. Inventoy is stated on the lower-of-FIFO-cost-or-market.

2. The investments section includes the cash surrender value of a life insurance contract $40,000; investments in common stock, short-term (trading) $80,000 and long-term (available-for-sale)

$270,000; and bond sinking fund $250,000. The cost and fair value of investments in common stock are the same.

3. Property, plant, and equipment includes buildings $1,040,000 less accumulated depreciation

$360,000; equipment $450,000 less accumulated depreciation $180,000; land $500,000; and land held for future use $270,000.

4. Intangible assets include a franchise $165,000; goodwill $100,000; and discount on bonds payable $40,000.

5. Current liabilities include accounts payable $140,000; notes payable—short-term $80,000 and longterm

$120,000; and income taxes payable $40,000.

6. Long-term liabilities are composed solely of 7% bonds payable due 2022.

7. Stockholders’ equity has preferred stock, no par value, authorized 200,000 shares, issued 70,000

shares for $450,000; and common stock, $1.00 par value, authorized 400,000 shares, issued 100,000 shares at an average price of $10. In addition, the corporation has retained earnings of $320,000.

Instructions

Prepare a balance sheet in good form, adjusting the amounts in each balance sheet classification as affected by the information given above.

The balance sheet of Kishwaukee Corporation as of December 31, 2014, is as follows.

Equities

Notes payable (Note 3) $ 600,000

Common stock, authorized and issued, 1,000,000 shares, no par 1,150,000

Retained earnings 803,000

Noncontrolling interest 55,000

Appreciation capital (Note 1) 570,000

Income tax payable 75,000

Reserve for depreciation recorded to date on the building 410,000

$3,663,000

Note 1: Buildings are stated at cost, except for one building that was recorded at appraised value. The excess of appraisal value over cost was $570,000. Depreciation has been recorded based on cost.

Note 2: Goodwill in the amount of $120,000 was recognized because the company believed that book value was not an accurate representation of the fair value of the company. The gain of $120,000 was credited to Retained Earnings.

Note 3: Notes payable are long-term except for the current installment due of $100,000.

Instructions

Prepare a corrected classified balance sheet in good form. The notes above are for information only.

The adjusted trial balance of Eastwood Company and other related information for the year 2014 are presented as follows.

Additional information:

1. The LIFO method of inventory value is used.

2. The cost and fair value of the long-term investments that consist of stocks and bonds is the same.

3. The amount of the Construction in Progress account represents the costs expended to date on a building in the process of construction. (The company rents factory space at the present time.) The land on which the building is being constructed cost $85,000, as shown in the trial balance.

4. The patents were purchased by the company at a cost of $40,000 and are being amortized on a straight-line basis.

5. Of the discount on bonds payable, $2,000 will be amortized in 2015.

6. The notes payable represent bank loans that are secured by long-term investments carried at $120,000. These bank loans are due in 2015.

7. The bonds payable bear interest at 8% payable every December 31, and are due January 1, 2025.

8. 600,000 shares of common stock of a par value of $1 were authorized, of which 500,000 shares were issued and outstanding.

Instructions

Prepare a balance sheet as of December 31, 2014, so that all important information is fully disclosed.

resented below are a number of balance sheet items for Montoya, Inc., for the current year, 2014.

Goodwill $ 125,000 Accumulated depreciation—equipment $ 292,000

Payroll taxes payable 177,591 Inventory 239,800

Bonds payable 300,000 Rent payable (short-term) 45,000

Discount on bonds payable 15,000 Income taxes payable 98,362

Cash 360,000 Rent payable (long-term) 480,000

Land 480,000 Common stock, $1 par value 200,000

Notes receivable 445,700 Preferred stock, $10 par value 150,000

Notes payable (to banks) 265,000 Prepaid expenses 87,920

Accounts payable 490,000 Equipment 1,470,000

Retained earnings ? Equity investments (trading) 121,000

Income taxes receivable 97,630 Accumulated depreciation—buildings 270,200

Notes payable (long-term) 1,600,000 Buildings 1,640,000

Instructions

Prepare a classified balance sheet in good form. Common stock authorized was 400,000 shares, and preferred stock authorized was 20,000 shares. Assume that notes receivable and notes payable are short-term, unless stated otherwise. Cost and fair value of equity investments (trading) are the same.

Presented below is a list of accounts in alphabetical order. Accounts Receivable Inventory—Ending Accumulated Depreciation—Buildings Land Accumulated Depreciation—Equipment Land for Future Plant Site Accumulated Other Comprehensive Income Loss from Flood Advances to Employees Noncontrolling Interest Advertising Expense Notes Payable (due next year) MAllowance for Doubtful Accounts Paid-in Capital in Excess of Par—Preferred StockBond Sinking Fund Patents

Bonds Payable Payroll Taxes Payable Buildings Pension Liability Cash (in bank) Petty Cash Cash (on hand) Preferred Stock  ash Surrender Value of Life Insurance Premium on Bonds Payable

Commission Expense Prepaid Rent Common Stock Purchase Returns and Allowances

Copyrights Purchases Debt Investments (trading) Retained Earnings Dividends Payable Salaries and Wages Expense (sales) Equipment Salaries and Wages Payable Freight-In Sales Discounts Gain on Disposal of Equipment Sales Revenue Interest Receivable Treasury Stock (at cost) Inventory—Beginning Unearned Subscriptions Revenue

Instructions

Prepare a classified balance sheet in good form. (No monetary amounts are to be shown.)

The comparative balance sheets of Madrasah Corporation at the beginning and end of the year 2014 appear below.

Net income of $44,000 was reported, and dividends of $33,000 were paid in 2014. New equipment was purchased and none was sold.

Instructions

(a) Prepare a statement of cash flows for the year 2014.

(b) Compute the current ratio (current assets 4 current liabilities) as of January 1, 2014, and December

31, 2014, and compute free cash flow for the year 2014.

(c) In light of the analysis in (b), comment on Madrasah’s liquidity and financial flexibility.

Grant Wood Corporation’s balance sheet at the end of 2013 included the following items.

Current assets $235,000 Current liabilities $150,000

Land 30,000 Bonds payable 100,000

Buildings 120,000 Common stock 180,000

Equipment 90,000 Retained earnings 44,000

Accum. depr.—buildings (30,000) Total $474,000

Accum. depr.—equipment (11,000)

Patents 40,000

Total $474,000

The following information is available for 2014.

1. Net income was $55,000.

2. Equipment (cost $20,000 and accumulated depreciation $8,000) was sold for $10,000.

3. Depreciation expense was $4,000 on the building and $9,000 on equipment.

4. Patent amortization was $2,500.

5. Current assets other than cash increased by $29,000. Current liabilities increased by $13,000.

6. An addition to the building was completed at a cost of $27,000.

7. A long-term investment in stock was purchased for $16,000.

8. Bonds payable of $50,000 were issued.

9. Cash dividends of $30,000 were declared and paid.

10. Treasury stock was purchased at a cost of $11,000.

Instructions

(Show only totals for current assets and current liabilities.)

(a) Prepare a statement of cash flows for 2014.

(b) Prepare a balance sheet at December 31, 2014.

A comparative balance sheet for Shabbona Corporation is presented below.

Additional information:

1. Net income for 2014 was $125,000. No gains or losses were recorded in 2014.

2. Cash dividends of $60,000 were declared and paid.

3. Bonds payable amounting to $50,000 were retired through issuance of common stock.

Instructions

(a) Prepare a statement of cash flows for 2014 for Shabbona Corporation.

(b) Determine Shabbona Corporation’s current cash debt coverage, cash debt coverage, and free cash flow. Comment on its liquidity and financial flexibility.

Presented below is a condensed version of the comparative balance sheets for Zubin Mehta Corporation for the last two years at December 31.

2014 2013

Cash $177,000 $ 78,000

Accounts receivable 180,000 185,000

Investments 52,000 74,000

Equipment 298,000 240,000

Accumulated depreciation—equipment (106,000) (89,000)

Current liabilities 134,000 151,000

Common stock 160,000 160,000

Retained earnings 307,000 177,000

Additional information:

Investments were sold at a loss (not extraordinary) of $10,000; no equipment was sold; cash dividends paid were $30,000; and net income was $160,000.

Instructions

(a) Prepare a statement of cash flows for 2014 for Zubin Mehta Corporation.

(b) Determine Zubin Mehta Corporation’s free cash flow.

The comparative balance sheets of ConstantineCavamanlis Inc. at the beginning and the end of the year 2014 are as follows.

Net income of $44,000 was reported, and dividends of $23,000 were paid in 2014. New equipment was purchased and none was sold.

Instructions

Prepare a statement of cash flows for the year 2014.

The major classifications of activities reported in the statement of cash flows are operating, investing, and financing. Classify each of the transactions listed below as:

1. Operating activity—add to net income.

2. Operating activity—deduct from net income.

3. Investing activity.

4. Financing activity.

5. Reported as significant noncash activity.

The transactions are as follows.

(a) Issuance of common stock. (h) Payment of cash dividends.

(b) Purchase of land and building. (i) Exchange of furniture for office equipment.

(c) Redemption of bonds. (j) Purchase of treasury stock.

(d) Sale of equipment. (k) Loss on sale of equipment.

(e) Depreciation of machinery. (l) Increase in accounts receivable during the year.

(f) Amortization of patent. (m) Decrease in accounts payable during the year.

(g) Issuance of bonds for plant assets.

Presented below is the trial balance of Scott Butler Corporation at December 31, 2014.

Instructions

Prepare a balance sheet at December 31, 2014, for Scott Butler Corporation. (Ignore income taxes.)

Presented below is the adjusted trial balance of Kelly Corporation at

December 31, 2014.

Additional information:

1. Net loss for the year was $2,500.

2. No dividends were declared during 2014.

Instructions

Prepare a classified balance sheet as of December 31, 2014.

Debit Credit

Cash $ ?

Supplies 1,200

Prepaid Insurance 1,000

Equipment 48,000

Accumulated Depreciation—Equipment $ 4,000

Trademarks 950

Accounts Payable 10,000

Salaries and Wages Payable 500

Unearned Service Revenue 2,000

Bonds Payable (due 2021) 9,000

Common Stock 10,000

Retained Earnings 25,000

Service Revenue 10,000

Salaries and Wages Expense 9,000

Insurance Expense 1,400

Rent Expense 1,200

Interest Expense 900

Total $ ? $ ?