Acct Hw Chap Solutions Essay Example Essay Example

Acct Hw Chap Solutions Essay Example Paper Acct Hw Chap Solutions Essay Introduction For example, when a company carries a high level of long-term debt relative to assets, it has lower solvency, Information on long-term obligations, such as long-term debt and notes payable, in comparison to total assets and stockholders’ equity can be used to assess resources that will be needed to meet these fixed obligations (such as interest and principal payments). 3. Financial flexibility is the ability of an enterprise to take effective actions to alter the amounts and timing to cash flows so can respond to unexpected needs and opportunities. An enterprise with a high degree of financial flexibility is better able to survive bad times, to recover from unexpected setbacks, and to take advantage of profitable and unexpected investment opportunities. Generally, the greater the financial flexibility, the lower the risk of enterprise failure. 4. Some situations in which estimates affect amounts reported in the balance sheet include: (a) allowance for loan losses. (b) deprecia ble lives and estimated salvage values for plant and equipment. (c) warranty returns. (d) determining the amount of revenues that should be recorded as unearned. When estimates are required, there is subjectivity in determining the amounts. Such subjectivity can impact the usefulness of the information by reducing the reliability Of the measures, either because Of bias or lack of verifiability. . An increase in inventories increases current assets, which is in the numerator Of the current ratio. Therefore, inventory increases Will increase the current ratio. In general, an increase in the current ratio indicates a company has better liquidity, since there are more current assets relative to current liabilities. Acct Hw Chap Solutions Essay Body Paragraphs Note to instructors-?when inventories increase faster than sales. This may not be a good signal about liquidity. That is, inventory can only be used to meet current obligations when it is sold (and converted to cash). That is why some analysts use a liquidity ratio-?the acid test ratio-?that excludes inventories room current assets in the numerator. 6. Liquidity describes the amount of time that is expected to elapse until an asset is converted into cash or until a liability has to be paid. The ranking of the assets given in order of liquidity is: (1) (d) Short-term investments. (2) (e) Accounts receivable. (3) (b) Inventories. (4) (c) Buildings. (5) (a) Goodwill, Questions Chapter 4 (Continued) 7. (I) (2) (3) The values stated are generally historical and not current or fair value. Estimates have to be used in many instances, such as in the determination Of collectivity Of receivables or finding he approximate useful life of long-term tangible and intangible assets. Many items, even though they have financial value to the business, presently are not recorded. One example is the value of a commands human resources. 8. Some items of value to technology companies such as Intel or IBM are the value of research and development (new products that are being developed but which are not yet marketable), the value of the Wanderlust capital† of its workforce (the ability of the companies’ employees to come up with new ideas and products in the fast changing technology industry), and the value of the many reputation or name brand (e. G. , the â€Å"Intel Inside† logo). In most cases, the reasons why the value of these items is not recorded in the balance sheet concern the lack to reliability tooth estimates tooth future cash flows that will be generated by these â€Å"assets† (for all three types) and the ability to control the use of the asset (in the case of employees). Being able to reliably measure the expected future benefits and to control the use of an item are essential elements of the definition of an asset, according to the Conceptual Framework. 9. Classification in financial statements helps users by grouping items with similar heartsickness and separating items with different characteristics. Current assets are expected to be converted to cash within one year or one operating cycle, while property, plant and equipment, will provide cash inflows over a longer period of time. Thus, separating long-term assets from current assets facilitates computation of useful ratios such as the current ratio. 10. Separate amounts should be reported for accounts receivable and notes receivable. The amounts should be reported gross, and an amount for the allowance for doubtful accounts should be deducted. The amount and nature Of any annotated achievable, and any amounts pledged or discounted, should be clearly stated. II. Available-for-sale securities should be reported as a current asset only if management intends to convert t hem into cash as needed within one year or the operating cycle, whichever is longer. If available-for-sale securities are not held with this expectation, they should be reported as long-term investments. 12. The relationship between current assets and current liabilities is that current liabilities are those obligations that are reasonably expected to be liquidated either through the use of current assets or the creation of other current abilities. 3, The total selling price of the season tickets is (10,000 X $1 Of this amount, has been earned by 12/31/08 (18/40 x The remaining should be reported as unearned revenue, a current liability in the 12/31108 balance sheet (22/40 X 14. Working capital is the excess of total current assets over total current liabilities. This excess is sometimes called net working capital, with current assets and current liabilities being the components of working capital. Current assets and current liabilities consist of items that will be converted into c ash or paid within a year or he operating cycle, whichever is longer The working capital components are the financial resources utilized by an enterprise in its operating cycle. 2008 Questions Chapter 4 (Continued) 15. (a) (b) (c) (d) (e) (f) (g) (h) (i) 16. (a) (b) (c) (d) (e) (n (g) Stockholders’ Equity. â€Å"Capital stock shares) reacquired and held in treasury-?at cost,† Note: This is a reduction of stockholders’ equity. Current Assets. Included in â€Å"Cash. † Investments. â€Å"Land held as an investment. † Stockholders’ Equity. Appropriation for bonded redemption† or â€Å"Appropriation for sinking fund. † Long-term debt (adjunct account to bonds payable). Amortized premium on bonds payable. † Intangible Assets, â€Å"Copyrights,† Investments. â€Å"Employees’ pension tuned,† with substations of â€Å"Cash† and â€Å"Securities† if desired, (Assumes that the company still owns t hese assets,) Stockholders’ Equity. â€Å"Premium on capital stock† or â€Å"Additional paid-in capital in excess of par value,† Investments, Nature of investments should be given together with parenthetical information as follows: â€Å"pledged to secure loans payable to banks. Allowance for doubtful accounts should be deducted from accounts receivable. Merchandise held on consignment should not appear on he consignee?s balance sheet except possibly as a note to the financial statements. Advances received on sales contract are normally a current liability and should be shown as such in the balance sheet. Cash surrender value of life insurance should be shown as a long-term investment. Land should be reported in property, plant, and equipment unless held for investment. Merchandise out on consignment should be shown among current assets under the heading Of inventories. Pension fund on deposit With trustee should be shown among nonoccurrence assets under a sepa rate heading or grouped with similar funds and opposite in investment section. Note: Some pension funds are not reported on the balance sheet. This situation occurs when the company funds the pension plan through another party such that the company loses control over the funds. Franchises should be itemized in a section for intangible assets. Accumulated depreciation of plant and equipment should be deducted from the plant and equipment accounts. Materials in transit should not he shown on the balance sheet of the buyer, it purchased f. o. B. Destination. Trade accounts receivable should be stated at their estimated realizable value. The method most generally followed is to deduct trot the total accounts receivable the amount to the allowance for doubtful accounts. Land is generally stated in the balance sheet at cost. Inventories are generally stated at the lower of cost or market to provide for any possible losses and to avoid the anticipation of profits not yet realized, Trading securities consisting of common stock are generally stated at fair value. Prepaid expenses should be stated at cost less the amount apportioned to and written off over the previous accounting periods. (h) (i) 0) 17. (a) (b) (c) (d) (e) 18. Assets are defined as probable future economic benefits obtained or controlled by a particular entity as 3 result Of past transactions or events. If a building is leased, the future economic benefits of using the building are controlled by the lessee as the result Of a past event (the signing Of a lease agreement). 2008 4-6 Questions Chapter 4 (Continued) 19. Zigzag is incorrect. Retained earnings is a source to assets, but is not an asset itself. For example, even though the funds obtained from issuing a note payable are invested in the business, the note payable is not reported as an asset. It is a source of assets, but it is reported s a liability because the company has an obligation to repay the note in the future. Similarly, even though the earnings are invested in the business, retained earnings is not reported as an asset It is reported as part of stockholders’ equity because it is, in effect, an investment by owners which increases the ownership interest in the assets of an entity. 20. The notes should appear as long-term liabilities with full disclosure as to their terms. Each year, as the profit is determined, notes of an amount equal to two-thirds of the year’s profits should be transferred from the long-term liabilities to current liabilities until all of the totes hue been liquidated. 21. The Alton Z score is a measure Which indicates a company’s financial distress. The measure is computed as: Z= Working Capital Total Assets Retained Earnings BIT Sales NV Equity Total Liabilities Balance sheet information used includes: Current assets, Current liabilities, Total assets, Retained earnings, and Total liabilities. 2, â€Å"Subsequent events’ are of vivo types: (1) Those which affect th e financial statements directly and should be recognized therein through appropriate adjustments. (2) Those which do not attest the tangential statements directly and require no adjustment to the account balances but whose effects may be significant enough to be disclosed with appropriate figures or estimates shown. (a) Probably adjust the financial statements directly. (b) Disclosure, (c) Disclosure. (d) Disclosure. (e) Neither adjustment nor disclosure necessary. F) Neither adjustment nor disclosure necessary. (g) Probably adjust the financial statements directly. (h) Neither adjustment nor disclosure necessary. 23 Some of the techniques of disclosure for the balance sheet are: l. Parenthetical explanations. 2. Notes to the financial statements. 3. Supporting schedules. Cross references accounts (see page 169) and contra and adjunct accounts. 24 A statement entitled â€Å"Summary of Significant Accounting Policies† would indicate the basic accounting principles used by that enterprise. We will write a custom essay sample on Acct Hw Chap Solutions Essay Example specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Acct Hw Chap Solutions Essay Example specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Acct Hw Chap Solutions Essay Example specifically for you FOR ONLY $16.38 $13.9/page Hire Writer