Solution manual fundamentals of accounting by cabrera chapter 11 SM

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..

Presentation of Financial Statements

Review Questions

1 The statement of financial information provides information about the nature and amounts of investments in enterprise resources, obligations to enterprise creditors, and the owners’ equity in net enterprise resources That information not only complements information about the components of income, but also contributes to financial reporting by providing a basis for (1) computing rates of return, (2) evaluating the capital structure of the enterprise, and (3) assessing the liquidity and financial flexibility of the enterprise

2 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

3 (1) The values stated are generally historical and not current

(2) Estimates have to be used in many instances, such as in the determination of collectibility of receivables or finding the approximate useful life of long-term tangible and intangible assets

(3) Many items, even though they have financial value to the business, presently are not recorded One example is the value of a company’s human resources

4 Classification in financial statements helps users by grouping items with similar characteristics 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

5 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 nontrade receivables, and any amounts pledged or discounted, should

be clearly stated

6 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 cash or paid within a year or the operating cycle, whichever is longer The working capital components are the financial resources utilized by an enterprise in its operating cycle

7 (a) Equity “Share Capital ( shares) reacquired and held in

treasury—at cost.”

Note: This is a reduction of equity.

(b) Current Assets Included in “Cash.”

(c) Investments “Land held as an investment.”

(d) Equity “Appropriation for bonded redemption” or “Appropriation for sinking fund.”

(e) Long-term debt (adjunct account to bonds payable) “Unamortized premium on bonds payable.”

(f) Intangible Assets “Copyrights.”

(g) Investments “Employees’ pension fund,” with subcaptions of “Cash” and “Securities” if desired (Assumes that the company still owns these assets.)

(h) Equity “Premium on share capital” or “Additional paid-in capital in excess of par value.”

(i) Investments Nature of investments should be given together with parenthetical information as follows: “pledged to secure loans payable to banks.”

8 (a) Allowance for doubtful accounts receivable should be deducted from

accounts receivable

(b) Merchandise held on consignment should not appear on the consignee’s balance sheet except possibly as a note to the financial statements (c) Advances received on sales contract are normally a current liability and should be shown as such in the balance sheet

(d) Cash surrender value of life insurance should be shown as a long-term investment

(e) Land should be reported in property, plant, and equipment unless held for investment

(f) Merchandise out on consignment should be shown among current assets under the heading of inventories

(g) Pension fund on deposit with trustee should be shown among noncurrent assets under a separate heading or grouped with similar funds and deposits 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

(h) Franchises should be itemized in a section for intangible assets

(i) Accumulated depreciation of plant and equipment should be deducted from the plant and equipment accounts

(j) Materials in transit should not be shown on the balance sheet of the buyer, if purchased f.o.b destination

9 (a) Trade accounts receivable should be stated at their estimated realizable

value The method most generally followed is to deduct from the total accounts receivable the amount of the allowance for doubtful accounts (b) Land is generally stated in the balance sheet at cost

(c) 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

(d) Trading securities consisting of ordinary shares are generally stated at fair value

(e) Prepaid expenses should be stated at cost less the amount apportioned to and written off over the previous accounting periods

10 The statement of comprehensive income is important because it provides investors and creditors with information that helps them predict the amount, timing, and uncertainty of future cash flows It helps investors and creditors predict future cash flows in a number of different ways First, investors and creditors can use the information on the statement of comprehensive income

to evaluate the past performance of the enterprise Second, the statement of comprehensive income helps users of the financial statements to determine the risk (level of uncertainty) of income revenues, expenses, gains, and losses and highlights the relationship among these various components

It should be emphasized that the statement of comprehensive income is used

by parties other than investors and creditors For example, customers can use the statement of comprehensive income to determine a company’s ability to

provide needed goods or services, unions examine earnings closely as a basis for salary discussions, and the government uses the statements of comprehensive income of companies as a basis for formulating tax and economic policy

11 The major distinction between revenues and gains (or expenses and losses)

depends on the typical activities of the enterprise Revenues can occur from

a variety of different sources, but these sources constitute the entity’s

ongoing major or central operations Gains also can arise from many

different sources, but these sources occur from peripheral or incidental transactions of an entity The same type of distinction is made between an expense and a loss

12 Items that are considered prior period adjustments should be charged or credited to the opening balance of retained earnings Prior period adjustments would ordinarily be either corrections of errors made in a prior period discovered after issuance of financial statements for that period or retroactive adjustments required

13 Other comprehensive income must be displayed (reported) in one of three ways: (1) a second separate income statement, (2) a combined income statement of comprehensive income, or (3) as part (separate columns) of the statement of equity

Exercises

Exercise 1

Current assets

Less allowance for doubtful accounts (8,000) 102,000

Exercise 2

Current assets

Less allowance for doubtful accounts (4,000) 86,000

Exercise 3

Long-term investments

Exercise 4

Property, plant, and equipment

Less accumulated depreciation (45,000) 162,000

Less accumulated depreciation (19,000) 171,000

Total property, plant, and equipment P464,000

Exercise 5

Intangible assets

Exercise 6

Current liabilities

Exercise 7

Current liabilities

Total current liabilities P349,000

Exercise 8

Equity

Accumulated other comprehensive loss (150,000)

Exercise 9

Exercise 10

Michelle Inc

Statement of Financial Position December 31, 20–

Assets Current assets

Less cash restricted for plant

Less allowance for doubtful

Inventories

Long-term investments

Cash restricted for plant expansion XXX

Property, plant, and equipment

Less accum depreciation—

buildings

Intangible assets

Liabilities and Equity Current liabilities

Long-term debt

X

Equity

Share capital:

Additional paid-in capital:

Premium on ordinary shares XXX

Total paid-in capital and

Less: Treasury shares, at cost (XXX)

Total liabilities and equity PXXX

Exercise 11

Computation of net income

Change in assets: P79,000 + P45,000 +P127,000 – P47,000 = P204,000 Increase Change in liabilities: P 82,000 – P51,000 = 31,000 Increase

Change in equity accounted for as follows:

Increase in ordinary shares P125,000

Increase in additional paid-in capital 13,000

Decrease in retained earnings due to

dividend declaration (19,000)

Increase in retained earnings due to net

Exercise 12

(a) Total net revenue:

Sales returns 124,000 202,000

(b) Net income:

Expenses:

(c) Dividends declared:

Net increase 196,000

ALTERNATE SOLUTION

1,517,000 Deduct dividends declared ?

Dividends declared must be P177,000

(P1,517,000 – P1,340,000)

Exercise 13

(a) Multiple-Step Form

W Brothers Corp

Statement of Comprehensive Income For the Year Ended December 31, 2007 (In thousands, except earnings per share)

Operating Expenses

Selling expenses

Sales commissions 79,800

Depr of sales equipment 64,800

Transportation-out 26,900 171,500

Administrative expenses

Officers’ salaries 49,000

Depr of office furn and equip 39,600 88,600 260,100

Other Revenues and Gains

271,500 Other Expenses and Losses

(b) Single-Step Form

W Brothers Corp

Statement of Comprehensive Income For the Year Ended December 31, 2007 (In thousands, except earnings per share) Revenues

Expenses

(c) Single-step:

1 Simplicity and conciseness

2 Probably better understood by user

3 Emphasis on total costs and expenses and net income.

4 Does not imply priority of one expense over another

Multiple-step:

1 Provides more information through segregation of operating and

nonoperating items

2 Expenses are matched with related revenue

Note to instructor: Students’ answers will vary due to the nature of the question; i.e., it asks for an opinion However, the discussion supporting the answer should include the above points

Exercise 14

CG Corporation Statement of Comprehensive Income For the Year Ended December 31, 2007

Selling and administrative expenses 320,000

Exercise 15

LS Co.

Statement of Changes in Equity For the Year Ended December 31, 2007

Total

Compre-hensive Income

Retained Earnings

Accumulated Other Comprehensive Income

Ordinary Shares

0

Comprehensive income

Other comprehensive income

Ending balance P570,00

0

*(P700,000 – P500,000 – P80,000).

Test Material

Test Material 11-1

Luntian Corporation Statement of Financial Position

As of December 31, 2007

Assets Current assets

Long-term investments

Assets allocated to trustee for

expansion:

BSP Treasury notes, at fair value 138,000 208,000 Property, plant, and equipment

Less accum depreciation—

buildings 410,00

0 660,000 1,410,000

Liabilities and Equity Current liabilities

Notes payable—current installment P100,000

Long-term liabilities

Equity

Ordinary shares, no par; 1,000,000

shares authorized and issued;

950,000 shares outstanding P1,150,000

Retained earnings 538,000c

1,688,000 Less treasury shares, at cost (50,000

shares of no par ordinary) (87,000)

Total liabilities and equity P2,276,000

a P1,640,000 – P570,000 (to eliminate the excess of appraisal value over cost from the building account Note that the appreciation capital account is also deleted.)

b P600,000 – P100,000 (to reclassify the currently maturing portion of the note payable as

a current liability.)

c P658,000 – P120,000 (to remove the value of goodwill from retained earnings Apparently, retained earnings was credited, either directly or indirectly through the income summary, for the value of the goodwill since no separate equity account existed for goodwill Note that the goodwill account is also deleted.)

Note: As an alternate presentation, the cash restricted for plant expansion would

be added to the general cash account and then subtracted The amount reported

in the investments section would not change

Test Material 11-2

Makulay Corp

Statement of Comprehensive Income For the Year Ended December 31, 2007 Sales Revenue

Less: Sales returns and allowances P150,000

Sales discounts 45,000 195,000

Operating Expenses

Admin and general expenses 97,000 291,000

Other Revenues and Gains

359,000 Other Expenses and Losses

Extraordinary item

Less applicable tax reduction 51,000 99,000

Per ordinary share:

Income before extraordinary item (P197,340  100,000) P1.97

Test Material 11-3

Bahag-Hari Corporation

Equity December 31, 2007 Share capital

Preference shares, P4 cumulative, par value P50

per share; authorized 60,000 shares, issued

Ordinary shares, par value P1 per share;

authorized 600,000 shares, issued 200,000

shares, and outstanding 190,000 shares 200,000

Additional paid-in capital—

Total paid-in capital and retained earnings 2,461,000 Less treasury shares, 10,000 shares at cost 170,000