JANE COSTNER CASE: An Exploration of Modern Financial Reporting (Under the direction of Victoria Dickinson). Below is a series of comparative financial statements and ratio analysis for year one of operations for both Glenwood Heating, Inc.
Eads Heater, Inc. Data
Eads Heater, Inc
Income Statement
Classified Balance Sheet
Property, Plant, and
Liabilities and Stockholders' Equity
Statement of Cash Flows
Profitability Ratios
Analysis and Recommendations
Appendix A: Transactions for Glenwood Heating, Inc
Appendix B: Transactions for Eads Heater, Inc
ACCY 420 CASE 2 SOLUTION
Concepts
The classified income statement provides detailed financial reporting for the users of the financial statements. Dividing the income statement into detailed categories also provides more transparency and makes it difficult to hide fraudulent practices.
Process
Comprehensive income includes all income, gains, expenses, and losses included in net income, as well as all gains and losses affecting stockholders' equity that bypass the income statement, known as other comprehensive income. The difference between net and comprehensive income for 2013 was caused by the following items: foreign currency translation adjustments, unrealized gain on derivative instruments, reclassification of derivative losses to income, adjustments to pension and other post-exit benefits in retirement, amortization of net prior service cost and net actuarial gain to income and ownership's share of other comprehensive income of unconsolidated subsidiaries.
Analysis
The return on net current assets increased in 2013 because the company was able to convert its current assets an additional 1.43 times. Return on net current assets is higher if only forecasted continuing income is used in the calculation.
ACCY 420 CASE 3 SOLUTION
Supplementary Balance Sheet T-‐accounts
Supplementary Balance Sheet T-‐accounts (Cont.)
ACCY 420 CASE 4 SOLUTION
The two contra accounts associated with Pearson's trade receivable are allowances for bad and doubtful debts and allowances for sales returns. The provision for bad and doubtful debts creates a provision for debts that the company doubts it will actually collect, and the provision for sales returns allows for the possibility that not all sales will be final; some will inevitably return. To determine the ending account balance for this method, managers need to know total sales and the current account balance.
The aging-of-accounts method is most likely the more accurate of the two methods because there is generally a relevant correlation between the length of time a debt is outstanding and the likelihood that it will be paid. The provision for bad and doubtful debts is considered an operating expense in the profit and loss account.
ACCY 420 CASE 5 SOLUTION
- Current State of Graphic Apparel
- Revenue Recognition
- Accounting for Bad Debts
- Accounting for Sales Returns
- Accounting for Inventory
- Analysis and Recommendations
This year there was a leak in the roof of the warehouse which caused water damage to some of the shirts. However, some of the jerseys have already been returned and there may be more issues reported in the future. GAC must use the allowance method to account for its bad debts, where bad debts are assessed at the beginning of the period and all bad debt expense is carried forward.
Sales returns are significant to key users of the financial statements because they are a direct reduction of sales revenue. Reducing the book value of the damaged inventory will decrease GAC's current assets on the balance sheet and therefore reduce the current ratio.
ACCY 420 CASE 6 SOLUTION
The first set of sales prices is more realistic because each price closely corresponds to the book value of the purchased asset at the time of sale. This means that the sale price is an accurate reflection of the current valuation of the aircraft being sold by the individual airline. Management extended the estimated lives of trucks, increased used values of trucks without supporting justification, and made other unsupported changes to depreciation estimates.
In addition, three Arthur Andersen partners agreed to pay civil penalties and were barred from practicing before the SEC as auditors for at least three years, after which they could apply for reinstatement. One of the four disciplined partners, however, ironically later became head of Arthur Andersen Worldwide's Risk Management Group.
ACCY 420 CASE 7 SOLUTION
GAAP
IFRS
- GAPP
- GAPP
- GAPP
- GAPP
- GAPP
Construct should only record a liability for environmental liabilities if it is probable (greater than 75 percent chance) that a liability has been incurred and if the amount of the liability can be reasonably estimated.
ACCY 420 CASE 8 SOLUTION
Rite Aid distinguishes between the two types of debt in the notes so that investors and other users can clearly see the different levels of risk and security associated with the company's various loans. Senior” refers to the creditworthiness and indebtedness of Rite Aid's parent corporation, relative to its various subsidiaries. Rite Aid did not have to pay the face value of the notes upon redemption because the notes had not yet reached maturity.
The market interest rate at the time of the repurchase is higher than the coupon rate and effective rate on the repurchased bonds, making the repurchase a good decision for Rite Aid. Based on their financial ratio analysis, there is significant doubt about Rite Aid's ability to meet its long-term obligations.
ACCY 420 CASE 9 SOLUTION
Share capital is the total reported dollar value of your common stock on the books at par value, and the share premium account is the excess market value of the shares above par value. Another reason companies buy their own shares is to hold them until the market price of the shares rises and then reissue them. Merck records its own shares at cost, rather than par value, giving users of the financial statements an accurate picture of the market value of those shares at the time of the repurchase.
Treasury stock is classified as a contra stock account, reducing the total balance of the common stock account. The dividends to operating cash flow are comparable between the two companies, with Merck's being slightly more favorable.
ACCY 420 CASE 10 SOLUTION
The company would write off the investment in trading securities and credit an unrealized gain – trading securities for the amount of the increase. Amortized cost” represents the carrying amount of the bonds, which are amortized from their original cost over their lives using the effective interest method. The fair market value of the held-to-maturity securities is greater than their amortized cost, and there are net unrealized gains on the securities, meaning the securities have increased in value since the time of purchase.
The increase in value of the securities means that interest rates must also have increased since the time of purchase. The original cost of the available-for-sale securities sold in 2012 is their book value of.
ACCY 420 CASE 11 SOLUTION
Contd
Net Income
Revenue
Between 2009 and 2010, Groupon's gross margin percentage improved under both the gross and net recognition methods. Groupon believed it was the primary obligor in the transaction, thus justifying their use of the gross method of revenue recognition in accordance with the ASC. Groupon's argument for identifying itself as the primary obligor of the transactions they facilitate was weak, due to the fact that they are not selling or controlling the underlying goods or services.
Because their return policy is extremely open, even going so far as to promise to handle refunds on a case-by-case basis, and because they've proven incapable of anticipating large and sudden increases in refunds, they disagree with Groupon's current accounting method. Groupon's statement of cash flows is difficult to decipher since no specific increases or decreases in operating cash flow are listed, but it is possible that adjustments for the effects of non-cash accounts would cause Groupon's operating cash flow to remain unchanged after a drastic repeat.
ACCY 420 CASE 12 SOLUTION
Concepts a
Book income, also known as financial income, is the income a business reports before calculating income tax expense. Companies report deferred income taxes as part of their total income tax expense to provide financial statement users with a more accurate picture of the company's overall financial position. A deferred tax asset is an amount arising from a temporary difference that reduces the amount of income tax expense that the company will incur in a future period.
A deferred tax liability is an amount that arises from a temporary difference that increases the tax expense in a future period or defers it to a later period. However, as time goes on, their expenses (for tax purposes) will be lower, and therefore their tax expenses in future periods will be higher.
Process f
6,912 of the deferred tax assets is reported in the current assets section and the remaining $6,596 is reported in the long-term assets. Clearly, ZAGG applies accelerated depreciation to tax expense because the temporary difference has resulted in a deferred tax liability. The cumulative difference in depreciation costs between the two systems per December 31, 2012 can be estimated by dividing the deferred tax liability of $794 by the statutory tax rate of 38%, yielding $2,089.
It is clear that ZAGG recorded more expenses in the books because the temporary difference resulted in a deferred tax asset. The difference in bad debt expense between the accounting and tax systems for the year ended December 31, 2012 can be estimated by adjusting the deferred tax asset related to the allowance for doubtful accounts of $229 shares with a statutory tax rate of 38%. a return of $603.
Analysis j
During the year ended December 31, 2012, ZAGG recorded more bad debt expenses on the books than it has for tax purposes. ZAGG records bad debt expense when setting up the allowance for doubtful accounts, but for tax purposes bad debt expense cannot be deducted until it has been recognized through the non-‐collection of debt. ZAGG recorded this valuation against the deferred tax asset generated by losses on its equity method investment in HzO after determining that it is more likely than not that the amount will not be realizable.
ACCY 420 CASE 13 SOLUTION
Interest costs represent the interest accrued on the beginning balance of the expected benefit obligation. The actual return on pension investments consists of dividends, capital gains and interest from the pension scheme's assets. Benefits paid to retirees are paid out of plan assets and represent the actual payments retired employees receive each year.
Annual pension expense is calculated using the expected return on plan assets, which is determined by multiplying the fair value of plan assets at the beginning of the year by the estimated rate of return for the year. This represents the fair value of the program's assets at the end of the year.
