QUESTIONS
1. What are the major advantages of notes to the financial statements? What types of items are usually reported in notes?
2. What is the full disclosure principle in accounting? Why has disclosure increased substantially in the last 10 years?
3. The FASB requires a reconciliation between the effective tax rate and the federal government’s statutory rate. Of what benefit is such a disclosure requirement?
4. What type of disclosure or accounting do you believe is necessary for the following items?
(a) Because of a general increase in the number of labor disputes and strikes, both within and outside the industry, there is an increased likelihood that a company will suffer a costly strike in the near future.
(b) A company reports a material unusual and infrequent loss on the income statement. No other mention is made of this item in the annual report.
(c) A company expects to recover a substantial amount in connection with a pending refund claim for a prior year’s taxes. Although the claim is being contested, counsel for the company has confirmed the client’s expectation of recovery.
5. The following information was described in a note of Canon Packing Co. “During August, Holland Products Corporation purchased 311,003 shares of the Company’s common stock which constitutes approximately 35% of the stock outstanding. Holland has since obtained representation on the Board of Directors.” “An affiliate of Holland Products Corporation acts as a food broker for Canon Packing in the greater New
York City marketing area. The commissions for such services after August amounted to approximately $20,000.”
Why is this information disclosed?
6. What are the major types of subsequent events? Indicate how each of the following “subsequent events” would be reported.
(a) Collection of a note written off in a prior period.
(b) Issuance of a large preferred stock offering.
(c) Acquisition of a company in a different industry.
(d) Destruction of a major plant in a flood.
(e) Death of the company’s chief executive officer (CEO).
(f) Additional wage costs associated with settlement of a four-week strike.
(g) Settlement of a federal income tax case at considerably more tax than anticipated at year-end.
(h) Change in the product mix from consumer goods to industrial goods.
7. What are diversified companies? What accounting problems are related to diversified companies?
8. What quantitative materiality test is applied to determine whether a segment is significant enough to warrant separate disclosure?
9. Identify the segment information that is required to be disclosed by GAAP.
10. What is an operating segment, and when can information about two operating segments be aggregated?
11. The controller for Lafayette Inc. recently commented, “If
I have to disclose our segments individually, the only people who will gain are our competitors and the only people that will lose are our present stockholders.” Evaluate this comment.
12. An article in the financial press entitled “Important Information in Annual Reports This Year” noted that annual reports include a management’s discussion and analysis section. What would this section contain?
13. “The financial statements of a company are management’s, not the accountant’s.” Discuss the implications of this statement.
14. Olga Conrad, a financial writer, noted recently, “There are substantial arguments for including earnings projections in annual reports and the like. The most compelling is that it would give anyone interested something now available to only a relatively select few—like large stockholders, creditors, and attentive bartenders.” Identify some arguments against providing earnings projections.
15. The following comment appeared in the financial press: “Inadequate financial disclosure, particularly with respect to how management views the future and its role in the marketplace, has always been a stone in the shoe. After all, if you don’t know how a company views the future, how can you judge the worth of its corporate strategy?” What are some arguments for reporting earnings forecasts?
16. What are interim reports? Why are balance sheets often not provided with interim data?
17. What are the accounting problems related to the presentation of interim data?
18. Dierdorf Inc., a closely held corporation, has decided to go public. The controller, Ed Floyd, is concerned with presenting interim data when a LIFO inventory valuation is used. What problems are encountered with LIFO inventories when quarterly data are presented?
19. What approaches have been suggested to overcome the seasonality problem related to interim reporting?
20. What is the difference between a CPA’s unqualified opinion or “clean” opinion and a qualified one?
21. Jane Ellerby and Sam Callison are discussing the recent fraud that occurred at LowRental Leasing, Inc. The fraud involved the improper reporting of revenue to ensure that the company would have income in excess of $1 million.
What is fraudulent financial reporting, and how does it differ from an embezzlement of company funds?
*22. “The significance of financial statement data is not in the amount alone.” Discuss the meaning of this statement.
*23. A close friend of yours, who is a history major and who has not had any college courses or any experience in business, is receiving the financial statements from companies in which he has minor investments (acquired for him by his now-deceased father). He asks you what he needs to know to interpret and to evaluate the financial statement data that he is receiving. What would you tell him?
*24. Distinguish between ratio analysis and percentage analysis relative to the interpretation of financial statements.
What is the value of these two types of analyses?
*25. In calculating inventory turnover, why is cost of goods sold used as the numerator? As the inventory turnover increases, what increasing risk does the business assume?
*26. What is the relationship of the asset turnover to the return on assets?
*27. Explain the meaning of the following terms: (a) commonsize analysis, (b) vertical analysis, (c) horizontal analysis, and (d) percentage analysis.
*28. Presently, the profession requires that earnings per share be disclosed on the face of the income statement. What are some disadvantages of reporting ratios on the financial statements?
