EXERCISES
E24-1 (L02) (Post-Balance-Sheet Events) Madrasah Corporation issued its financial statements for the year ended December 31, 2017, on March 10, 2018. The following events took place early in 2018.
(a) On January 10, 10,000 shares of $5 par value common stock were issued at $66 per share.
(b) On March 1, Madrasah determined after negotiations with the Internal Revenue Service that income taxes payable for 2017 should be $1,270,000. At December 31, 2017, income taxes payable were recorded at $1,100,000.
Instructions
Discuss how the preceding post-balance-sheet events should be reflected in the 2017 financial statements.
E24-2 (L02) EXCEL (Post-Balance-Sheet Events) For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose. ______ 1. Settlement of federal tax case at a cost considerably in excess of the amount expected at year-end. ______ 2. Introduction of a new product line. ______ 3. Loss of assembly plant due to fire. ______ 4. Sale of a significant portion of the company’s assets. ______ 5. Retirement of the company president. ______ 6. Prolonged employee strike. ______ 7. Loss of a significant customer. ______ 8. Issuance of a significant number of shares of common stock. ______ 9. Material loss on a year-end receivable because of a customer’s bankruptcy. ______ 10. Hiring of a new president. ______ 11. Settlement of prior year’s litigation against the company (no loss was accrued). ______ 12. Merger with another company of comparable size.
E24-3 (L02) EXCEL (Segmented Reporting) Carlton Company is involved in four separate industries. The following information is available for each of the four industries…
Instructions
Determine which of the operating segments are reportable based on the:
(a) Revenue test.
(b) Operating profit (loss) test.
(c) Identifiable assets test.
* E24-4 (L06) (Ratio Computation and Analysis; Liquidity) As loan analyst for Utrillo Bank, you have been presented the following information...
Instructions
Which of the two companies, as judged by the information given above, would you recommend as the better risk and why? Assume that the ending account balances are representative of the entire year.
* E24-5 (L06) (Analysis of Given Ratios) Picasso Company is a wholesale distributor of packaging equipment and supplies.
The company’s sales have averaged about $900,000 annually for the 3-year period 2015–2017. The firm’s total assets at the end of 2017 amounted to $850,000.
The president of Picasso Company has asked the controller to prepare a report that summarizes the financial aspects of the company’s operations for the past 3 years. This report will be presented to the board of directors at their next meeting.
In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios which can assist in the identification and interpretation of trends. At the request of the controller, the accounting staff has calculated the following ratios for the 3-year period 2015–2017…
In preparation of the report, the controller has decided first to examine the financial ratios independent of any other data to determine if the ratios themselves reveal any significant trends over the 3-year period.
Instructions
(a) The current ratio is increasing while the acid-test (quick) ratio is decreasing. Using the ratios provided, identify and explain the contributing factor(s) for this apparently divergent trend.
(b) In terms of the ratios provided, what conclusion(s) can be drawn regarding the company’s use of financial leverage during the 2015–2017 period?
(c) Using the ratios provided, what conclusion(s) can be drawn regarding the company’s net investment in plant and equipment?
* E24-6 (L06) (Ratio Analysis) Edna Millay Inc. is a manufacturer of electronic components and accessories with total assets of $20,000,000. Selected financial ratios for Millay and the industry averages for firms of similar size are presented below...
Instructions
(a) Describe the analytical use of each of the six ratios presented above.
(b) For each of the four entities, identify two financial ratios, from the ratios presented above, that would be most valuable as a basis for its decision regarding Millay.
(c) Discuss what the financial ratios presented in the question reveal about Millay. Support your answer by citing specific ratio levels and trends as well as the interrelationships between these ratios.
(CMA adapted)
