FINANCIAL STATEMENT - is to evaluate the fi nancial reports. 2 . ...

135

CHAPTER 1

FINANCIAL STATEMENT

ANALYSIS:

AN INTRODUCTION

SOLUTIONS

• . B is correct. Th is is the role of fi nancial reporting. Th e role of fi nancial statement analysis

is to evaluate the fi nancial reports.

• . A is correct. Th e balance sheet portrays the current fi nancial position. Th e income state-

ment and statement of cash fl ows present diff erent aspects of performance.

• . B is correct. Profi tability is the performance aspect measured by the income statement.

Th e balance sheet portrays the current fi nancial position. Th e statement of cash fl ows presents a diff erent aspect of performance.

• . C is correct. Th e notes disclose choices in accounting policies, methods, and estimates.
• . A is correct. Information about management and director compensation is not found in

the auditor’s report. Disclosure of management compensation is required in the proxy statement, and some aspects of management compensation are disclosed in the notes to the fi nancial statements.

• . B is correct. Th ese are components of management commentary.
• . C is correct. An unqualifi ed opinion is a “clean” opinion and indicates that the fi nancial

statements present the company’s performance and fi nancial position fairly in accordance with a specifi ed set of accounting standards.

• . C is correct. Ratios are an output of the process data step but are an input into the analyze/

interpret data step.(International Financial Statement Analysis 3e Robinson Henry, Pirie Broihahn Cope) (Solution Manual, For Complete File, Download link at the end of this File) 1 / 4

137

CHAPTER 2

FINANCIAL

REPORTING MECHANICS

SOLUTIONS

• . C is correct. Sales of products, a primary business activity, are classifi ed as an operating

activity. Issuance of debt would be a fi nancing activity. Acquisition of a competitor and the sale of surplus equipment would both be classifi ed as investing activities.

• . A is correct. Issuance of debt would be classifi ed as a fi nancing activity. B is incorrect be-

cause payment of income taxes would be classifi ed as an operating activity. C is incorrect because investments in common stock would be generally classifi ed as investing activities.

• . A is correct. An asset is an economic resource of an entity that will either be converted into

cash or consumed.

• . C is correct. Owners’ equity is a residual claim on the resources of a business.
• . A is correct. Assets must equal liabilities plus owners’ equity and, therefore, €2,000 = €1,200
• Owners’ equity. Owners’ equity must be €800.
• . B is correct.

Beginning retained earnings $1,400

• Net income200

– Distributions to owners (100) = Ending retained earnings $1,500 2 / 4

138 Solutions

• . C is correct.

Assets = Liabilities + Contributed capital + Beginning retained earnings − Distributions to owners + Revenues − Expenses Liabilities$1,000

• Contributed capital500
• Beginning retained earnings 600

− Distributions to owners(0)

• Revenues5,000

− Expenses(4,300) = Assets$2,800

• . C is correct. Th is is a contribution of capital by the owners. Assets would increase by

$500,000 and contributed capital would increase by $500,000, maintaining the balance of the accounting equation.

• . A is correct. Th e payment of January rent represents prepaid rent (an asset), which will

be adjusted at the end of January to record rent expense. Cash (an asset) decreases by $12,000. Deposits (an asset) increase by $4,000. Prepaid rent (an asset) increases by $8,000. Th ere is no net change in assets.10 . B is correct. Th e sale of products without receipt of cash results in an increase in accounts receivable (an asset) of €10,000. Th e balance in inventory (an asset) decreases by €8,000.Th e net increase in assets is €2,000. Th is would be balanced by an increase in revenue of €10,000 and an increase in expenses (costs of goods sold) of €8,000.11 . C is correct. Th e receipt of cash in advance of delivering goods or services results in un- earned revenue, which is a liability. Th e company has an obligation to deliver $30,000 in goods in the future. Th is balances the increase in cash (an asset) of $30,000.12 . B is correct. Depreciation is an expense and increases accumulated depreciation. Accumu- lated depreciation is a contra account which reduces property, plant, and equipment (an asset) by €250,000. Assets decrease by €250,000, and expenses increase by €250,000.13 . A is correct. Th e balance sheet shows the fi nancial position of a company at a particular point in time. Th e balance sheet is also known as a “statement of fi nancial position.” 14 . B is correct. Th e three sections of the statement of cash fl ows are operating, investing, and fi nancing activities.15 . C is correct. Cash received prior to revenue recognition increases cash and deferred or unearned revenue. Th is is a liability until the company provides the promised goods or services.

• 6 . A is correct. When cash is to be received after revenue has been recognized but no

billing has actually occurred, an unbilled (accrued) revenue is recorded. Such accruals would usually occur when an accounting period ends prior to a company billing its customer. Th is type of accrual can be contrasted with a simple credit sale, which is refl ected as an increase in revenue and an increase in accounts receivable. No accrual is necessary. 3 / 4

Chapter 2 Financial Reporting Mechanics 139 17 . B is correct. Payment of expenses in advance is called a prepaid expense which is classifi ed as an asset.18 . C is correct. When an expense is incurred and no cash has been paid, expenses are in- creased and a liability (“accrued expense”) is established for the same amount.19 . B is correct. Th e general ledger is the collection of all business transactions sorted by account in an accounting system. Th e general journal is the collection of all business ac- tivities sorted by date.20 . C is correct. In order to balance the accounting equation, the company would either need to increase assets or decrease liabilities. Creating a fi ctitious asset would be one way of attempting to cover up the fraud.

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