13. The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. Property, Plant, and Equipment Illustration 2-5
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17. The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. Current Liabilities Illustration 2-7
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22. Using the Financial Statements Illustration: Best Buy has current assets of $9,081 million and current liabilities of $6,301 million. We can determine a relationship between these accounts by dividing current assets by current liabilities, to get 1.44. The alternative means of expression are: Percentage: Current assets are 144% of current liabilities. Rate: Current assets are 1.44 times as great as current liabilities. Proportion: The relationship of current assets to current liabilities is 1.44:1.
24. Using the Financial Statements Circuit City reported a net loss of $10.2 million for the year ended Feb. 28, 2007. Using the Income Statement Illustration 2-10 SO 2 Identify and compute ratios for analyzing a company’s profitability.
25. Using the Financial Statements Illustration: Earnings per share (EPS) measures the net income earned on each share of common stock. Profitability Ratio $1,377 (481 - $0 + 485) 2 = $2.85 $1,140 (485 - $0 + 493) 2 = $2.33 Best Buy Illustration 2-11
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27. Using the Financial Statements Using the Statement of Stockholders’ Equity SO 3 Explain the relationship between a retained earnings statement and a statement of stockholders’ equity. Most companies use a statement of stockholders’ equity , rather than a retained earnings statement, so that they can report all changes in stockholders’ equity accounts. Illustration 2-12
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30. Using the Financial Statements Using a Classified Balance Sheet Illustration 2-13
31. Using the Financial Statements Using a Classified Balance Sheet SO 4 Identify and compute ratios for analyzing a company’s liquidity and solvency using a balance sheet. Liquidity —the ability to pay obligations expected to become due within the next year or operating cycle. Illustration 2-14 When working capital is positive, there is greater likelihood that the company will pay its liabilities. Best Buy had working capital in 2007 of $2,780 million.
32. Using the Financial Statements Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. Illustration 2-15 Liquidity Ratio $6,301 = 1.44:1 $9,081 $6,056 = 1.32:1 $7,985 1.68:1 1.75:1 1.21:1 For every dollar of current liabilities, Best Buy has $1.44 of current assets SO 4 Identify and compute ratios for analyzing a company’s liquidity and solvency using a balance sheet. NA
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34. Using the Financial Statements Using a Classified Balance Sheet SO 4 Identify and compute ratios for analyzing a company’s liquidity and solvency using a balance sheet. Solvency —the ability to pay interest as it comes due and to repay the balance of a debt due at its maturity. Solvency ratios measure the ability of the company to survive over a long period of time.
35. Using the Financial Statements Debt to total assets ratio measures the percentage of total financing provided by creditors rather than stockholders. Illustration 2-16 Solvency Ratio $13,570 = 54% $7,369 $11,864 = 56% $6,607 55% 52% 21% The 2007 ratio means that every dollar of assets was financed by 54 cents of debt. SO 4 Identify and compute ratios for analyzing a company’s liquidity and solvency using a balance sheet. NA
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39. Using the Financial Statements Using the Statement of Cash Flows SO 5 Use the statement of cash flows to evaluate solvency. Illustration 2-17 Would you feel better about a company’s health if you knew that most of its cash was generated by operating its business rather than by borrowing cash from lenders? ) ) ( (
40. Using the Financial Statements SO 5 Use the statement of cash flows to evaluate solvency. Cash provided by operating activities fails to take into account that a company must invest in new PP&E and must maintain dividends at current levels to satisfy investors. Answers on notes page.
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44. Financial Reports Concepts Characteristics of Useful Information SO 7 Discuss financial reporting concepts. Illustration 2-18
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46. Financial Reports Concepts Assumptions in Financial Reporting Illustration 2-19 Monetary Unit Time Period Economic Entity Going Concern SO 7 Discuss financial reporting concepts.
47. Financial Reports Concepts Principles in Financial Reporting Illustration 2-20 Cost Full Disclosure SO 7 Discuss financial reporting concepts.
48. Financial Reports Concepts Constraints in Financial Reporting Illustration 2-20 Materiality Conservatism SO 7 Discuss financial reporting concepts.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)
Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods