Spiceland C3 Solutions.docx
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Spiceland C3 Solutions.docx
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SpicelandC3Solutions
Chapter3TheBalanceSheetandFinancialDisclosures
QuestionsforReviewofKeyTopics
Question3-1
Thepurposeofthebalancesheet,alsoknownasthestatementoffinancialposition,istopresentthefinancialpositionofthecompanyonaparticulardate.Unliketheincomestatement,whichisachangestatementthatreportseventsoccurringduringaperiodoftime,thebalancesheetisastatementthatpresentsanorganizedarrayofassets,liabilities,andshareholders’equityatapointintime.Itisafreezeframeorsnapshotpictureoffinancialpositionattheendofaparticulardaymarkingtheendofanaccountingperiod.
Question3-2
Thebalancesheetdoesnotportraythemarketvalueoftheentity(numberofcommonstocksharesoutstandingmultipliedbypricepershare)foranumberofreasons.Mostassetsarenotreportedatfairvalue,butinsteadaremeasuredaccordingtohistoricalcost.Also,therearecertainresources,suchastrainedemployees,anexperiencedmanagementteam,andagoodreputation,thatarenotrecordedasassetsatall.Therefore,theassetsofacompanyminusitsliabilities,asshowninthebalancesheet,willnotberepresentativeofthecompany’smarketvalue.
Question3-3
Currentassetsincludecashandotherassetsthatarereasonablyexpectedtobeconvertedtocashorconsumedduringoneyear,orwithinthenormaloperatingcycleofthebusinessiftheoperatingcycleislongerthanoneyear.Thetypicalassetcategoriesclassifiedascurrentassetsinclude:
—Cashandcashequivalents
—Short-terminvestments
—Accountsreceivable
—Inventories
—Prepaidexpenses
Question3-4
Currentliabilitiesarethoseobligationsthatareexpectedtobesatisfiedthroughtheuseofcurrentassetsorthecreationofothercurrentliabilities.So,thisclassificationwillincludeallliabilitiesthatarescheduledtobeliquidatedwithinoneyearortheoperatingcycle,whicheverislonger,exceptthosethatmanagementintendstorefinanceonalong-termbasis.Thetypicalliabilitycategoriesclassifiedascurrentliabilitiesinclude:
—Accountspayable
—Short-termnotespayable
—Accruedliabilities
—Currentmaturitiesoflong-termdebt
AnswerstoQuestions(continued)
Question3-5
Theoperatingcycleforatypicalmanufacturingcompanyreferstotheperiodoftimerequiredtoconvertcashtorawmaterials,rawmaterialstoafinishedproduct,finishedproducttoreceivables,andthenfinallyreceivablesbacktocash.
Question3-6
Investmentsinequitysecuritiesareclassifiedascurrentifthecompany’smanagement
(1)intendstoliquidatetheinvestmentinthenextyearoroperatingcycle,whicheverislonger,and
(2)hastheabilitytodoso,i.e.,theinvestmentismarketable.Ifeitherofthesecriteriadoesnothold,theinvestmentisclassifiedasnoncurrent.
Question3-7
Thecommoncharacteristicsthattheseassetshaveincommonarethattheyaretangible,long-livedassetsusedintheoperationsofthebusiness.Theyusuallyaretheprimaryrevenue-generatingassetsofthebusiness.Theseassetsincludeland,buildings,equipment,machinery,furnitureandotherassetsusedintheoperationsofthebusiness,aswellasnaturalresources,suchasmineralmines,timbertractsandoilwells.
Question3-8
Property,plant,andequipmentandintangibleassetseachrepresentassetsthatarelong-livedandareusedintheoperationsofthebusiness.Thedifferenceisthatproperty,plant,andequipmentrepresentphysicalassets,whileintangibleassetslackphysicalsubstance.Generally,intangibleassetsrepresenttheownershipofanexclusiveright,suchasapatent,copyrightorfranchise.
Question3-9
Anotepayableof$100,000dueinfiveyearswouldbeclassifiedasalong-termliability.A$100,000notedueinfiveannualinstallmentsof$20,000eachwouldbeclassifiedasa$20,000currentliability—currentmaturitiesoflong-termdebt—andan$80,000long-termliability.
Question3-10
Paid-in-capitalconsistsofamountsinvestedbyshareholdersinthecorporation.Retainedearningsequalsnetincomelessdividendspaidtoshareholdersfromtheinceptionofthecorporation.
AnswerstoQuestions(continued)
Question3-11
Disclosurenotesprovideadditionaldetailconcerningspecificfinancialstatementitems.Includedaresuchdataasthefairvaluesoffinancialinstrumentsandoff-balance-sheetriskassociatedwithfinancialinstrumentsanddetailsofpensionplans,leases,debt,andassets.Commontoallcompanies’disclosuresarecertainspecificnotessuchasasummaryofsignificantaccountingpolicies,descriptionsofsubsequentevents,andrelatedthird-partytransactions.However,manynotesaredesignedtofitthedisclosureneedsoftheparticularreportingcompany.Infact,anyexplanationthathelpsinvestorsandcreditorsmakedecisionsshouldbeincluded.
Question3-12
Thedisclosureofthecompany’ssignificantaccountingpoliciesisextremelyimportanttoexternalusersintermsoftheirabilitytocomparefinancialinformationacrosscompanies.Itiscriticaltoafinancialanalystinvolvedinassessingfuturecashflowsoftwoconstructioncompaniestoknowthatonecompanyusesthepercentage-of-completionmethodinrecognizinggrossprofit,whiletheothercompanyusesthecompletedcontractmethod.
Question3-13
Asubsequenteventisaneventthatoccursafterthedateofthefinancialstatementsbutpriortothedateonwhichthestatementsareactuallyissuedor“availabletobeissued.”Itmayhelptoclarifyapreviouslyexistingsituationoritmayrepresentaneweventnotdirectlyaffectingfinancialpositionattheendofthereportingperiod.
Question3-14
Thediscussionprovidesmanagement’sviewsonsignificantevents,trendsanduncertaintiespertainingtothecompany’s(a)operations,(b)liquidity,and(c)capitalresources.CertainlytheManagementDiscussionandAnalysissectionmaybeslantedtomanagement’sbiasedperspectiveandthereforecanlackobjectivity.However,managementcanofferaninformedinsightthatmightnotbeavailableelsewhere,soifthereadermaintainsawarenessoftheinformation’ssource,itcanofferauniqueviewofthesituation.
AnswerstoQuestions(continued)
Question3-15
Dependingonthecircumstances,theauditorwillissuea(an):
1.Unqualifiedopinion–Theauditorsaresatisfiedthatthefinancialstatements“presentfairly”thefinancialposition,resultsofoperations,andcashflowsandare“preparedinaccordancewithgenerallyacceptedaccountingprinciples.”
2.Qualifiedopinion–Thiscontainsanexceptiontothestandardunqualifiedopinion,butnotofsufficientseriousnesstoinvalidatethefinancialstatementsasawhole.Examplesofexceptionsare(a)unconformitywithgenerallyacceptedaccountingprinciples,(b)inadequatedisclosures,and(c)alimitationorrestrictionofthescopeoftheexamination.
3.Adverseopinion–Thisisnecessarywhentheexceptions(a)and(b)abovearesoseriousthataqualifiedopinionisnotjustified.Adverseopinionsarerarebecauseauditorsusuallyareabletopersuademanagementtorectifyproblemstoavoidthisundesirablereport.
4.Disclaimer–Anauditorwilldisclaimanopinionifitem(c)aboveappliesandthereforeinsufficientinformationhasbeengatheredtoexpressanopinion.
Question3-16
Aproxystatementmustbesenteachyeartoallshareholders.Itusuallyisinthesamemailingwiththeannualreport.Thestatementinvitesshareholderstotheshareholders’meetingtoelectboardmembersandtovoteonissuesbeforetheshareholders.Italsopermitsshareholderstovoteusinganenclosedproxycard.Theproxystatementalsoprovidesformoredisclosuresoncompensationtodirectorsandexecutives,andinparticular,stockoptionsgrantedtoexecutives.
Question3-17
Workingcapitalisthedifferencebetweencurrentassetsandcurrentliabilities.Thecurrentratioiscomputedbydividingcurrentassetsbycurrentliabilities.Theacid-testratio(orquickratio)iscomputedbydividingquickassets(cashandcashequivalents,marketablesecurities,andaccountsreceivable)bycurrentliabilities.
Question3-18
Debttoequityratio=Totalliabilities
Shareholders'equity
Timesinterestearnedratio=Netincome+interest+taxes
Interest
AnswerstoQuestions(concluded)
Question3-19
IASNo.1,revised,“PresentationofFinancialStatements,”providesauthoritativeguidanceforbalancesheetpresentationunderIFRS.
Question3-20
DifferencesinbalancesheetpresentationbetweenU.S.GAAPandIFRSinclude:
1.Internationalstandardsspecifyaminimumlistofitemstobepresentedinthebalancesheet.U.S.GAAPhasnominimumrequirements.
2.IASNo.1,revised,changedthetitleofthebalancesheettostatementoffinancialposition,althoughcompaniesarenotrequiredtousethattitle.SomeU.S.companiesusethestatementoffinancialpositiontitleaswell.
3.UnderU.S.GAAP,wepresentcurrentassetsandliabilitiesbeforenoncurrentassetsandliabilities.IASNo.1doesn’tprescribetheformatofthebalancesheet,butbalancesheetspreparedusingIFRSoftenreportnoncurrentitemsfirst.
Question3-21
Anoperatingsegmentisacomponentofanenterprise:
1.Thatengagesinbusinessactivitiesfromwhichitmayearnrevenuesandincurexpenses(includingrevenuesandexpensesrelatingtotransactionswithothercomponentsofthesameenterprise).
2.Whoseoperatingresultsareregularlyreviewedbytheenterprise'schiefoperatingdecision-makertomakedecisionsaboutresourcestobeallocatedtothesegment,andtoassessitsperformance.
3.Forwhichdiscretefinancialinformationisavailable.
Question3-22
Forareasdeterminedtobereportableoperatingsegment
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