Chap 003

Chapter 3
The Balance Sheet and Financial Disclosures
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basis for assessment. To aid faculty in this endeavor, we have labeled each question, exercise, and
problem in Intermediate Accounting, 7e with the following AACSB learning skills:
Questions
AACSB Tags
Exercises (cont.)
AACSB Tags
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Solutions Manual, Vol.1, Chapter 3
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The McGraw-Hill Companies, Inc., 2013
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Intermediate Accounting, 7/e
QUESTIONS FOR REVIEW OF KEY TOPICS

Question 31
The purpose of the balance sheet, also known as the statement of financial position, is to present
the financial position of the company on a particular date. Unlike the income statement, which is a
change statement that reports events occurring during a period of time, the balance sheet is a
statement that presents an organized array of assets, liabilities, and shareholders equity at a point in
time. It is a freeze-frame or snapshot picture of financial position at the end of a particular day
marking the end of an accounting period.
Question 32
The balance sheet does not portray the market value of the entity (number of common stock
shares outstanding multiplied by price per share) for a number of reasons. Most assets are not
reported at fair value, but instead are measured according to historical cost. Also, there are certain
resources, such as trained employees, an experienced management team, and a good reputation, that
are not recorded as assets at all. Therefore, the assets of a company minus its liabilities, as shown in
the balance sheet, will not be representative of the companys market value.
Question 33
Current assets include cash and other assets that are reasonably expected to be converted to
cash or consumed during one year, or within the normal operating cycle of the business if the
operating cycle is longer than one year. The typical asset categories classified as current assets
include:
Cash and cash equivalents
Short-term investments
Accounts receivable
Inventories
Prepaid expenses
Question 34
Current liabilities are those obligations that are expected to be satisfied through the use of
current assets or the creation of other current liabilities. So, this classification will include all
liabilities that are scheduled to be liquidated within one year or the operating cycle, whichever is
longer, except those that management intends to refinance on a long-term basis. The typical liability
categories classified as current liabilities include:
Accounts payable
Short-term notes payable
Accrued liabilities
Current maturities of long-term debt

33
Answers to Questions (continued)

Question 35
The operating cycle for a typical manufacturing company refers to the period of time required to
convert cash to raw materials, raw materials to a finished product, finished product to receivables,
and then finally receivables back to cash.
Question 36
Investments in equity securities are classified as current if the companys management (1)
intends to liquidate the investment in the next year or operating cycle, whichever is longer, and (2) has
the ability to do so, that is, the investment is marketable. If either of these criteria does not hold, the
investment is classified as noncurrent.
Question 37
The common characteristics that these assets have in common are that they are tangible, longlived assets used in the operations of the business. They usually are the primary revenue-generating
assets of the business. These assets include land, buildings, equipment, machinery, furniture, and
other assets used in the operations of the business, as well as natural resources, such as mineral mines,
timber tracts, and oil wells.
Question 38
Property, plant, and equipment and intangible assets each represent assets that are long-lived
and are used in the operations of the business. The difference is that property, plant, and equipment
represent physical assets, while intangible assets lack physical substance. Generally, intangible assets
represent the ownership of an exclusive right, such as a patent, copyright, or franchise.
Question 39
A note payable of $100,000 due in five years would be classified as a long-term liability. A
$100,000 note due in five annual installments of $20,000 each would be classified as a $20,000
current liabilitycurrent maturities of long-term debtand an $80,000 long-term liability.
Question 310
Paid-in capital consists of amounts invested by shareholders in the corporation. Retained
earnings equals net income less dividends paid to shareholders from the inception of the corporation.

34

Question 311
Disclosure notes provide additional detail concerning specific financial statement items.
Included are such data as the fair values of financial instruments and off-balance-sheet risk associated
with financial instruments and details of pension plans, leases, debt, and assets. Common to all
companies disclosures are certain specific notes such as a summary of significant accounting policies,
descriptions of subsequent events, and related third-party transactions. However, many notes are
designed to fit the disclosure needs of the particular reporting company. In fact, any explanation that
helps investors and creditors make decisions should be included.
Question 312
The disclosure of the companys significant accounting policies is extremely important to
external users in terms of their ability to compare financial information across companies. It is critical
to a financial analyst involved in assessing future cash flows of two construction companies to know
that one company uses the percentage-of-completion method in recognizing gross profit, while the
other company uses the completed contract method.
Question 313
A subsequent event is an event that occurs after the date of the financial statements but prior to
the date on which the statements are actually issued or available to be issued. It may help to clarify
a previously existing situation or it may represent a new event not directly affecting financial position
at the end of the reporting period.
Question 314
The discussion provides managements views on significant events, trends, and uncertainties
pertaining to the companys (a) operations, (b) liquidity, and (c) capital resources. Certainly the
Management Discussion and Analysis section may be slanted toward managements biased perspective
and therefore can lack objectivity. However, management can offer an informed insight that might not
be available elsewhere, so if the reader maintains awareness of the informations source, it can offer a
unique view of the situation.

35

Question 315
Depending on the circumstances, the auditor will issue a (an):
1. Unqualified opinionThe auditors are satisfied that the financial statements present fairly the
financial position, results of operations, and cash flows and are prepared in accordance with
generally accepted accounting principles.
2. Qualified opinionThis contains an exception to the standard unqualified opinion, but not of
sufficient seriousness to invalidate the financial statements as a whole. Examples of exceptions
are (a) unconformity with generally accepted accounting principles, (b) inadequate disclosures,
and (c) a limitation or restriction of the scope of the examination.
3. Adverse opinionThis is necessary when the exceptions (a) and (b) above are so serious that a
qualified opinion is not justified. Adverse opinions are rare because auditors usually are able to
persuade management to rectify problems to avoid this undesirable report.
4. DisclaimerAn auditor will disclaim an opinion if item (c) above applies and, therefore,
insufficient information has been gathered to express an opinion.
Question 316
A proxy statement must be sent each year to all shareholders. It usually is in the same mailing
with the annual report. The statement invites shareholders to the shareholders meeting to elect board
members and to vote on issues before the shareholders. It also permits shareholders to vote using an
enclosed proxy card. The proxy statement also provides for more disclosures on compensation to
directors and executives, and in particular, stock options granted to executives.
Question 317
Working capital is the difference between current assets and current liabilities. The current ratio
is computed by dividing current assets by current liabilities. The acid-test ratio (or quick ratio) is
computed by dividing quick assets (cash and cash equivalents, marketable securities, and accounts
receivable) by current liabilities.
Question 318
Debt to equity ratio
Total liabilities
Shareholders' equity
Times interest earned ratio
Net income + interest + taxes

Interest

36
Answers to Questions (concluded)

Question 319
IAS No.1, revised, Presentation of Financial Statements, provides authoritative guidance for
balance sheet presentation under IFRS.
Question 320
Differences in balance sheet presentation between U.S. GAAP and IFRS include:
1. International standards specify a minimum list of items to be presented in the balance sheet. U.S.
GAAP has no minimum requirements.
2. IAS No. 1, revised, changed the title of the balance sheet to statement of financial position,
although companies are not required to use that title. Some U.S. companies use the statement of
financial position title as well.
3. Under U.S. GAAP, we present current assets and liabilities before noncurrent assets and liabilities.
IAS No. 1 doesnt prescribe the format of the balance sheet, but balance sheets prepared using
IFRS often report noncurrent items first.
Question 321
An operating segment is a component of an enterprise:
1. That engages in business activities from which it may earn revenues and incur expenses (including
revenues and expenses relating to transactions with other components of the same enterprise).
2. Whose operating results are regularly reviewed by the enterprise's chief operating decision-maker
to make decisions about resources to be allocated to the segment, and to assess its performance.
3. For which discrete financial information is available.
Question 322
For areas determined to be reportable operating segments, the following disclosures are required:
1. General information about the operating segment.
2. Information about reported segment profit or loss, including certain revenues and expenses
included in reported segment profit or loss, segment assets, and the basis of measurement.
3. Reconciliations of the totals of segment revenues, reported profit or loss, assets, and other
significant items to corresponding enterprise amounts.
4. Interim period information.
Question 323
U.S. GAAP requires companies to report information about reported segment profit or loss,
including certain revenues and expenses included in reported segment profit or loss, segment assets,
and the basis of measurement. The international standard on segment reporting, IFRS No. 8, requires
that companies also disclose the total liabilities of its reportable segments.
BRIEF
EXERCISES
Brief
Exercise 31
(a)
(b)
Current
Current

37
(c)
(d)
(e)
(f)
Noncurrent
Current
Noncurrent
Noncurrent
Brief Exercise 32
Current assets:
$16,000 + 11,000 + 25,000 = $52,000

Current liabilities:
$14,000 + 9,000 + 1,000 = $24,000
Brief Exercise 33
Assets: $ 52,000 current assets

80,000 equipment
$132,000 total assets
minus
Liabilities
equals
Shareholders equity

38
$ 24,000 current liabilities

30,000 notes payable
$ 54,000 total liabilities
$78,000
(50,000) common stock
$28,000 retained earnings
Brief Exercise 34
K AND J NURSERY, INC.
Balance Sheet
At December 31, 2013
Assets
Current assets:
Cash ....................................................................
Accounts receivable ............................................
Inventories ..........................................................
Total current assets ........................................
Property, plant, and equipment:
Equipment ...........................................................
Less: Accumulated depreciation .........................
Net property, plant, and equipment ...............
Total assets .................................................
$ 16,000
11,000
25,000
52,000
$140,000
(60,000)
80,000
$132,000
Liabilities and Shareholders' Equity

Accounts payable ...............................................
Wages payable ....................................................
Interest payable ..................................................
Total current liabilities ...................................
$ 14,000
9,000
1,000
24,000
Long-term liabilities:
Note payable .......................................................
30,000
Shareholders equity:
Common stock ....................................................
Retained earnings* .............................................
Total shareholders equity ..............................
Total liabilities and shareholders equity
$50,000
28,000
78,000
$132,000
$28,000 is the amount needed to cause total assets to equal total liabilities and
shareholders equity. This is calculated in BE 33.

39
Brief Exercise
1.
35CULVER
Brief Exercise
36
CITY LIGHTING,
INC.
Balance Sheet
Assets
Current assets:
Cash ....................................................................
Inventories ..........................................................
Prepaid insurance ................................................
Equipment ...........................................................
$ 55,000
39,000
45,000
15,000
154,000
$100,000
(34,000)
66,000
Intangible assets:
Patent ...............................................................
Total assets .................................................
40,000
$260,000

Interest payable...................................................
Current maturities of long-term debt ...................
$ 12,000
2,000
10,000
24,000
Note payable .......................................................
90,000
Common stock ....................................................
Retained earnings ...............................................
1.
$70,000
76,000
146,000
$260,000
The $30,000 should be classified as a noncurrent asset, under the

investments classification.

310
2.
$10,000, next years installment, should be classified as a current liability,

current maturities of long-term debt. The remaining $90,000 is included in
long-term liabilities.
Two-thirds of the unearned revenue, $40,000, should be classified as a
current liability, the remaining $20,000 as a long-term liability.
3.
Brief Exercise 37
$235,000
Current assets Cash and cash equivalents Accounts

receivable = Inventories
40,000
120,000
$75,000
Total assets Current assets = Property, plant, and equipment

$400,000
235,000 =
$165,000
Total assets Accounts payable Note payable Common stock = Retained
earnings
$400,000
32,000
50,000
100,000
= $218,000
Brief Exercise 38
(2)
(3)
(4)
(5)
(6)
(1)
B
B
A
B
A

311
Brief Exercise 39
(a)
Current assets
Current liabilities
($55,000 + 39,000 + 45,000 + 15,000) ($12,000 + 2,000 + 10,000)

$154,000
$24,000 = 6.42
(b) (Cash + Short-term investments + Accounts receivable) Current liabilities
($55,000 + 0 + 39,000)
$24,000 =
3.92
(c) Total liabilities Shareholders equity
$24,000 Current liabilities + 90,000 Long-term liabilities = $114,000
$70,000 Common stock + 76,000 Retained earnings = $146,000
$114,000 $146,000 = .78
Paying accounts payable reduces both current
Brief Exercise 310
assets and current liabilities. If the ratio before the
payment was above 1.0, the transaction would cause
the ratio to increase. However, if the ratio before the
transaction was less than 1.0, the ratio would decrease.
Brief Exercise 311
Acid-test ratio = (Cash + Short-term investments

+ A/R) Current liabilities
1.5 = ($20,000 + 0 + 40,000) Current liabilities

1.5 x Current liabilities = $60,000
Current liabilities = $60,000 1.5
Current liabilities = $40,000
Current ratio = Current assets Current liabilities
2.0 = Current assets $40,000
Current assets = $40,000 x 2.0
Current assets = $80,000
$80,000 20,000(cash) 40,000(A/R) = $20,000 inventories
EXERCISES
Exercise
31
312
1. Total current assets

Current liabilities = $44,000 + 15,000 + 1,000 (accrued interest)
= $60,000
Since the current ratio is 1.5:1, Current assets = 1.5 x $60,000 = $90,000
2. Short-term investments
$90,000 5,000 20,000 60,000 = $5,000
3. Retained earnings
Current assets + Noncurrent assets = Current liabilities + Long-term liabilities
+ Paid-in capital + Retained earnings (RE)
$90,000 + 120,000 = $60,000 + 30,000 (note payable) + 100,000 + RE
RE = $20,000
Exercise 32
1.
2.
3.
4.
5.
6.
7.
8.
9.
c
f
-a _
b_
g_
f
f
i
b
Equipment
Accounts payable
Allowance for uncollectible accounts
Land, held for investment
Note payable, due in 5 years
Unearned rent revenue
Note payable, due in 6 months
Income less dividends, accumulated
Investment in XYZ Corp., long-term
10.
11.
12.
13.
14.
15.
16.
17.
18.
a
Inventories
d _ Patent
c
Land, in use
f _ Accrued liabilities
a
Prepaid rent
h _ Common stock
c
Building, in use
a
Cash
f _ Taxes payable
Exercise 33
1.
f
2.
d
3.
-c
4.
a
revenue
5.
g
6.
f
7.
f
8.
b
9.
b
Accrued interest payable

10.
a
Franchise
11.
c
Accumulated depreciation
12.
c
Prepaid insurance, for 2014 13.___
Bonds payable, due in 10 years
Current maturities of long-term debt
Note payable, due in 3 months
Long-term receivables
Bond sinking fund, will be used to
retire bonds in 10 years
14.
15.
16.
17.
18.
d
h
b
a
f
Supplies
Machinery
Land, in use
f
Unearned
_ Copyrights
_ Preferred stock
_ Land, held for speculation
Cash equivalents
_ Wages payable

313
VALLEY
JACKSON
PUMPCORPORATION
CORPORATION
Exercise 34Exercise 35
Exercise
36
Balance
BalanceSheet
Sheet
At
December
31,
2013
At December 31,
2013
Assets
Assets
Current assets:
Current
assets:
Cash .................................................................................
Cash ....................................................................
Marketable
securities .......................................................
Marketable
securities
Accounts
receivable,
net of ..........................................
allowance for
uncollectible
accounts
of
$5,000 ...............................
Inventories
.......................................................................
Inventories
..........................................................
Prepaid
expenses
.............................................................
Prepaid rent ........................................................
Total current assets ....................................................
$ 25,000
$22,000
40,000
10,000
51,000
34,000
81,000
75,000
32,000
16,000
211,000
Investments:
Marketable plant,
securities
Property,
and.......................................................
equipment:
Land ................................................................................
Machinery
...........................................................
Total investments .......................................................

Property,
plant,
and equipment:
Net
property,
plant, and equipment ...............
Land ................................................................................
Buildings ..........................................................................
Intangible
assets:
Equipment .......................................................................
Patent ...............................................................
Total assetsdepreciation
.................................................
Less: Accumulated
......................................
175,000
$22,000
20,000
$145,000
(11,000)
100,000
300,000
75,000
475,000
(125,000)
Net property, plant, and equipment ...........................
42,000
134,000
83,000
$392,000
350,000
Intangible
Currentassets:
liabilities:
Copyright
........................................................................
Accounts
payable ...............................................
Total assets .............................................................
Wages
payable ....................................................
Taxes
payable
.....................................................
Totalpayable
current
liabilities ...................................
Accounts
............................................................
Interest payable ...............................................................
Long-term
liabilities:
Unearned revenues
..........................................................
Note
payable
....................................................................
Bonds
payable
....................................................
Current maturities of long-term debt ...............................
Total current equity:
liabilities ...............................................
Shareholders
$12,000
8,000
$615,000
4,000
32,000
44,000
$ 65,000
10,000
20,000
100,000
200,000
50,000
245,000
Common
stock ....................................................
Long-term
liabilities:
Retained
...............................................
Note
payableearnings
....................................................................
$100,000
48,000
Retained earnings ............................................................

Total shareholders equity ..........................................
Total liabilities and shareholders equity .................
70,000
Total shareholders
equity ..............................
Shareholders
equity:
Total
and shareholders equity
Common
stockliabilities
................................................................
$200,000
100,000
148,000
$392,000
270,000
$615,000
Current assets:
314
Cash
Accounts receivable
Less: Allowance for uncollectible accounts
Note receivable
Interest receivable
Marketable securities
Raw materials
Work in process
Finished goods
Prepaid rent (one-half of $60,000)
Total current assets
Unearned revenue (one half of $36,000)
Accounts payable
Interest payable
Total current liabilities
Working capital
$20,000
130,000
(13,000)
100,000
3,000
32,000
24,000
42,000
89,000
30,000
$457,000
18,000
180,000
5,000
(203,000)
$254,000
Exercise 37

315
Exercise 38
LOS GATOS CORPORATION

Balance Sheet
Assets
Current assets:
Cash ........................................................................
CONE CORPORATION
Exercise
39receivable, net of allowance
Accounts
Balancefor
Sheet (Partial)
uncollectible accounts of $5,000
.........................
Inventories ...............................................................
Total current assets .............................................
$ 20,000
55,000
55,000
130,000
Assets
Current assets:
Investments:
Marketable
securities
.......................................... $ 20,000
Bond
sinking fund
...................................................
Prepaid
rent........................................................
........................................................ 20,000
Note
receivable
Total investments ...............................................
$ 40,000
12,000
40,000
Investments:
Property,
andfund
equipment:
Bondplant,
sinking
...............................................
Machinery
...............................................................
Marketable securities .......................................... 190,000
Less: Accumulated depreciation ..............................
(70,000)
Net property, plant, and equipment ....................
Other assets:
Prepaid
rent (1) ...................................................
Intangible
assets:
50,000
40,000
120,000
12,000
Franchise .................................................................
Total assets ......................................................
Interest
payable
..................................................
Accounts
payable
....................................................
Current
maturities
of long-term debt ...................
Interest payable .......................................................
Note
payable liabilities:
...........................................................
Long-term
Total current
.......................................
Note
payableliabilities
.......................................................
30,000
$320,000
$ 12,000
$ 50,000
20,000
5,000
50,000
105,000
180,000
(1) Note:
In practice,
companies often report all prepaid expenses110,000
as
Bonds
payable
.........................................................
current assets.
Common stock, no par value; 100,000 shares
authorized; 50,000 shares issued and outstanding
Retained earnings ....................................................
Total shareholders equity ..................................
Total liabilities and shareholders equity .........
$ 70,000
35,000
105,000
$320,000
See calculations below the balance sheet.

316
KORVER SUPPLY COMPANY

Balance Sheet
Assets
Current assets:
Cash ....................................................................
Inventories ..........................................................
Furniture and fixtures ..........................................
Total assets .................................................
$168,000
320,000
250,000
738,000
$300,000
(170,000)
130,000
$868,000

Note payable .......................................................
Common stock ....................................................
Retained earnings ...............................................
$180,000
6,000
200,000
386,000
$100,000
382,000
482,000
$868,000

317
Exercise 39 (concluded)
Beginning balance in cash
+ Cash collected from customers
Cash paid to suppliers
Cash paid for operating expenses
Cash paid for interest
Ending cash balance
$120,000
780,000
(560,000)
(160,000)
(12,000)
$168,000
Beginning balance in accounts receivable

+ Credit sales
Cash collected from customers
Ending balance in accounts receivable
$300,000
800,000
(780,000)
$320,000
Beginning balance in inventories

+ Purchases
Cost of merchandise sold
Ending balance in inventories
$200,000
550,000
(500,000)
$250,000
Beginning balance in furniture and fixtures, net

Depreciation for the year
Ending balance in furniture and fixtures, net
$150,000
(20,000)
$130,000
Beginning balance in accounts payable

+ Purchases on account
Cash paid to suppliers
Ending balance in accounts payable
$190,000
550,000
(560,000)
$180,000
Beginning balance in retained earnings

+ Sales revenue
Cost of goods sold
Operating expenses
Depreciation expense
Interest expense
Ending balance in retained earnings
$274,000
800,000
(500,000)
(160,000)
(20,000)
(12,000)
$382,000
Accrued interest on note ($200,000 x 6% x 6/12)

1.
Exercise 310method
318
$6,000
Inventory costing
A
2.
3.
4.
5.
6.
7.
8.
Information on related-party transactions

Composition of property, plant, and equipment
Depreciation method
Subsequent event information
Basis of revenue recognition on long-term contracts
Important merger occurring after year-end
Composition of receivables
When related-party transactions occur, companies must

disclose the nature of the relationship, provide a description of
the transaction, and report the dollar amounts of the
transactions and any amounts due from or to related parties.
When an event that has a material effect on the companys financial position
occurs after the fiscal year-end, but before the financial statements actually are
issued, the event is disclosed in a subsequent event disclosure note.
The choice of the straight-line method to determine depreciation typically is
disclosed in the companys summary of significant accounting policies disclosure
note.
This information would be included in a disclosure note describing the companys
debt.
The choice of the FIFO method to determine value inventory typically is disclosed
in the companys summary of significant accounting policies disclosure note.
Exercise 311
2.
3.
4.
5.
1.
Exercise 312
2.
3.
4.
5.
6.
7.
B
B
A
B
A
B
B
1.
(B) in a separate disclosure note.
(A) in the summary of significant policies note.

(C) on the face of the balance sheet.
(A) in the summary of significant policies note.
(C) on the face of the balance sheet.

319
8.
Exercise 313Requirement 1
The topic number that provides guidance on information contained in the notes to
the financial statements is ASC Topic 235: Notes to the Financial Statements.
Requirement 2
The specific citation that describes the information that companies must disclose in
the accounting policies note is FASB ASC 23510503: Notes to Financial
StatementsOverallDisclosureWhat to Disclose.
Requirement 3
Disclosure of accounting policies should identify and describe the accounting principles
the company follows and the methods of applying those principles that materially affect
the determination of financial position, cash flows, or results of operations. In general,
the disclosure encompasses important judgments as to appropriateness of principles
relating to recognition of revenue and allocation of asset costs to current and future
periods. In particular, it encompasses those accounting principles and methods that
involve any of the following:
a. A selection from existing acceptable alternatives.
b. Principles and methods peculiar to the industry in which the entity operates,
even if such principles and methods are predominantly followed in that
industry.
c. Unusual or innovative applications of GAAP.
<<AU: Something seems to be missing here. Please correct. ~Ed>>
Exercise 314
The FASB Accounting Standards Codification represents

the single source of authoritative U.S. generally accepted
accounting principles. The specific citation for each of the following items is:

320
1. What is the balance sheet classification for a note payable due in six
months that was used to purchase a building?
FASB ASC 21010459: Notes to Financial StatementsOverallOther
Presentation MattersOther Liabilities.
Other liabilities whose regular and ordinary liquidation is expected to
occur within a relatively short period of time, usually 12 months, are also
generally included, such as the following:
a. Short-term debts arising from the acquisition of capital assets.
b. Serial maturities of long-term obligations.
c. Amounts required to be expended within one year under sinking fund
provisions.
d. Agency obligations arising from the collection or acceptance of cash or
other assets for the account of third persons. Loans accompanied by
pledge of life insurance policies would be classified as current liabilities if,
by their terms or by intent, they are to be repaid within 12 months. The
pledging of life insurance policies does not affect the classification of the
asset any more than does the pledging of receivables, inventories, real
estate, or other assets as collateral for a short-term loan. However, when a
loan on a life insurance policy is obtained from the insurance entity with
the intent that it will not be paid but will be liquidated by deduction from
the proceeds of the policy upon maturity or cancellation, the obligation
shall be excluded from current liabilities.
Exercise 314 (continued)

2. Which assets may be excluded from current assets?
FASB ASC 21010454: Notes to Financial StatementsOverallOther
Presentation Matters.

321
The concept of the nature of current assets contemplates the exclusion

from that classification of such resources as the following:
a. Cash and claims to cash that are restricted as to withdrawal or use for
other than current operations, are designated for expenditure in the
acquisition or construction of noncurrent assets, or are segregated for the
liquidation of long-term debts. Even though not actually set aside in
special accounts, funds that are clearly to be used in the near future for the
liquidation of long-term debts, payments to sinking funds, or for similar
purposes shall also, under this concept, be excluded from current assets.
However, if such funds are considered to offset maturing debt that has
properly been set up as a current liability, they may be included within the
current asset classification.
b. Investments in securities (whether marketable or not) or advances that
have been made for the purposes of control, affiliation, or other continuing
business advantage.
c. Receivables arising from unusual transactions (such as the sale of
capital assets, or loans or advances to affiliates, officers, or employees)
that are not expected to be collected within 12 months.
d. Cash surrender value of life insurance policies.
e. Land and other natural resources.
f. Depreciable assets.
g. Long-term prepayments that are fairly chargeable to the operations of
several years, or deferred charges such as bonus payments under a longterm lease, costs of rearrangement of factory layout or removal to a new
location.
Exercise 314 (continued)

322
3. Should a note receivable from a related party be included in the

balance sheet with notes receivable from customers?
FASB ASC 85010502: Related Party DisclosuresOverall
Disclosure.
Notes or accounts receivable from officers, employees, or affiliated
entities must be shown separately and not included under a general
heading such as notes receivable or accounts receivable.

323
Exercise 314 (concluded)

4. What items are nonrecognized subsequent events that require a
disclosure in the notes to the financial statements?
FASB ASC 85510552: Subsequent EventsOverallImplementation
Guidance and IllustrationsNonrecognized Subsequent Events.
The following are examples of nonrecognized subsequent events
addressed in paragraph 85510552:
a. Sale of a bond or capital stock issued after the balance sheet date but
before financial statements are issued or are available to be issued.
b. A business combination that occurs after the balance sheet date but
before financial statements are issued or are available to be.
c. Settlement of litigation when the event giving rise to the claim took
place after the balance sheet date but before financial statements are
issued or are available to be issued.
d. Loss of plant or inventories as a result of fire or natural disaster that
occurred after the balance sheet date but before financial statements are
issued or are available to be issued.
e. Losses on receivables resulting from conditions (such as a customers
major casualty) arising after the balance sheet date but before financial
statements are issued or are available to be issued.
f. Changes in the fair value of assets or liabilities (financial or
nonfinancial) or foreign exchange rates after the balance sheet date but
g. Entering into significant commitments or contingent liabilities, for
example, by issuing significant guarantees after the balance sheet date but

324
Exercise 315
List A
d
1. Balance sheet
2. Liquidity
3. Current assets
4. Operating cycle
5. Current liabilities
k 6. Cash equivalent
m 7. Intangible asset
l
8. Working capital
9. Accrued liabilities
List B
a. Will be satisfied through the use of current
assets.
b. Items expected to be converted to cash or
consumed within one year or the operating
cycle, whichever is longer.
c. The statements are presented fairly in
conformity with GAAP.
d. An organized array of assets, liabilities, and
equity.
e. Important to a user in comparing financial
information across companies.
f. Scope limitation or a departure from GAAP.
g. Recorded when an expense is incurred but not
yet paid.
h. Relates to the amount of time before an asset
is converted to cash or a liability is paid.
i. Occurs after the fiscal year-end but before the
statements are issued.
j. Cash to cash.
e 10. Summary of significant

accounting policies
i 11. Subsequent events
k. One-month U.S. treasury bill.
c 12. Unqualified opinion
l. Current assets minus current liabilities.
f 13. Qualified opinion
m. Lacks physical substance.
1. Current ratio [$200 + 150 + 200 + 350] $400 = 2.25
Exercise 316
2. Acid-test ratio
3. Debt to equity ratio
[$200 + 150 + 200] $400 = 1.375

[$400 + 350] [$750 + 400] = .65
325
4. Times interest earned ratio

326
[$160 + 40 + 100] $40 = 7.5 times
a. Current ratio
b. Acid-test ratio
c. Debt to equity ratio
d. Times interest earned ratio
$10,473 $8,663 = 1.21

[$1,103 + 22 + 2,348] $8,663 = .40
[$8,663 + 1,894] $7,292 = 1.45
[$1,277 + 87 + 714] $87 = 24 times
Requirement 2
Best Buys current ratio is almost identical to the industry average but the acid-test
ratio is lower than the industry average. The debt to equity ratio is significantly higher
than the industry average, indicating that the companys assets are primarily financed
with liabilities rather than equity. However, the companys times interest earned ratio is
significantly higher than the industry average. Even with high leverage, Best Buy
seems quite capable of meeting its debt interest obligations.
Exercise 318a. Acid-test ratio = Quick assets Current liabilities = 1.20
Quick assets = Current assets Inventories
Quick assets = Current assets $840,000
Current assets Current liabilities =
Current assets $840,000 Current liabilities =
$840,000 Current liabilities =
Current liabilities = $800,000
Current assets $800,000 = 2.25
Current assets = $1,800,000
2.25
1.20
1.05
b. Debt to equity ratio = Total liabilities Shareholders equity = 1.8

Total liabilities + Shareholders' equity = Total assets
Total liabilities + Shareholders' equity = $2,800,000
Let x equal shareholders' equity
1.8 x + x = $2,800,000
x = $1,000,000 = Shareholders' equity
c. Noncurrent assets = Total assets Current assets
Noncurrent assets = $2,800,000 1,800,000 = $1,000,000
d. Long-term liabilities = Total assets Current liabilities Shareholders' equity
Long-term liabilities = $2,800,000 800,000 1,000,000 = $1,000,000

327
Exercise 3191.Debt to equity ratio = Total liabilities Shareholders equity = 1.4

Total liabilities $2,500,000 = 1.4
Shareholders equity x 1.4 = Total liabilities
$2,500,000 x 1.4 = $3,500,000 = Total liabilities
Total liabilities + Equity = Total assets
$3,500,000 + 2,500,000 = $6,000,000 = Total assets
Total assets Noncurrent assets = Current assets
$6,000,000 2,400,000 = $3,600,000 = Current assets
Current ratio = Current assets Current liabilities
2.0
= $3,600,000 Current liabilities
Current liabilities = $3,600,000 2 = $1,800,000
2. Total assets = Total liabilities + Shareholders equity
Total assets = Current liabilities + Long-term liabilities + Shareholders equity
$6,000,000 = $1,800,000
+ Long-term liabilities + 2,500,000
Long-term liabilities = $1,700,000
3. Current assets = Cash + Accounts receivable + Prepaid expenses
$3,600,000 = $1,300,000 + Accounts receivable + 360,000
Accounts receivable = $1,940,000
4. Acid-test ratio = Quick assets Current liabilities
Quick assets = Cash + Accounts receivable
Quick assets = $1,300,000 + 1,940,000 = $3,240,000
Acid-test ratio = $3,240,000 $1,800,000 = 1.8

328
Exercise 320
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Current
Debt to
Action
Ratio
Equity Ratio
Issuance of long-term bonds
I
I
Issuance of short-term notes
I
I
Payment of accounts payable
D
D
Purchase of inventory on account
I
D
Purchase of inventory for cash
N
D
Purchase of equipment with a 4-year note
N
N
Retirement of bonds
D
D
Sale of common stock
I
I
Write-off of obsolete inventory
D
N
Purchase of short-term investment for cash
N
N
Decision to refinance on a long-term basis
some currently maturing debt
I
I
Acid-test
Ratio
I
I
D
I
N
I
D
D
I
N
N

329
The pharmaceuticals, plastics, and farm equipment segments are reportable. Only
segments representing 10% or more of total company revenues, assets, or net income
must be reported. The electronics segment does not meet this criterion.
Requirement 2
For segments determined to be reportable, the following disclosures are required:
a. General information about the operating segment.
b. Information about reported segment profit or loss, including certain revenues and
expenses included in reported segment profit or loss, segment assets, and the basis
of measurement.
c. Reconciliations of the totals of segment revenues, reported profit or loss, assets, and
other significant items to corresponding enterprise amounts.
d. Interim period information.
In addition to revenues, profit or loss, and assets, IFRS also
Exercise 322require the disclosure of total liabilities for each of the reportable
segments.

330
CPA / CMA REVIEW QUESTIONS

CPA Exam Questions
1. a. The principal would have to be due after April 30, 2014, to be considered as a
noncurrent asset at April 30, 2013. The accrued interest for eight months
(since August 31, 2012) is a current asset at April 30, 2013. Since the
principal is due August 31, 2014, additional interest would have to be
recorded for the period September 1, 2013 to August 31, 2014.
2. a. Current liabilities are obligations that are expected to be paid within one year
or the operating cycle, whichever is longer.
Accounts payable
Bonds payable
Dividends payable
$15,000
22,000
8,000
$45,000
The notes payable are not classified as current liabilities because they are not
due until 2015.
3.a. Inventory pricing is a significant accounting policy that should be disclosed
according to generally accepted accounting principles, but the composition of plant
assets is not a policy disclosure.

331
CPA Exam Questions (concluded)

4. c. The auditors standard report includes a statement that the financial
statements are the responsibility of the Company's management and that the
auditors responsibility is to express an opinion on the financial statements.
5. b. Current ratioincreased; Quick ratiodecreased.
Current ratio = Current assets Current liabilities.
When the current ratio is greater than 1 to 1, an equal decrease in current
assets and current liabilities will result in an increase in the current ratio. The
decrease in current liabilities (the smaller number) is proportionately greater
than the decrease in current assets, resulting in an increase in the ratio.
Quick ratio = (Cash + Marketable Securities + Accounts receivable) Current liabilities
When the quick ratio is less than 1:1, an equal decrease in quick assets
and current liabilities will result in a decrease in the ratio. The decrease in
current liabilities (the larger number) is proportionately smaller than the
decrease in quick assets, resulting in a decrease in the ratio.
6. a. Since inventory is not included in the quick ratio, the write-off of obsolete
inventory would have no effect on the quick ratio; however, it would decrease
the current ratio as the write-off would reduce current assets.
7. d. Under U.S. GAAP, we present current assets and liabilities before noncurrent
assets and liabilities. Balance sheets prepared using IFRS often report
noncurrent items first, but IAS No. 1 doesnt prescribe the format of the
balance sheet.
8. a. IFRS requires that companies disclose total liabilities of its reportable
segments. This disclosure is not required under U.S. GAAP

332
CMA Exam Questions

1 d. GAAP requires disclosure of related-party transactions except for
compensation agreements, expense allowances, and transactions eliminated in
consolidated working papers. Required disclosures include the
relationship(s) of the related parties; a description and dollar amounts of
transactions for each period presented and the effects of any change in the
method of establishing their terms; and amounts due to or from the related
parties and, if not apparent, the terms and manner of settlement. The effect
on the cash flow statement need not be disclosed.
2 b. The MD&A section is included in SEC filings. It addresses in a
nonquantified manner the prospects of a company. The SEC examines it with
care to determine that management has disclosed material information
affecting the companys future results. Disclosures about commitments and
events that may affect operations or liquidity are mandatory. Thus, the
MD&A section pertains to liquidity, capital resources, and results of
operations.
3. a. The current ratio equals current assets divided by current liabilities. An equal
increase in both the numerator and denominator of a current ratio less than
1.0 causes the ratio to increase. Windham Companys current ratio is .8
($400,000 $500,000). The purchase of $100,000 of inventory on account
would increase the current assets to $500,000 and the current liabilities to
$600,000, resulting in a new current ratio of .833.
Problem
31
PROBLEMS

333
Problem 32
Balance Sheet
Assets
Current assets:
Cash
Short-term investments
Accounts receivable, net of allowance for uncollectible accounts
Interest receivable
Inventories
Prepaid expenses
Investments:
Bond sinking fund
Long-term investments
Notes receivable
Total investments
Land
Buildings
Equipment
Less: Accumulated depreciation
Net property, plant, and equipment
Intangible assets:
Patent
Copyright
Total intangible assets
Total assets
Accounts payable
Rent payable
Taxes payable
Wages payable
Notes payable
Bonds payable
Common stock
Preferred stock
Retained earnings
Total shareholders equity
334
Requirement 1
Inventories:
Current assets Cash and cash equivalents Short-term investments
Accounts receivable Prepaid expenses = Inventories
$1,594,927 239,186 353,700 504,944 83,259 = $413,838
Total assets:
Total liabilities + Shareholders equity = Total assets
$956,140 + 1,370,627 = $2,326,767
Property and equipment (net):
Total assets Current assets Long-term receivables = Property and equipment
$2,326,767 1,594,927 110,800 = $621,040
Accounts payable:
Total current liabilities Notes payable and short-term debt
Accrued liabilities Other current liabilities = Accounts payable
$693,564 31,116 421,772 181,604 = $59,072
Long-term debt and deferred taxes:
Total liabilities Current liabilities = Long-term debt and deferred taxes
$956,140 693,564 = $262,576

335
Problem 32 (concluded)
Requirement 2
Problem 33 Problem 34 TRIDENT

ALMWAY CORPORATION
CORPORATION
Balance Sheet
AtBalance
December Sheet
31, 2013
Assets
WEISMULLER PUBLISHING
COMPANY
Assets
Current assets:
Balance Sheet
($ in thousands)
Cash and cash equivalents ......................................................
$ 30,000
Short-term
investments
...........................................................
80,000
Current assets:
Accounts receivable, net of allowance for Assets
Cash
and cash
equivalents
.............................
$ 239,186
Current
assets:
uncollectible
accounts
of $8,000
.......................................
60,000
Cash
and cash
equivalents (1) ..................................
................................................
$200,000
95,000
Short-term
investments
353,700
Inventories
..............................................................................
Short-term
investments
...........................................................
110,000
Prepaid
insurance
...................................................................
9,000
Accounts
receivable,
net of allowance for
Accounts
receivable,
net
of
allowance
for
uncollectible
Total
current assets
..........................................................
379,000
uncollectible
accounts
.............................
504,944
accounts of $16,000 ............................................................
144,000
Investments:
Inventories
.....................................................
413,838
Inventories ..............................................................................
285,000
Marketable
securities
..............................................................
$ 30,000
Prepaid expenses
(2)................................................................
88,000
Prepaid
expenses
...........................................
83,259
LandTotal
heldcurrent
for saleassets
...................................................................
25,000
..........................................................
722,000
current
assets ...................................
BondTotal
sinking
fund ..................................................................
15,000 1,594,927
Property,
plant,
and equipment:
Total
investments
.............................................................
70,000
Machinery
and
equipment
.......................................................
$320,000
Investments:
Property,
plant, and equipment:
Less: Accumulated
depreciation ..............................................
(110,000)
LandNet
.......................................................................................
65,000
Long-term
receivables
...................................
110,800
property,
plant, and equipment
..................................
210,000
Buildings ................................................................................
420,000
Other
assets:..............................................................................
Equipment
110,000
Property
and equipment (net)...........................
621,040
Prepaid expenses
60,000
595,000
Total
assets
...................................................................
$992,000
Total assetsdepreciation
............................................
Less: Accumulated
..............................................
(160,000) $2,326,767
Net property, plant, andLiabilities
equipmentand
..................................
435,000
Shareholders' Equity
Intangible assets:
Patents ....................................................................................
10,000
Current
Accountsliabilities:
payable ...................................................................
$ 60,000
Total
assets
......................................................................
$894,000
Notes payable
payable
and short-term debt .................
$ 31,116
Interest
......................................................................
20,000
Liabilities
and
Shareholders'
Equity
Unearned
revenues
..................................................................
80,000
Accounts payable ...........................................
59,072
Current
liabilities:
Taxes payable .........................................................................
30,000
Accrued
liabilities
...........................................
421,772
Accounts
payable
...................................................................
$ 40,000
75,000
Note payable
..........................................................................
Other
current
liabilities
...................................
181,604
Interest
payable
......................................................................
20,000
Current maturities of long-term debt .......................................
NoteTotal
payable
..........................................................................
30,000
current
liabilities
...............................
693,564
Total
current
liabilities
.....................................................
250,000
10,000
Total current liabilities .....................................................
135,000
Notes payable
.........................................................................
140,000
Long-term
debt
and deferred taxes ..................
262,576
Notes payable .........................................................................
$ 90,000
Common stock, no
par value;
800,000 shares
Shareholders
equity
.........................................
Bonds payable ........................................................................
240,000 1,370,627
authorized; 400,000 shares issued and outstanding .............
400,000
Total
liabilities
and.................................................
shareholders equity
$2,326,767
Total
long-term
liabilities
330,000
Retained
earnings
...................................................................
202,000
Shareholders
equity:
Total shareholders
equity .................................................
Common
stock,
no parand
value;
500,000 shares
Total
liabilities
shareholders
equity .......................
Retained earnings ...................................................................
Total shareholders equity .................................................
Total liabilities
and shareholders equity .......................
The McGraw-Hill Companies,
Inc., 2013
336
300,000
129,000
602,000
$992,000
429,000
$894,000
(1) Includes $30,000 in U.S. treasury bills.

(2) Excludes $60,000 in prepaid rent for the second year on the building lease.
Problem 35
EXCELL COMPANY
(1) Includes $18,000 in U.S. treasury
bills.
Problem 36
Balance Sheet
At June 30, 2013
Assets
Current assets:
Cash and cash equivalents (1) ................................................
Short-term investments ...........................................................
Accounts receivable, net of allowance for uncollectible
accounts of $15,000 ............................................................
Interest receivable ...................................................................
Prepaid expenses ....................................................................
Total current assets ..........................................................
Investments:
Note receivable .......................................................................
Land held for sale ...................................................................
Land .......................................................................................
Buildings ................................................................................
Equipment ..............................................................................
Less: Accumulated depreciation ..............................................
Net property, plant, and equipment ..................................
Total assets ...................................................................
$101,000
47,000
210,000
5,000
32,000
395,000
$ 65,000
25,000
90,000
50,000
320,000
265,000
635,000
(280,000)
355,000
$840,000

Accounts payable ...................................................................
Accrued expenses ...................................................................
Note payable ..........................................................................
$173,000
45,000
50,000
10,000
278,000
Note payable ..........................................................................
Mortgage payable ...................................................................
Total long-term liabilities .................................................
50,000
240,000
Retained earnings ...................................................................
Total liabilities and shareholders equity .......................
100,000
172,000
290,000
272,000
$840,000
Requirement 1

337
VOSBURGH ELECTRONICS CORPORATION

Balance Sheet
Assets
Current assets:
Cash and cash equivalents (1)..........................................
Marketable securities (2)..................................................
Accounts receivable (net) ................................................
Loans to employees .........................................................
Interest receivable ...........................................................
Note receivablecurrent portion ....................................
Inventories .......................................................................
Prepaid expenses .............................................................
Investments:
Marketable securities........................................................
Note receivable ................................................................
Total investments .......................................................
Land ................................................................................
Buildings ..........................................................................
Machinery and equipment ...............................................
Less: Accumulated depreciation ......................................
117,000
132,000
115,000
40,000
12,000
50,000
215,000
16,000
697,000
35,000
200,000
235,000
280,000
1,550,000
637,000
2,467,000
(830,000)
1,637,000
Intangible assets:
Patent ..............................................................................
Franchise .........................................................................
Total intangible assets .............................................
Total assets .............................................................

338
152,000
40,000
192,000
$2,761,000
Problem 36 (continued)
Accounts payable ............................................................
Dividends payable ............................................................
Interest payable ...............................................................
Taxes payable ..................................................................
Unearned revenue (3).......................................................
Total current liabilities ...............................................
$ 189,000
10,000
16,000
40,000
48,000
303,000
Notes payable ..................................................................
Unearned revenue (3).......................................................
Total long-term liabilities ........................................
$ 300,000
12,000
Common stock, no par value; 1,000,000 shares
authorized; 500,000 shares issued and outstanding .....
Total liabilities and shareholders equity .................
2,000,000
146,000
312,000
2,146,000
$2,761,000

339
(1) $67,000 + 50,000 in treasury bills considered a cash equivalent.
(2) $182,000 50,000 in treasury bills considered a cash equivalent.
(3) $60,000 in unearned revenue, 80%, $48,000, current and 20%, $12,000,
long-term.
Requirement 2
Cash equivalentsthe policy used to determine what items are considered to be
cash equivalents.
Accounts receivable, netdisclosure on the face of the statement of the allowance
for uncollectible accounts, if material.
Investmentsinformation about the types of investments and the accounting
method used to value the investments.
Inventoriesdisclosure in Accounting Policies note of the cost method used.
Also, for a manufacturer, note disclosure of the breakout of inventory into raw
materials, work in process, and finished goods.
Property, plant, and equipmentoriginal cost by major category should be
disclosed along with the accumulated depreciation either on the face of the statement or
in a note. Also, the method used to compute depreciation should be disclosed in the
Accounting Policies disclosure note.
Long-term liabilitiesdisclosure in a note of the various debt instruments
comprising long-term liabilities to include information such as payment terms, interest
rates, and collateral pledged as security for the debt.
Problem 37

340
HUBBARD CORPORATION
Balance Sheet
Assets
Current assets:
Cash .......................................................................................
Marketable securities ..............................................................
Accounts receivable (net) .......................................................
Inventories ..............................................................................
Total current assets ..........................................................
Investments:
Marketable securities...............................................................
Land held for sale ...................................................................
Total investments .............................................................
Land (1) .................................................................................
Buildings ................................................................................
Machinery ..............................................................................
Less: Accumulated depreciation ..............................................
Net property, plant, and equipment ..................................
60,000
20,000
120,000
160,000
360,000
40,000
50,000
90,000
Problem 38
130,000
750,000
280,000
1,160,000
(255,000)
905,000
Intangible assets:
Patent .....................................................................................
Total assets ...................................................................
100,000
$1,455,000

Accounts payable ...................................................................
$ 215,000
25,000
240,000
Notes payable .........................................................................
Retained earnings (2) ..............................................................
Total liabilities and shareholders equity .......................
(1)
$250,000
$50,000
in land
held for
sale
$70,000
increase
in land.
(2)
$380,000
$70,000
increase
in land.
475,000
$ 430,000
310,000
740,000
$1,455,000
Solve for missing amounts:

Liabilities Equity = 1.2
$18,000 Equity = 1.2
Equity = $18,000 1.2 = $15,000

341
Beginning retained earnings + Net income Dividends = Ending retained earnings
$4,000
+ 1,560
560
$5,000
Total equity Retained earnings = Common stock

$15,000
5,000
=
$10,000
Assets = Liabilities + Equity
Assets = $18,000 + 15,000 = $33,000
$33,000 all other assets = Patent
$33,000
27,600
= $5,400

342
Problem 39 SANDERSON MANUFACTURING COMPANY

Balance Sheet
($ in 000s, except share data)
Assets
Current assets:
Cash .................................................................................
Short-term investments ...................................................
Accounts receivable, net of $400 allowance for
uncollectible accounts ..................................................
Inventories:
Raw materials and work in process ..............................
Finished goods .............................................................
Prepaid expenses .............................................................
Equipment .......................................................................
Less: Accumulated depreciation ......................................
$ 1,250
3,000
3,100
$ 2,250
6,000
8,250
1,200
16,800
15,000
(4,200)
10,800
Intangible assets:
Patent ...........................................................................
Total assets .............................................................
5,400
$33,000

Accounts payable ............................................................
Interest payable................................................................
Unearned revenue ............................................................
Current maturities of long-term debt ...............................
Total current liabilities ...............................................
$ 5,200
300
1,500
1,000
8,000
Unearned revenue ............................................................
Note payable ....................................................................
Bonds payable .................................................................
Common stock, no par, 400,000 shares authorized,........
250,000 shares issued and outstanding
1,500
3,000
5,500
10,000
10,000
5,000
15,000
$33,000

343
HHD, INC.
Balance Sheet
Assets
Current assets:
Cash
$
...............................................................................................
Investment in stocks
...............................................................................................
Accounts receivable
...............................................................................................
MELODY LANE MUSIC COMPANY
Inventories
...............................................................................................
Balance Sheet
Prepaid insurance
...............................................................................................
.........................................................................................
Assets
Problem 310
150,000
90,000
200,000
225,000
25,000
690,000
Current assets:
Investments:
Cash (1) ..............................................................
Investment in stocks
$ 160,000
Inventories ..........................................................
...............................................................................................
Bond sinking
fund
Prepaid
rent ........................................................ 250,000
...............................................................................................
Total investments
.........................................................................................
$167,000
100,000
3,000
270,000
410,000
Property,Equipment
plant, and equipment:
and furniture ..................................... $ 40,000
Land Less: Accumulated depreciation ......................... 800,000(4,000)
...............................................................................................
36,000
Buildings Net property, plant, and equipment ...............
1,500,000
Total assets .................................................
$306,000
...............................................................................................
Equipment
500,000
...............................................................................................
2,800,000
liabilities:
Less:Current
Accumulated
depreciation
(800,000)
Accounts payable (2) ..........................................
$ 21,000
...............................................................................................
Net
property,
plant,
and
equipment
2,000,000
9,000
.........................................................................................
Loan payable ......................................................

Intangible assets:
100,000
130,000
Patent
110,000
...............................................................................................
Copyright
90,000
Common stock, no par, 100,000 shares
...............................................................................................
20,000 shares issued and
$100,000 200,000
Totalauthorized,
intangible assets
.........................................................................................
outstanding .........................................................
Total
assets earnings (3) ..........................................
$3,300,000
Retained
76,000
......................................................................................

Total liabilities
and shareholders
equity
.....
Liabilities
and Shareholders'
Equity
Accounts payable .................................................................
Notes payable .......................................................................
Taxes payable .......................................................................
Total current liabilities ...................................................
Notes payable .......................................................................
Bonds payable ......................................................................
The McGraw-Hill
2013 ...............................................
TotalCompanies,
long-termInc.,
liabilities
344 Shareholders equity:
Common stock, no par, 500,000 shares authorized,
200,000 shares issued and outstanding ...............................
Retained earnings .................................................................
176,000
$306,000
100,000
150,000
60,000
310,000
90,000
1,100,000
1,190,000
1,000,000
800,000
(1) Cash receipts of $560,000 less cash disbursements of $393,000.

(2) $20,000 owed to suppliers + $1,000 owed to utility company.
(3) Net income for the year.
CASES
Communication Case 31
IBM manufactures and sells personal and mainframe computers. The computers
included as current assets in the balance sheet for the company represent the cost of
inventory available for sale. In addition, IBM uses computers in its operations. The
cost of these computers is included in the property, plant, and equipment category in
the balance sheet.
Marketable securities could be classified as either current or noncurrent assets
depending on the intent of management. If management intends to sell the securities in
the next year or operating cycle, they are classified as current assets. If management
intends to hold the securities beyond the coming year or operating cycle, they are
classified as noncurrent assets.
Analysis Case 32Requirement 1

Current assets include cash and other assets that are reasonably expected to be
converted to cash or consumed during one year, or within the normal operating cycle of
the business if the operating cycle is longer than one year. Current liabilities include all
liabilities that are scheduled to be liquidated within one year or the operating cycle,
whichever is longer, except those that management intends to refinance on a long-term
basis.
Therefore, key factors determining classification are the nature of the asset or
liability, managements intent, and the length of the operating cycle.
Requirement 2
Assets:
Cash
Normally classified as current, however, if restriction

prohibits use of the cash, could be classified as noncurrent.
Receivables
Depends on the expected date of collection.
Marketable
securities
Depends on when management intends to sell the securities.
Prepaid expenses
Depends on the period of time prepaid.
Liabilities:

345
Notes payable
Depends on scheduled payment date and managements

intent to pay or refinance.
Unearned revenue
Depends on the period the revenue will be earned.

Communication Case 33 The critical question that student groups should
address is whether the cost of the egg-producing
flock should be classified as inventory or as
property, plant, and equipment. There is no right or wrong answer. The process of
developing the proposed solutions will likely be more beneficial than the solutions
themselves. Students should benefit from participating in the process, interacting first
with other group members, then with the class as a whole.
Solutions should address the following issues:
1. The definitions of inventory and property, plant, and equipment.
The definition of inventory according to GAAP [FASB ASC Master Glossary] is
goods awaiting sale, goods in the course of production, and goods to be consumed
directly in production. The chickens certainly represent goods awaiting sale, since
they will eventually be sold to soup companies. However, they also represent property,
plant, and equipment, since they are used in the production of productthe eggs.
2. The definition of a current asset.
GAAP [FASB ASC Master Glossary and FASB ASC 21010451 through 4:
Balance SheetOverallOther Presentation MattersGeneralClassification of Current
Assets] provides the following definition of a current asset:
Current assets is used to designate cash and
other assets or resources commonly identified as those
which are reasonably expected to be realized in cash or sold
or consumed during the normal operating cycle of the
business.
GAAP [FASB ASC 21010453] also states that a one-year time period is to be
used where there are several operating cycles occurring within a year. In this case, it
could be argued that the operating cycle is two years, since the chickens are not sold
until after the laying life and, therefore, the cost of the flock should be classified as a
current asset. However, if the chickens are considered productive assets, then the
concept of an operating cycle is not relevant. According to this argument, the chickens
should be classified as a noncurrent asset, that is, a producing asset, and not a saleable
asset. It appears that the primary benefits of the chickens come from the sale of eggs,
not the sale of the chickens themselves.

346
Case 33 (concluded)
3. Regardless of the classification of the cost of the chickens, the cost capitalized
when the chickens begin to lay eggs must be depreciated down to an estimated salvage
value at the end of the egg-laying life. This is necessary to properly match expenses
with revenues.
(Industry practice is to classify the costs of the egg-producing flock as inventory in
the current asset section of the balance sheet, but to depreciate the inventory down to
estimated salvage value.)
It is important that each student actively participate in the process. Domination by
one or two individuals should be discouraged. Students should be encouraged to
contribute to the group discussion by (a) offering information on relevant issues, and (b)
clarifying or modifying ideas already expressed, or (c) suggesting alternative direction.
IFRS Case 34Requirement 1

A major difference is the format of Vodafones balance sheets (statements of
financial position). Under U.S. GAAP, we present current assets and liabilities before
noncurrent assets and liabilities. IAS No. 1 doesnt prescribe the format of the balance
sheet, but balance sheets prepared using IFRS often report noncurrent items first.
Vodafones balance sheets present noncurrent assets and liabilities before current assets
and liabilities and also present equity before liabilities.
Another difference is the order of the individual line items within categories. For
example, in the United States, current assets generally are listed in order of liquidity,
with cash and cash equivalents listed first, followed by short-term investments,
accounts receivable, and then inventories. Vodafones current assets appear to be listed
in the reverse order of liquidity.
There also are differences in terminology. The term equity in Vodafones
balance sheets is titled shareholders equity or stockholders equity in a U.S. balance
sheet. The term provisions is not generally seen in U.S. balance sheets. (See the
solution to Requirement 2 for a discussion of this term.)
Requirement 2
The dictionary defines the term provision as a measure taken beforehand to deal
with a need or contingency. This indicates that Vodafones provisions liabilities are
contingent. A loss contingency is defined in Chapter 13 as an uncertain situation

347
involving potential loss depending on whether some future event occurs. Vodafones
annual report includes a Provisions disclosure note describing these liabilities. They
include liabilities for pending legal actions against the company, restructuring
obligations, and asset retirement obligations.
Judgment Case 35
DEFICIENCIES:
1. Accounts receivableif material, the allowance for uncollectible accounts

should be disclosed.
2. Note receivableonly the interest receivable of $3,000 should be classified as
a current asset. The $50,000 note receivable should be classified in the
noncurrent investments category.
3. Inventoriesthe method used to cost inventory should be disclosed in a note.
4. Investmentsshould be classified in the noncurrent investments category. Also,
disclosures include information about the types of investments and the
accounting method used to value the investments.
5. Prepaid expensesin the absence of information to the contrary, should be
classified as a current asset.
6. Landshould be classified in the noncurrent investments category.
7. Equipment, netshould be classified in the property, plant, and equipment
category. Original cost should be disclosed along with the accumulated
depreciation to arrive at the net amount. Also, the method used to compute
depreciation should be disclosed in a note.
8. Patentshould be classified in the intangible assets category of noncurrent
assets.
9. Note payable$20,000, the next installment, should be classified as a current
liability as current maturities of long-term debt. Also, note disclosure is
required for the note and bonds payable that provides information such as
payment terms, interest rates, and collateral pledged as security for the debt.
10. Interest payableshould be classified as a current liability.
11. Common stockthe par value, if any, and the number of shares authorized,
issued and outstanding should be disclosed.
Accounts receivable, netdisclosure on the face of the
Judgment Case 36statement of the allowance for uncollectible accounts, if
material.
Inventoriesdisclosure in Accounting Policies note of the cost method used.
Also, for a manufacturer, note disclosure of the breakout of inventory into raw
materials, work in process, and finished goods.
348
Investmentsinformation about the types of investments and the accounting

method used to value the investments.
Property, plant, and equipmentoriginal cost by major category should be
disclosed along with the accumulated depreciation either on the face of the statement or
in a note. Also, the method used to compute depreciation should be disclosed in the
Accounting Policies disclosure note.
Long-term liabilitiesdisclosure in a note of the various debt instruments
comprising long-term liabilities to include information such as payment terms, interest
rates, and collateral pledged as security for the debt.
Common stockdisclosure on the face of the statement of par value, if any, and
the number of shares authorized, issued and outstanding.
Real World Case 37Requirement 1

The asset classifications are (1) Current assets, (2) Property and equipment, (3)
Property under capital leases, (4) Goodwill, and (5) Other assets and deferred charges.
Requirement 2
a. Total assets
b. Current assets
c. Current liabilities
d. Total shareholders' equity
e. Retained earnings
f. Inventories
=
=
=
=
=
=
$180,663 million
$51,893 million
$58,484 million
$71,247 million
$63,967 million
$36,318 million
Requirement 3
The par value is $.10 per share. 11,000 million shares are authorized and 3,516
million shares are issued and outstanding.
Requirement 4
Current ratio = Current assets divided by Current liabilities
Current ratio = $51,893 $58,484 = .89
Requirement 5
a.
b.
The company values inventories at the lower of cost or market

determined primarily by the retail method of accounting, using the
last-in, first-out (LIFO) method for U.S. inventories and the first-in,
first-out (FIFO) method for foreign operations.
All highly liquid investments with a maturity of three months or less
when purchased are considered to be cash equivalents.

349
1.
This is a significant event occurring after the end of the

Judgment Case 38
fiscal year but prior to the issuance of the financial
statements. Details of the merger should be disclosed
in a note to the financial statements.
2. This is a significant event occurring after the end of the fiscal year but prior to the
issuance of the financial statements. Details of the issuance of the new debt
should be described in a note to the financial statements.
3. This is a significant event occurring after the end of the fiscal year but prior to the
issuance of the financial statements. The event should be described in a note to
the financial statements along with the amount of uninsured damage.
Research Case 39Requirement 1

Generally accepted accounting principles require the disclosure of related-party
transactions. The required information is outlined in FASB ASC 85010501:
Related Party DisclosuresOverallDisclosure.
Requirement 2
When related-party transactions occur, companies must disclose the nature of the
relationship(s) involved, provide a description of the transactions, and report the dollar
amounts of the transactions and any amounts due from or to related parties.
Requirement 3
The related-party transactions disclosure note describes transactions with limited
partnerships whose general partners managing member is a senior officer of Enron.
The transactions include various hedging and derivative transactions with the related
party, as well as the sale of inventory and other assets to the related party.
Requirement 4
The potential problem with related-party transactions is that their economic
substance may differ from their legal form. One of Enrons disclosed transactions
involved the sale of dark fiber inventory to the related party in exchange for $30 million
in cash and a $70 million note receivable. Enron recognized gross margin on the sale
of $67 million. Is the $100 million sales price a proper representation of the sales price
of the inventory in a normal transaction to an unrelated party? Is the interest rate
charged by Enron on the note a fair interest rate? If the answer to these questions is no,
then income (wealth) has been transferred from one party to the other, to the detriment
of the shareholders of one of the entities and the benefit of the other.

350
Real World Case 310
Requirement 3
a. Note 16 reports the following subsequent event:

In February 2011, we entered into an agreement to acquire HauteLook, Inc., an
online private sale retailer, for $180 in Nordstrom stock, with a portion subject to
ongoing vesting requirements. In addition, the agreement provides for additional
payments of up to $90 in Nordstrom stock under a three-year earn-out provision
which is subject to HauteLooks performance and vesting requirements for
HauteLooks existing management team. The transaction is expected to close in
the first quarter of 2011 and is subject to customary closing conditions, including
regulatory and HauteLook shareholder approvals.
b. The company's auditor was Deloitte & Touche LLP. The firm rendered an
unqualified opinion on the company's financial statements.
Requirement 4
a. Michael G. Koppel is listed as EVP (Executive Vice-president) and CFO (Chief
Financial Officer.
b. The annual salary for Mr. Koppel was $518,722.
Comparative income for the first year of operations
Judgment Case 311resulting from the two alternative financing choices is
illustrated below.
DEBT versus EQUITY
Comparative Income for Two Financing Alternatives
Income before interest and taxes

Less: Interest
Income before taxes
Less: Income taxes
Net Income
Alternative 1
$5,000,000
-05,000,000
(2,500,000)**
$2,500,000
Alternative 2
$5,000,000
(1,600,000)*
3,400,000
(1,700,000)**
$1,700,000
$2,500,000
$1,700,000
* 8% x $20,000,000.
** 50% x Income before taxes.
Return on investment

351
=5.67%
= 5%
(Net income investment)
$50,000,000
$30,000,000
We can see that Alternative 1 generated a higher net income. However, the return
on shareholders investment is actually higher for Alternative 2.
Alternative 2 generated a higher return for each dollar invested by shareholders.
This was made possible because the corporation was able to generate income on
borrowed funds at a higher rate than the cost of the debt. This represents financial
leverage. However, alternative 2 also results in a riskier capital structure. The debt in
Alternative 2 requires fixed payments of interest and principal to be made. The
company's income before interest and income taxes could drop to zero under
Alternative 1 and the company would still be solvent (i.e., able to pay its debts). Under
Alternative 2, however, if income before interest and taxes drops below the required
interest payments of $1,600,000, the company could become insolvent and eventually
go bankrupt.
The objective of this case is to motivate students to
Analysis Case 312obtain hands-on familiarity with an actual annual report. You
may wish to provide students with multiple copies of the
same annual report and compare responses. Another
approach is to divide the class into teams who evaluate reports from a group
perspective.
The objectives of this case are to motivate students to
Analysis Case 313obtain hands-on familiarity with an actual annual report and
to apply the techniques learned in the chapter. You may wish
to provide students with multiple copies of the same annual
reports and compare responses. Another approach is to divide the class into teams who
evaluate reports from a group perspective.

352

The balance sheet includes seven asset classifications: Current assets; Property,
plant, and equipment, net; Investments; Long-term financing receivables, net;
Goodwill; Purchased intangible assets, net; and Other noncurrent assets; and four
liability classifications: Current liabilities; Long-term debt; Long-term deferred services
revenue; and Other noncurrent liabilities.
Requirement 2
These assets are shown as current because the company intends to convert them to
cash in the next year or operating cycle.
Requirement 3
Deferred services revenue, sometimes called unearned revenue, represents cash
received from customers in advance of providing services.
Requirement 4
Disclosure notes explain or elaborate upon the data presented in the financial
statements themselves. They must include certain specific notes such as a summary of
significant accounting policies, descriptions of subsequent events, and related thirdparty transactions, but many notes are company specific. Actually, any explanation that
contributes to investors and creditors understanding of the results of operations,
financial position, or cash flows of the company should be included.
Requirement 5
Straight-line.

353
Case 314 (concluded)

Requirement 6
Dell reported the completion of an acquisition in its subsequent events disclosure
note:
In February 2011, Dell completed its acquisitions of Compellent Technologies,
Inc. (Compellent), a provider of virtual storage solutions for enterprise and cloud
computing environments, and SecureWorks Inc. (SecureWorks), a global provider of
information security service, for approximately $938 million and $612 million,
respectively. Both Compellent and SecureWorks will be integrated into Dells
Commercial segments. Because the acquisitions have recently closed, Dell has not
completed the purchase accounting and initial purchase price allocation for these
acquisitions. Dell expects to complete the purchase accounting and initial purchase
price allocations in the first quarter of fiscal 2012.
The acquisition of MessageOne was identified and acknowledged by Dells
board of directors as a related-party transaction because Michael Dell and his family
held indirect ownership interests in MessageOne. Consequently, Dells board directed
management to implement a series of measures designed to ensure that the transaction
was considered, analyzed, negotiated, and approved objectively and independent of any
control or influence from the related parties.

Segment disclosures assist in analyzing and understanding financial statements by
permitting better assessment of past performance and future prospects. Disaggregated
information provides more precise details of the uncertainties surrounding the timing
and the amount of expected cash flows, because the various segments may have
different rates of profitability, degrees and types of risk, opportunities for growth, and
future capital demands.
Requirement 2
An operating segment is a component of an enterprise:
1. That engages in business activities from which it may earn revenues and incur
expenses (including revenues and expenses relating to transactions with other
components of the same enterprise).
2. Whose operating results are regularly reviewed by the enterprise's chief
operating decision maker to make decisions about resources to be allocated to
the segment and assess its performance.
354
3. For which discrete financial information is available.

Requirement 3
For areas determined to be reportable operating segments, the following
disclosures are required:
1. General information about the operating segment.
2. Information about segment profit or loss, including certain revenues and
expenses included in reported segment profit or loss, segment assets, and the
basis of measurement.
3. Reconciliations of the totals of segment revenues, reported profit or loss,
assets, and other significant items to corresponding enterprise amounts.
4. Interim period information.
Requirement 4
If Levens Co. prepares its segment disclosure according to IFRS, in addition to
revenues, profit or loss, and assets, IFRS also require the disclosure of total liabilities
for each of the reportable segments.
Discussion should include these elements.
Ethics Case 316
Facts:
The impact of following the controller's suggestions would be to obscure financial
information by aggregating the financial data of segment operations and investments.
Aggregation of data makes projections of future performance for African or European
segments difficult and does not reveal relative investments for each segment. GAAP
suggests that reportable segments are those for whom financial data is available and
whose results are regularly reviewed by company management in assessing
performance. The data for South Africa, Egypt, France, and Denmark are available and
most likely reviewed for performance purposes by the controller and higher
management levels.
Ethical Dilemma:
Should you, as staff accountant, challenge the controller's combination of segments
or follow the controller's suggestion to obscure financial information by aggregating the
financial data of segment operations and investments?
Who is affected?
You, as a staff accountant
Controller and other managers
Other employees
Shareholders

355
Potential shareholders
Creditors
Financial analysts
Auditors
Who benefits and who is injured:
Company management may benefit from aggregating the African and European
data by attracting more investors to their company and obtaining more loans from
creditors than would be the case with more complete disclosure regarding the South
African segment. Injured parties include current and future investors and creditors with
economic, social, and political concerns regarding Africa and Europe. If investors and
creditors later learn about undisclosed segment operations that prove unprofitable or
violate their value systems, they may take action against McCarver-Lynn.
Under U.S. GAAP, we present current assets and
Air FranceKLM Case liabilities
before
noncurrent
assets and liabilities. IAS No. 1 doesnt prescribe the
format
of
the
balance
sheet, but balance sheets prepared using IFRS often report noncurrent items first. AFs
balance sheet presents noncurrent assets and liabilities before current assets and
liabilities and also presents equity before liabilities.
Another difference is the order of the individual line items within categories. For
example, in the United States, current assets generally are listed in order of liquidity,
with cash and cash equivalents listed first, followed by short-term investments,
accounts receivable, and then inventories. AFs current assets appear to be listed in the
reverse order of liquidity.

356

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Chapter 3

The Balance Sheet and Financial Disclosures

The McGraw-Hill Companies, Inc., 2013

Intermediate Accounting, 7/e

QUESTIONS FOR REVIEW OF KEY TOPICS

Solutions Manual, Vol.1, Chapter 3

The McGraw-Hill Companies, Inc., 2013

Answers to Questions (continued)

The McGraw-Hill Companies, Inc., 2013

Intermediate Accounting, 7/e

Answers to Questions (continued)

Solutions Manual, Vol.1, Chapter 3

The McGraw-Hill Companies, Inc., 2013

Answers to Questions (continued)

Times interest earned ratio

Net income + interest + taxes

The McGraw-Hill Companies, Inc., 2013

Intermediate Accounting, 7/e

Answers to Questions (concluded)

Solutions Manual, Vol.1, Chapter 3

The McGraw-Hill Companies, Inc., 2013

$16,000 + 11,000 + 25,000 = $52,000

Assets: $ 52,000 current assets

The McGraw-Hill Companies, Inc., 2013

$ 24,000 current liabilities

Intermediate Accounting, 7/e

Liabilities and Shareholders' Equity

The McGraw-Hill Companies, Inc., 2013

Liabilities and Shareholders' Equity

The $30,000 should be classified as a noncurrent asset, under the

The McGraw-Hill Companies, Inc., 2013

Intermediate Accounting, 7/e

$10,000, next years installment, should be classified as a current liability,

Current assets Cash and cash equivalents Accounts

Total assets Current assets = Property, plant, and equipment

Solutions Manual, Vol.1, Chapter 3

The McGraw-Hill Companies, Inc., 2013

($55,000 + 39,000 + 45,000 + 15,000) ($12,000 + 2,000 + 10,000)

Brief Exercise 311

Acid-test ratio = (Cash + Short-term investments

1.5 = ($20,000 + 0 + 40,000) Current liabilities

Intermediate Accounting, 7/e

1. Total current assets

Accrued interest payable

Solutions Manual, Vol.1, Chapter 3

The McGraw-Hill Companies, Inc., 2013

Total current assets ........................................

Less: Accumulated depreciation .........................

Net property, plant, and equipment ...........................

Liabilities and Shareholders' Equity

Retained earnings ............................................................

Intermediate Accounting, 7/e

Solutions Manual, Vol.1, Chapter 3

The McGraw-Hill Companies, Inc., 2013

LOS GATOS CORPORATION

See calculations below the balance sheet.

The McGraw-Hill Companies, Inc., 2013

Intermediate Accounting, 7/e

KORVER SUPPLY COMPANY

Liabilities and Shareholders' Equity

Solutions Manual, Vol.1, Chapter 3

The McGraw-Hill Companies, Inc., 2013