Exam 17: Understanding Corporate Annual Reports: Basic Financial Statements

Comparison of a company's financial ratios with general rules of thumb or best- practices ratios

The market method is the method of accounting for investments in equity securities used when one company owns less than 20% of the common stock of another company.

Constant dollars are defined as:

Below is the balance sheet for Triple H Company: Triple H Company Balance Sheet Dec ember $31 _ {, }$ 20X6 20X5 Current as sets: Cash \ 380 \ 242 Accounts receivable 430 194 Inventory 238 388 Prep aid insur ance Total current ass ets \ 1,080 \ 900 Long-term as sets: Fixed assets \ 406 \ 452 Less: Accumulated depreciation Total long-term assets \ 134 \ 224 Total assets \ 1.214 \ 1.124 Current liabilities: Accounts pay able \ 176 \ 152 Wages payable Total current liabilities \ 214 \ 184 Long-term liabilities: Notes payable Total liabilities \ Owners' equity: Common stock \ 190 \ 160 Retained income Total owner' equity \ 580 \ 520 Total liabilities and owners' \ 1,214 \ 1,124 equity Triple H Company's prepaid insurance increased (decreased) by:

The following are the income statements and balance sheets for Coors Company: 20X2 Sales (onlycredit sales) \ 1,606.0 Less cost of goods sold Gross profit \ 544.0 Less operating expenses 322.0 Operating income \ 222.0 Less other expense: Interest 9.6 Income before tax \ 212.4 Less income tax expense 85.0 Net income \1 27.4 20X2 20X1 20X2 20X1 Current assets: Current liab: Cash \ 36 \ 38 Accts payable \ 98 \ 64 Accts receivable 180 144 W ages p ayable 18 16 Inventory 120 100 Taxes payable 28 4 Prep aid rent 20 24 Current portion Total current as sets Long-term as sets: \ 356 \ 306 of long- term debt Total current Fixed ass ets \ 320 \ 316 liabilities \ 174 \ 90 Accum. deprec. (206) (180) Long-term liabilities 66 92 Total long- term \ 114 \ 136 T otal liabilities \ 240 \ 182 assets Owners' equity: Common stock, \ 5 par \ 80 \ 80 Retained income T otal owners' equity \ 230 \ 260 T ot al liab. and Total assets \ 470 \ 442 own. equity \ 470 \ 442 December 31 market price per share: $120 $106 The return on stockholders' equity for Coors Company in 20X2 is:

Financial statements are helpful to predict the future performance of a company for all of the following reasons except:

Total liabilities / stockholders' equity

The current cost/constant dollars method adjusts historical costs using:

An index used to approximate the current costs of particular assets or types of assets

When a company is acquired and becomes a subsidiary of another company, the books of the subsidiary are unaffected on the date of the acquisition.

Current assets / current liabilities

The following are the income statements and balance sheets for Coors Company: 20X2 Sales (only credit sales) \ 1,606.0 Less cost of goods sold Gross profit \ 544.0 Less operating expenses Operating income \ 222.0 Less other expense: Interest Income before tax \ 212.4 Less income tax expens e Net income \ 127.4 20X2 20X1 20X2 20X1 Current assets: Current liab: Cash \ 36 \ 38 Accts payable \ 98 \ 64 Accts receivable 180 144 W ages p ayable 18 16 Inventory 120 100 Taxes payable 28 4 Prep aid rent 20 24 Current portion Total current as sets Long-term as sets: \ 356 \ 306 of long- term debt Total current Fixed ass ets \ 320 \ 316 liabilities \ 174 \ 90 Accum. deprec. (206) (180) Long-term liabilities 66 92 Total long- term \ 114 \ 136 T otal liabilities \ 240 \ 182 assets Owners' equity: Common stock, \ 5 par \ 80 \ 80 Retained income T otal owners' equity \ 230 \ 260 T ot al liab. and Total assets \ 470 \ 442 own. equity \ 470 \ 442 December 31 market price per share: $120 $106 The price- earnings ratio for Coors Company in 20X2 is:

Liquidity focuses on whether there are sufficient current assets to satisfy current liabilities as they become due.

Vince Company purchased as a long- term investment common stock of Gill Company. During the current year Gill Company earned $4,000,000 and paid dividends of $1,000,000. Assume that Vince Company owns 40% of Gill Company. Gill Company's net income will affect Vince Company by:

The concept that income emerges after investors recover their financial resources

Dividends per common share / market price per common share

The following are the income statements and balance sheets for Coors Company: 20X2 Sales (only credit sales) \ 1,606.0 Less cost of goods sold Gross profit \ 544.0 Less operating expenses Operatingincome \ 222.0 Less other expense: Interest Income before tax \ 212.4 Less income tax expense \8 5.0 20X2 Sales (only credit sales) \ 1,606.0 Less cost of goods sold Gross profit \ 544.0 Less operating expenses Operatingincome \ 222.0 Less other expense: Interest Income before tax \ 212.4 Less income tax expense \8 5.0 Net income $\quad\quad\quad\quad\$ 127.4$ 20X2 20X1 20X2 20X1 Current assets: Current liab: Cash \ 36 \ 38 Accts payable \ 98 \ 64 Accts receivable 180 144 W ages p ayable 18 16 Inventory 120 100 Taxes payable 28 4 Prep aid rent 20 24 Current portion Total current as sets Long-term as sets: \ 356 \ 306 of long- term debt Total current Fixed ass ets \ 320 \ 316 liabilities \ 174 \ 90 Accum. deprec. (206) (180) Long-term liabilities 66 92 Total long- term \ 114 \ 136 T otal liabilities \ 240 \ 182 assets Owners' equity: Common stock, \ 5 par \ 80 \ 80 Retained income T otal owners' equity \ 230 \ 260 T ot al liab. and Total assets \ 470 \ 442 own. equity \ 470 \ 442 $\text { December } 31 \text { market price per share: } \quad \$ 120 \quad \$ 106$ The dividend- payout ratio for Coors Company in 20X2 is:

Brian Company purchased as a long- term investment 10% of the outstanding shares of Wilson Company. At the end of the year the market value of the shares had increased. The increase in market value of Wilson Company shares will affect Brian Company by:

The following are the income statements and balance sheets for Coors Company: 20X2 Sales (only credit sales) \ 1,606.0 Less cost of goods sold Gross profit \ 544.0 Less operating expenses Operating income \ 222.0 Less other expense: Interest Income before tax \ 212.4 Less income tax expens e Net income \ 127.4 Curpentacsete: 20\times2 20\times1 Curpentliah. 20\times2 20\times1 C ash \ 36 \ 38 Accts payable \ 98 \ 64 Accts receivable 180 144 W ages payable 18 16 Inventory 120 100 Taxes payable 28 4 Prep aid rent Current portion Total current as sets \ 356 \ 306 of long-term debt 30 6 Long-term assets: Total current Fixed ass ets \ 320 \ 316 liabilities \ 174 \ 90 Accum. deprec. (206) (180) Long-term liabilities Total long- term \ 114 \ 136 Total liabilities \ 240 \ 182 assets Owners' equity: Common stock, \ 5 par \ 80 \ 80 Retained income Total owners' equity \ 230 \ 260 Total liab. and own. equity \ 470 \ 442 Total ass ets \ 470 \ 442 December 31 market price per share: \ 120 \ 106 The average collection period in days for Coors Company in 20X2 is:

Complaints regarding the use of historical cost accounting include all of the following except: