Exam 17: Understanding Corporate Annual Reports: Basic Financial Statements

The measurement method that uses current costs and nominal dollars

Presented below are the balance sheets of Monty Company and Hall Company at January 1, 20X6: Hall Company Balance Monty Company Balance Sheet Sheet January 1,20X6 January 1,20X6 Cash \ 100 Cash \ 400 Net fixed assets Net fixed assets Total assets \ 500 Total assets \ 780 Accounts payable Long- \ 20 Accounts payable \ 120 termbonds Long-termbonds payable 220 payable 280 Stockholders' equity 260 Stockholders' equity 380 Total liabilities and Total liabilities and stockholders' equity \5 00 stockholders' equity \7 80 On January 1, 20X6, Monty Company acquired 100% of the outstanding common stock of Hall Company for $260 in cash. The net income for 20X6 was $30 and $40 for Hall Company and Monty Company, respectively. None of the income resulted from intercompany sales. The net income on the consolidated income statement is:

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 accounts receivable increased (decreased) by:

Rock Company acquired 40% of the voting stock of Hudson Company for $40 million. In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million. At the end of the year the market value of Rock Company's investment in Hudson Company is $44 million. What accounts would be affected on Rock Company's books at the time they acquire Hudson Company's stock and by how much?

On January 1, 20X6, Parent Company acquired 80% of the outstanding shares of Subsidiary Company. At the time of the acquisition, Parent Company's current and long- term liabilities were $30 and $180, respectively. Subsidiary Company's current and long- term liabilities were $80 and $200, respectively. The balance in liabilities on the consolidated balance sheet immediately after the acquisition of Subsidiary Company's stock is:

A company owned by a parent company that owns more than 50% of its stock

Which of the following statements is incorrect?

Eliminating entries are:

Minority interests affect only the balance sheet of the consolidated financial statements.

Marketable securities can be further classified as:

The evaluation of operating performance should exclude extraordinary items.

Which of the following statement(s) describe the principal reason(s) why investors and creditors use financial statement analysis? 1. To assess the risks associated with expected returns 2) To establish recommended dividend and interest payments 3) To evaluate top and middle level management 4) To predict the amount of expected returns

Presented below is the income statement for Nicklaus Company. Sales (only credit sales) \ 1,606 Less: Cost of goods sold Gross profit \ 544.0 Less: Operating expenses Operating income \ 222.0 Less other expens e: Interest Income before tax \ 212.4 Less: Income tax expense Net income \ 127.4 The gross profit rate for Nicklaus Company is:

Intercompany eliminations avoid double counting on consolidated financial statements

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 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 debt- to- equity ratio for Coors Company in 20X2 is:

Provided below is the December 31, 20X6, balance sheet of Neighbor Company: Neighbor C ompany Balance Sheet December 31, 20X6 Current assets: Current liabilities: Cash \ 18 Accounts payable \ 44 Accounts receivable 36 Taxes payable 14 Inventory Total current liabilities \ 58 Total current as sets \ 208 Long-term liabilities 60 Long-term assets: Total liabilities \1 18 Fixed assets \ 322 Stockholders' equity: Acc depreciation Common stock \ 120 Total long- term ass ets \ 186 Retained income Total stockholders' equity \2 76 Total assets \3 94 Total liabilities and stock \3 94 equity Required: Prepare a common- size balance sheet.

The following information pertains to Barnum Company: Balance Sheet At December $31,20 \times 2$ Current assets \ 18,700 Current liabilities \ 7,600 Long- term ass ets 29,700 Long-term liabilities 13,250 Stockholders' equity Total assets \4 8,400 Total liabilities and s.e. \4 8,400 Barnum Company Income Statement For the Year Ended Decemb er 31, $20 \times 2$ Sales \ 106,950 Less: Cost of goods sold (61,800) Gross profit \ 45,150 Less: Operating expenses Operating income \ 13,450 Less other expenses: interest Income before taxes \ 12,150 Less: Income tax expense \ 4,850) Net income \ 7,300 There were 1,000 shares of common stock outstanding with a market value of $75 as of December 31, 20X2. Dividends declared and paid was $5 per share. The dividend payout ratio for 20X2 is:

The financial maintenance concept focuses on recovering the investor's original capital.

Rock Company acquired 40% of the voting stock of Hudson Company for $40 million. In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million. At the end of the year the market value of Rock Company's investment in Hudson Company is $44 million. What accounts would be affected on Rock Company's books at the time Hudson Company paid its dividends and by how much?

For each category, give two examples of financial statement ratios that fit within that category. 1. Short- term liquidity ratios 2. Long- term solvency ratios 3. Profitability ratios 4. Market price and dividend ratios