Chapter 5: 1 (page 237)
How does information from the balance sheet help users of the financial statements?
Financial capacity and financial flexibility can be determined using the company’s balance sheet.
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Keyser Beverage Company reported the following items in the most recent year.
Net income $40,000
Dividends paid 5,000
Increase in accounts receivable 10,000
Increase in accounts payable 7,000
Purchase of equipment (capital expenditure) 8,000
Depreciation expense 4,000
Issue of notes payable 20,000
Compute net cash provided by operating activities, the net change in cash during the year, and free cash flow.
(Identifying Balance Sheet Deficiencies) The assets of Fonzarelli Corporation are presented below (000s omitted).
FONZARELLI CORPORATION | ||
BALANCE SHEET (PARTIAL) | ||
DECEMBER 31, 2018 | ||
Assets | ||
Cash | \(100,000 | |
Unclaimed payroll check | 27,500 | |
Debt investment (trading) (fair value \)30,000) at cost | 37,000 | |
Accounts receivables (less bad debt reserves) | 75,000 | |
Inventory—at lower-of-cost (determined by the next-in, first-out method) or net realizable value | 240,000 | |
Total current assets | 479,500 | |
Tangible assets | ||
Land (less accumulated depreciation) | 80,000 | |
Building and equipment | \(800,000 | |
Less: Accumulated depreciation | (250,000) | 550,000 |
Net tangible assets | 630,000 | |
Long-term investment | ||
Stock and bonds | 100,000 | |
Treasury stock | 70,000 | |
Total long-term investment | 170,000 | |
Other assets | ||
Discount on bonds payable | 19,400 | |
Sinking funds | 975,000 | |
Total other assets | 994,400 | |
Total assets | \)2,273,900 |
Instructions
Indicate the deficiencies, if any, in the foregoing presentation of Fonzarelli Corporation’s assets.
Case 3: Deere & Company Presented below is the SEC-mandated disclosure of contractual obligations provided by Deere & Company in a recent annual report. Deere & Company reported current assets of \(50,060 and total current liabilities of \)21,394 at year-end. (All dollars are in millions.)
Aggregate Contractual Obligations
The payment schedule for the company’s contractual obligations at year-end in millions of dollars is as follows:
Total | Less than 1 year | 1-3 Years | 4 and 5 Years | More than 5 Years | |
Debt | |||||
Equipment Operations | \( 5,091 | \) 434 | \( 270 | \)775 | \( 3,612 |
Financial services | 31,692 | 9,962 | 11,477 | 6,578 | 3,675 |
Total | 36,783 | 10,396 | 11,747 | 7,353 | 7,287 |
Interest on debt | 4,777 | 609 | 1,069 | 745 | 2,354 |
Account payable | 2,743 | 2,611 | 90 | 39 | 3 |
Capital lease | 87 | 39 | 42 | 4 | 2 |
Purchase obligations | 3,007 | 2,970 | 37 | 0 | 0 |
Operating leases | 371 | 121 | 134 | 70 | 46 |
Total | \) 47,768 | \( 16,746 | \)13,119 | 8,211 | 9,692 |
Instructions
(a) Compute Deere & Company’s working capital and current ratio (current assets ÷ current liabilities) with and without the off-balance-sheet contractual obligations reported in the schedule.
(b) Briefly discuss how the information provided in the contractual obligation disclosure would be useful in evaluating Deere & Company for loans (1) due in one year and (2) due in five years.
The creditors of Chester Company agree to accept promissory notes for the amount of its indebtedness with a proviso that two-thirds of the annual profits must be applied to their liquidation. How should these notes be reported on the balance sheet of the issuing company? Give a reason for your answer
2. Current assets under IFRS are listed generally:
(a) by importance.
(b) in the reverse order of their expected conversion to cash.
(c) by longevity.
(d) alphabetically.
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