Chapter 5: 7 (page 237)
What are the major limitations of the balance sheet as a source of information?
Balance information has some limitations because of the historical cost concept, estimations, and eliminating some items having value.
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EXCEL (Balance Sheet Preparation) Presented below are a number of balance sheet items for Montoya, Inc., for the current year, 2017.
Goodwill | \(125,000 | Accumulated depreciation - equipment | \)292,000 |
Payroll tax payable | 177,591 | Inventory | 239,800 |
Bond payable | 300,000 | Rent payable (short-term) | 45,000 |
Discount on bond payable | 15,000 | Income tax payable | 98,362 |
Cash | 360,000 | Rent payable (long-term) | 480,000 |
Land | 480,000 | Common stock, \(1 par value | 200,000 |
Notes receivable | 445,700 | Preferred stock, \)10 par value | 150,000 |
Note payable | 265,000 | Prepaid expenses | 87,920 |
Account payable | 490,000 | Equipment | 1,470,000 |
Retained earnings | Debt investment (trading) | 121,000 | |
Income tax receivable | 97,630 | Accumulated depreciation – building | 270,200 |
Note payable (Long-term) | 1,600,000 | Buildings | 1,640,000 |
Instructions
Prepare a classified balance sheet in good form. Common stock authorized was 400,000 shares, and preferred stock authorized was 20,000 shares. Assume that notes receivable and notes payable are short-term unless stated otherwise. The cost and fair value of equity investments (trading) are the same.
Aero Inc. had the following balance sheet at December 31, 2016.
LANSBURY INC. | |||
BALANCE SHEET | |||
DECEMBER 31, 2016 | |||
Cash | \(20,000 | Account payable | \)30,000 |
Accounts receivables | 21,200 | Bond payable | 41,000 |
Investment | 32,000 | Common stock | 100,000 |
Plant assets (net) | 81,000 | Retained earnings | 23,200 |
Land | 40,000 | ||
\(194,200 | \)194,200 |
During 2017, the following occurred.
1. Aero liquidated its available-for-sale debt investment portfolio at a loss of \(5,000.
2. A tract of land was purchased for \)38,000.
3. An additional \(30,000 in common stock was issued at par.
4. Dividends totaling \)10,000 were declared and paid to stockholders.
5. Net income for 2017 was \(35,000, including \)12,000 in depreciation expense.
6. Land was purchased through the issuance of \(30,000 in additional bonds.
7. At December 31, 2017, Cash was \)70,200, Accounts Receivable was \(42,000, and Accounts Payable was \)40,000.
Instructions
(a) Prepare a statement of cash flows for the year 2017 for Aero.
(b) Prepare the unclassified balance sheet as it would appear at December 31, 2017.
(c) Compute Aero’s free cash flow and current cash debt coverage for 2017.
(d) Use the analysis of Aero to illustrate how information in the balance sheet and statement of cash flows helps the user of the financial statements.
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.
A recent financial magazine indicated that the airline industry has poor financial flexibility. What is meant by financial flexibility, and why is it important?
How does separating current assets from property, plant, and equipment in the balance sheet help analysts?
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