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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Presented below is the balance sheet for Tomkins plc, a British company.
Tomkins plc Consolidated Balance Sheet (amounts in £ million)
Particular | Amount £ |
Non-Current Assets | |
Goodwill | 436 |
Other tangible assets | 78 |
Property, plant, and equipment | 1,122.80 |
Investment in associates | 20.6 |
Trade and other receivables | 81.1 |
Deferred tax assets | 82.9 |
Post-employment benefits surpluses | 1.3 |
1,822.7 | |
Current assets | |
Inventories | 590.8 |
Trade and other receivables | 753 |
Income tax recoverable | 49 |
Available for sale investment | 1.2 |
Cash and Cash equivalents | 445 |
1,839 | |
Assets held for sale | 11.9 |
Total assets | 3,673.6 |
| |
Current liabilities | |
Bank overdraft | 4.8 |
Bank and other loans | 11.2 |
Obligations under finance leases | 1 |
Trade and other payables | 677.6 |
Income tax liabilities | 15.2 |
Provisions | 100.3 |
810.1 | |
Non-Current liabilities | |
Bank and other loans | 687.3 |
Obligations under financial leases | 3.6 |
Trade and other payables | 27.1 |
Post-Employment benefits obligations | 343.5 |
Deferred tax liabilities | 25.3 |
Income tax liabilities | 79.5 |
Provisions | 19.2 |
1,185.5 | |
Total liabilities | 1,995.6 |
Net assets | 1,678 |
Capital reserve | |
Ordinary share capital | 79.6 |
Share premium account | 799.2 |
Own shares | (8.2) |
Capital redemption reserve | 921.8 |
Currency translation reserve | (93) |
Available for sale reserve | (0.9) |
Accumulated deficit | (161.9) |
Shareholder’s equity | 1,536.6 |
Minority interest | 141.4 |
Total equity | 1,678 |
Instructions
(a) Identify at least three differences in balance sheet reporting between British and U.S. firms, as shown in Tomkins’ balance sheet.
(b) Review Tomkins’ balance sheet and identify how the format of this financial statement provides useful information, as illustrated in the chapter.
The net income for the year for Genesis, Inc. is \(750,000, but the statement of cash flows reports that the net cash provided by operating activities is \)640,000. What might account for the difference?
Use the information presented in BE5-14 for Martinez Corporation to compute the net cash used (provided) by financing activities.
BE5-14 (L05) Martinez Corporation engaged in the following cash transactions during 2017.
Sale of land and building $191,000
Purchase of treasury stock 40,000
Purchase of land 37,000
Payment of cash dividend 95,000
Purchase of equipment 53,000
Issuance of common stock 147,000
Retirement of bonds 100,000
Compute the net cash provided (used) by investing activities.
(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.
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.
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