Chapter 5: Q1Q (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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Perez Company reported an increase in inventories in the past year. Discuss the effect of this change on the current ratio (current assets ÷ current liabilities). What does this tell a statement user about Perez Company’s liquidity?
The bookkeeper for Geronimo Company has prepared the following balance sheet as of July 31, 2017.
GERONIMO COMPANY | |||
Balance Sheet | |||
As of July 31, 2017 | |||
Cash | \(69,000 | Notes and accounts payable | \)44,000 |
Account receivable (net) | 40,500 | Long-term liabilities | 75,000 |
Inventory | 60,000 | Stockholder’s equity | 155,500 |
Equipment (net) | 84,000 | ||
Patents | 21,000 | ||
\(274,500 | \)274,500 |
The following additional information is provided.
1. Cash includes \(1,200 in a petty cash fund and \)15,000 in a bond sinking fund.
2. The net accounts receivable balance is comprised of the following two items: (a) accounts receivable \(44,000 and (b) allowance for doubtful accounts \)3,500.
3. Inventory costing \(5,300 was shipped out on consignment on July 31, 2017. The ending inventory balance does not include the consigned goods. Receivables in the amount of \)5,300 were recognized on these consigned goods.
4. Equipment had a cost of \(112,000 and an accumulated depreciation balance of \)28,000.
5. Income taxes payable of $6,000 were accrued on July 31. Geronimo Company, however, had set up a cash fund to meet this obligation. This cash fund was not included in the cash balance but was offset against the income taxes payable amount.
Instructions
Prepare a corrected classified balance sheet as of July 31, 2017, from the available information, adjusting the account balances using the additional information.
In its December 31, 2017, balance sheet Oakley Corporation reported as an asset, “Net notes and accounts receivable, $7,100,000.” What other disclosures are necessary?
What is meant by liquidity? Rank the following assets from one to five in order of liquidity.
(a) Goodwill.
(b) Inventory.
(c) Buildings.
(d) Short-term investments.
(e) Accounts receivable.
Lansbury Inc. had the following balance sheet on December 31, 2016.
LANSBURY INC. | |||
BALANCE SHEET | |||
DECEMBER 31, 2016 | |||
Cash | \(20,000 | Account payable | \)30,000 |
Accounts receivables | 21,200 | Note 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. Lansbury Inc. sold part of its debt investment portfolio for \(15,000. This transaction resulted in a gain of \)3,400 for the firm. The company classifies these investments as available for sale.
2. A tract of land was purchased for \(13,000 cash.
3. Long-term notes payable in the amount of \)16,000 were retired before maturity by paying \(16,000 cash.
4. An additional \)20,000 in common stock was issued at par.
5. Dividends of \(8,200 were declared and paid to stockholders.
6. Net income for 2017 was \)32,000 after allowing for depreciation of \(11,000.
7. Land was purchased through the issuance of \)35,000 in bonds.
8. At December 31, 2017, Cash was \(37,000, Accounts Receivable was \)41,600, and Accounts Payable remained at $30,000.
Instructions
(a) Prepare a statement of cash flows for 2017.
(b) Prepare an unclassified balance sheet as it would appear at December 31, 2017.
(c) How might the statement of cash flows help the user of the financial statements? Compute two cash flow ratios.
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