Chapter 5: Question 1IFRS (page 262)
IFRS5-1 Where can authoritative IFRS guidance be found related to the statement of financial position (balance sheet) and the statement of cash flows?
IAS 1 and IAS 7 states the disclosure requirements of the statement of financial position and cash flow statement.
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(L03) Koch Corporation’s adjusted trial balance contained the following asset accounts at December 31, 2017: Cash \(7,000, Land \)40,000, Patents \(12,500, Accounts Receivable \)90,000, Prepaid Insurance \(5,200, Inventory \)30,000, Allowance for Doubtful Accounts \(4,000, and Equity Investments (trading) \)11,000. Prepare the current assets section of the balance sheet, listing the accounts in proper sequence.
Case 1: Uniroyal Technology Corporation
Uniroyal Technology Corporation (UTC), with corporate offices in Sarasota, Florida, is organized into three operating segments. The high-performance plastics segment is responsible for research, development, and manufacture of a wide variety of products, including orthopedic braces, graffiti-resistant seats for buses and airplanes, and a static-resistant plastic used in the central processing units of microcomputers. The coated fabrics segment manufactures products such as automobile seating, door and instrument panels, and specialty items such as waterproof seats for personal watercraft and stain-resistant, easy-cleaning upholstery fabrics. The foams and adhesives segment develops and manufactures products used in commercial roofing applications.
The following items relate to operations in a recent year.
1. Serious pressure was placed on profitability by sharply increasing raw material prices. Some raw materials increased in price 50% during the past year. Cost containment programs were instituted and product prices were increased whenever possible, which resulted in profit margins actually improving over the course of the year.
2. The company entered into a revolving credit agreement, under which UTC may borrow the lesser of \(15,000,000 or 80% of eligible accounts receivable. At the end of the year, approximately \)4,000,000 was outstanding under this agreement. The company plans to use this line of credit in the upcoming year to finance operations and expansion.
Instructions
(a) Should investors be informed of raw materials price increase, such as described in item 1? Does the fact that the company successfully met the challenge of higher prices affect the answer? Explain.
(b) How should the information in item 2 be presented in the financial statements of UTC?
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.
5. A company has purchased a tract of land and expects to build a production plant on the land in approximately five years. During the 5 years before construction, the land will be idle. Under IFRS, the land should be reported as:
(a) land expense.
(b) property, plant, and equipment.
(c) an intangible asset.
(d) a long-term investment.
Case 4: Amazon.com The incredible growth of Amazon.com has put fear into the hearts of traditional retailers. Amazon’s stock price has soared to amazing levels. However, it is often pointed out in the financial press that it took the company several years to report its first profit. The following financial information is taken from a recent annual report.
(\( in millions) | Current year | Prior year |
Current assets | \)31,327 | $24,625 |
Total assets | 54,505 | 40,159 |
Current liabilities | 28,089 | 22,980 |
Total liabilities | 43,764 | 30,413 |
Cash provided by operations | 6,842 | 5,475 |
Capital expenditures | 4,893 | 3,444 |
Dividend paid | 0 | 0 |
Net income (loss) | (241) | 274 |
Sales | 88,988 | 74,452 |
Instructions
(a) Calculate free cash flow for Amazon for the current and prior years, and discuss its ability to finance expansion from internally generated cash. Thus far Amazon has avoided purchasing large warehouses. Instead, it has used those of others. It is possible, however, that in order to increase customer satisfaction, the company may have to build its own warehouses. If this happens, how might your impression of its ability to finance expansion change?
(b) Discuss any potential implications of the change in Amazon’s cash provided by operations from the prior year to the current year.
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