Chapter 24: 13Q (page 1445)
“The financial statements of a company are management’s, not the accountant’s.” Discuss the implications of this statement.
Management can display the information only if the auditor does not object to it.
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Edna Millay Inc. is a manufacturer of electronic components and accessories with total assets of $20,000,000. Selected financial ratios for Millay and the industry averages for firms of similar size are presented below.
Edna Millay | 2017 Industry | |||
2015 | 2016 | 2017 | Averages | |
Current ratio | 2.09 | 2.27 | 2.51 | 2.24 |
Quick ratio | 1.15 | 1.12 | 1.19 | 1.22 |
Inventory turnover | 2.40 | 2.18 | 2.02 | 3.50 |
Net sales to stockholders’ equity | 2.71 | 2.80 | 2.99 | 2.85 |
Return on common stockholders’ equity | 0.14 | 0.15 | 0.17 | 0.11 |
Total liabilities to stockholders’ equity | 1.41 | 1.37 | 1.44 | 0.95 |
Millay is being reviewed by several entities whose interests vary, and the company’s financial ratios are a part of the data being considered. Each of the parties listed below must recommend an action based on its evaluation of Millay’s financial position.
Archibald MacLeish Bank. The bank is processing Millay’s application for a new 5-year term note. Archibald MacLeish has been Millay’s banker for several years but must reevaluate the company’s financial position for each major transaction.
Robert Penn Warren. A brokerage firm specializing in the stock of electronics firms that are sold over-the-counter, Robert Penn Warren must decide if it will include Millay in a new fund being established for sale to Robert Penn Warren’s clients.
Working Capital Management Committee. This is a committee of Millay’s management personnel chaired by the chief operating officer. The committee is charged with the responsibility of periodically reviewing the company’s working capital position, comparing actual data against budgets, and recommending changes in strategy as needed.
Instructions
a) Describe the analytical use of each of the six ratios presented above.
Tina Bailey, a student of intermediate accounting, was heard to remark after a class discussion on segment reporting, “All this is very confusing to me. First we are told that there is merit in presenting the consolidated results, and now we are told that it is better to show segmental results. I wish they would make up their minds.” Evaluate this comment.
Answer each of the questions in the following unrelated situations.
c) A company has current assets of \(90,000 (of which \)40,000 is inventory and prepaid items) and current liabilities of \(40,000. What is the current ratio? What is the acid-test ratio? If the company borrows \)15,000 cash from a bank on a 120-day loan, what will its current ratio be? What will the acid-test ratio be?
(Post-Balance-Sheet Events) For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.
What quantitative materiality test is applied to determine whether a segment is significant enough to warrant separate disclosure?
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