Chapter 24: 16Q (page 1445)
What are interim reports? Why are balance sheets often not provided with interim data?
The reason behind the Balance Sheet is not given with interim data as the data is not considered to be significant for a short period.
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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.
What are the accounting problems related to the presentation of interim data?
Snider Corporation, a publicly-traded company, is preparing the interim financial data which it will issue to its shareholders at the end of the first quarter of the 2017–2018 fiscal year. Snider’s financial accounting department has compiled the following summarized revenue and expense data for the first quarter of the year.
Sales revenue \(60,000,000
Cost of goods sold 36,000,000
Variable selling expenses 1,000,000
Fixed selling expenses 3,000,000
Included in the fixed selling expenses was the single lump-sum payment of \)2,000,000 for television advertisements for the entire year.
Instructions
b) What financial information, as a minimum, must Snider Corporation disclose to its shareholders in its quarterly reports?
(Disclosure of Estimates) Nancy Tercek, the financial vice president, and Margaret Lilly, the controller, of Romine Manufacturing Company are reviewing the financial ratios of the company for the years 2017 and 2018. The financial vice president notes that the profit margin on sales ratio has increased from 6% to 12%, a hefty gain for the 2-year period. Tercek is in the process of issuing a media release that emphasizes the efficiency of Romine Manufacturing in controlling cost. Margaret Lilly knows that the difference in ratios is due primarily to an earlier company decision to reduce the estimates of warranty and bad debt expense for 2018. The controller, not sure of her supervisor’s motives, hesitates to suggest to Tercek that the company’s improvement is unrelated to efficiency in controlling cost. To complicate matters, the media release is scheduled in a few days.
Instructions
What are the major advantages of notes to financial statements? What types of items are usually reported in notes?
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