Chapter 24: 2Q (page 1445)
What is the full disclosure principle in accounting? Why has disclosure increased substantially in the last 10 years?
The full disclosure relates to the imperative data, which is expanding due to the complexity of the business environment.
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What are the major advantages of notes to financial statements? What types of items are usually reported in notes?
(Horizontal and Vertical Analysis) Presented below is the comparative balance sheet for Gilmour Company.
GILMOUR COMPANY COMPARATIVE BALANCE SHEET AS OF DECEMBER 31, 2018 AND 2017 | ||
December 31 | ||
2018 | 2017 | |
Assets | ||
Cash | \( 180,000 | \) 275,000 |
Accounts receivable (net) | 220,000 | 155,000 |
Short-term investments | 270,000 | 150,000 |
Inventories | 1,060,000 | 980,000 |
Prepaid expenses | 25,000 | 25,000 |
Plant & equipment | 2,585,000 | 1,950,000 |
Accumulated depreciation | (1,000,000) | (750,000) |
\(3,340,000 | (2,785,000) | |
Liabilities and Stockholders’ Equity | ||
Accounts payable | \) 50,000 | \( 75,000 |
Accrued expenses | 170,000 | 200,000 |
Bonds payable | 450,000 | 190,000 |
Common stock | 2,100,000 | 1,770,000 |
Retained earnings | 570,000 | 550,000 |
\)3,340,000 | (2,785,000) |
Instructions
(Round to two decimal places.)
(Ratio Computations and Additional Analysis) Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2018, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two \(35,000 notes, which are due on June 30, 2018, and September 30, 2018. Another note of \)6,000 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburn’s cash flow problems are due primarily to the company’s desire to finance a \(300,000 plant expansion over the next 2 fiscal years through internally generated funds. The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years
BRADBURN CORPORATION BALANCE SHEET MARCH 31 | ||
Assets | 2018 | 2017 |
Cash | \) 18,200 | \( 12,500 |
Notes receivable | 148,000 | 132,000 |
Accounts receivable (net) | 131,800 | 125,500 |
Inventories (at cost) | 105,000 | 50,000 |
Plant & Equipment (net of depreciation) | 1,449,000 | 1,420,500 |
Total assets | \)1,852,000 | \(1,740,500 |
Liabilities and Stockholders’ Equity | ||
Accounts payable | \) 79,000 | \( 91,000 |
Notes payable | 76,000 | 61,500 |
Accrued liabilities | 9,000 | 6,000 |
Common stock (130,000 shares, \)10 par) | 1,300,000 | 1,300,000 |
Retained earnings* | 388,000 | 282,000 |
Total liabilities and stockholders’ equity | \(1,852,000 | \)1,740,500 |
*Cash dividends were paid at the rate of \(1 per share in the fiscal year 2017 and \)2 per share in the fiscal year 2018.
BRADBURN CORPORATION INCOME STATEMENT FOR THE FISCAL YEARS ENDED MARCH 31 | ||
2018 | 2017 | |
Sales revenue | \(3,000,000 | \)2,700,000 |
Cost of goods sold* | 1,530,000 | 1,425,000 |
Gross margin | 1,470,000 | 1,275,000 |
Operating expenses | 860,000 | 780,000 |
Income before income taxes | 610,000 | 495,000 |
Income taxes (40%) | 244,000 | 198,000 |
Net income | \( 366,000 | \) 297,000 |
Depreciation charges on the plant and equipment of \(100,000 and \)102,500 for fiscal years ended March 31, 2017, and 2018, respectively, are included in the cost of goods sold.
c). Assume that the percentage changes experienced in fiscal year 2018 as compared with fiscal year 2017 for sales and cost of goods sold will be repeated in each of the next 2 years. Is Bradburn’s desire to finance the plant expansion from internally generated funds realistic? Discuss.
(Ratio Computations and Additional Analysis) Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2018, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two \(35,000 notes, which are due on June 30, 2018, and September 30, 2018. Another note of \)6,000 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburn’s cash flow problems are due primarily to the company’s desire to finance a \(300,000 plant expansion over the next 2 fiscal years through internally generated funds. The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years
BRADBURN CORPORATION BALANCE SHEET MARCH 31 | ||
Assets | 2018 | 2017 |
Cash | \) 18,200 | \( 12,500 |
Notes receivable | 148,000 | 132,000 |
Accounts receivable (net) | 131,800 | 125,500 |
Inventories (at cost) | 105,000 | 50,000 |
Plant & Equipment (net of depreciation) | 1,449,000 | 1,420,500 |
Total assets | \)1,852,000 | \(1,740,500 |
Liabilities and Stockholders’ Equity | ||
Accounts payable | \) 79,000 | \( 91,000 |
Notes payable | 76,000 | 61,500 |
Accrued liabilities | 9,000 | 6,000 |
Common stock (130,000 shares, \)10 par) | 1,300,000 | 1,300,000 |
Retained earnings* | 388,000 | 282,000 |
Total liabilities and stockholders’ equity | \(1,852,000 | \)1,740,500 |
*Cash dividends were paid at the rate of \(1 per share in the fiscal year 2017 and \)2 per share in the fiscal year 2018.
BRADBURN CORPORATION INCOME STATEMENT FOR THE FISCAL YEARS ENDED MARCH 31 | ||
2018 | 2017 | |
Sales revenue | \(3,000,000 | \)2,700,000 |
Cost of goods sold* | 1,530,000 | 1,425,000 |
Gross margin | 1,470,000 | 1,275,000 |
Operating expenses | 860,000 | 780,000 |
Income before income taxes | 610,000 | 495,000 |
Income taxes (40%) | 244,000 | 198,000 |
Net income | \( 366,000 | \) 297,000 |
*Depreciation charges on the plant and equipment of \(100,000 and \)102,500 for fiscal years ended March 31, 2017, and 2018, respectively, are included in the cost of goods sold.
Instructions
(a). Compute the following items for Bradburn Corporation.
Madrasah Corporation issued its financial statements for the year ended December 31, 2017, on March 10, 2018. The following events took place early in 2018.
Instructions
Discuss how the preceding post-balance-sheet events should be reflected in the 2017 financial statements.
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