Chapter 24: 7Q (page 1445)
What are diversified companies? What accounting problems are related to diversified companies?
The diversified company has the characteristics of offering different or mixed trimming structures but has lower than normal returns due to market risks and lots of complexities.
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For each of the following subsequent 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.
The following statement is an excerpt from the FASB pronouncement related to interim reporting. Interim financial information is essential to provide investors and others with timely information as to the progress of the enterprise. The usefulness of such information rests on the relationship that it has to the annual results of operations. Accordingly, the Board has concluded that each interim period should be viewed primarily as an integral part of an annual period. In general, the results for each interim period should be based on the accounting principles and practices used by an enterprise in the preparation of its latest annual financial statements unless a change in an accounting practice or policy has been adopted in the current year. The Board has concluded, however, that certain accounting principles and practices followed for annual reporting purposes may require modification at interim reporting dates so that the reported results for the interim period may better relate to the results of operations for the annual period.
Instructions
The following six independent cases present how accounting facts might be reported on an individual company’s interim financial reports. For each of these cases, state whether the method proposed to be used for interim reporting would be acceptable under generally accepted accounting principles applicable to interim financial data. Support each answer with a brief explanation.
f) LaBrava Company was reasonably certain it would have an employee strike in the third quarter. As a result, it shipped heavily during the second quarter but plans to defer the recognition of the sales in excess of the normal sales volume. The deferred sales will be recognized as sales in the third quarter when the strike is in progress. LaBrava Company management thinks this is more representative of normal second- and third-quarter operations.
Answer each of the questions in the following unrelated situations.
d) A company has current assets of \(600,000 and current liabilities of \)240,000. The board of directors declares a cash dividend of $180,000. What is the current ratio after the declaration but before payment? What is the current ratio after the payment of the dividend?
(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
d. Should Topeka National Bank grant the extension on Bradburn’s notes considering Daniel Brown’s statement about financing the plant expansion through internally generated funds? 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
b)Identify and explain what other financial reports and/or financial analyses might be helpful to the commercial loan officer of Topeka National Bank in evaluating Daniel Brown’s request for a time extension on Bradburn’s notes.
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