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Chapter 24: Question E24-2 (page 1447)

(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.

  1. Settlement of federal tax case at a cost considerably in excess of the amount expected at year-end.
  2. Introduction of a new product line.
  3. Loss of assembly plant due to fire.
  4. Sale of a significant portion of the company’s assets.
  5. Retirement of the company president.
  6. Prolonged employee strike.
  7. Loss of a significant customer.
  8. Issuance of a significant number of shares of common stock.
  9. Material loss on a year-end receivable because of a customer’s bankruptcy.
  10. Hiring of a new president.
  11. Settlement of prior year’s litigation against the company (no loss was accrued).
  12. Merger with another company of comparable size.

Short Answer

Expert verified

An entity adjusts the sums perceived in its financial statements to reflect altering events, but not to reflect non-adjusting events.

Step by step solution

01

Meaning of Financial Statements

Financial statements are documents that express a company's business practices and monetary success.Government offices, accountants, and corporations, among others, routinely audit financial accounts to ensure accuracy and for valuation, financing, or contribution purposes.

02

Indicating the different events of the post-balance sheet

  1. Adjust the financial statements
  2. Neither adjust nor disclose
  3. Disclose in notes to the financial statements.
  4. Disclose in notes to the financial statements.
  5. Neither adjust nor disclose
  6. Neither adjust nor disclose
  7. Neither adjust nor disclose
  8. Disclose in notes to the financial statements.
  9. Adjust the financial statements
  10. Neither adjust nor disclose
  11. Adjust the financial statements
  12. Disclose in notes to the financial statements.

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Most popular questions from this chapter

The following information was described in a note of Canon Packing Co.

“During August, Holland Products Corporation purchased 311,003 shares of the Company’s common stock which constitutes approximately 35% of the stock outstanding. Holland has since obtained representation on the Board of Directors.”

“An affiliate of Holland Products Corporation acts as a food broker for Canon Packing in the greater New York City marketing area. The commissions for such services after August amounted to approximately $20,000.”

Why is this information disclosed?

What approaches have been suggested to overcome the seasonality problem related to interim reporting?

(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

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.

5. Percentage change in sales, cost of goods sold, gross margin, and net income after taxes from fiscal year 2017 to 2018.

An article in the financial press entitled “Important Information in Annual Reports This Year” noted that annual reports include a management’s discussion and analysis section. What would this section contain?

Differential reporting for small- and medium-sized entities:

a) is required for all companies less than a certain size.

b) omits accounting topics not relevant for SMEs, such as earnings per share, and interim and segment reporting.

c) has different rules for topics such as earnings per share, and interim and segment reporting.

d) requires significantly more disclosures, since more items are not recognized in the financial statements.

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