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Chapter175.ProblemOne:InformationcontainedinFinancialStatementsListtendifferentitemsyouwouldexpecttofindinanaverageannualreporttoshareholders.ProblemOne:InformationcontainedinFinancialStatementsExercise1-3(25minutes)a.Currentratio:2006:=1.9to12005:=2.5to12004:=2.9to1b.Acid-testratio:2006:=0.9to1$30,800+$88,500+$111,500+$9,700$128,900$35,625+$62,500+$82,500+$9,375$75,250$36,800+$49,200+$53,000+$4,000$49,250$30,800+$88,500$128,9002005:=1.3to12004:=1.7to1AnalysisandInterpretation:Mixon'sshort-termliquiditypositionhasweakenedoverthistwo-yearperiod.Boththecurrentandacid-testratiosshowdecliningtrends.Althoughwedonothaveinformationaboutthenatureofthecompany'sbusiness,theacid-testratioshiftfrom‘1.7to1’downto‘0.9to1’andthecurrentratioshiftfrom‘2.9to1’downto‘1.9to1’indicateapotentialliquidityproblem.Still,wemustrecognizethatindustrystandardsmayshowthatthe2004ratiosweretoohigh(insteadof2006ratiosastoolow).$35,625+$62,500$75,250$36,800+$49,200$49,250Chapter270.ProblemTwo:EarningsManagementEarningsmanagementcanbedefinedasthepurposefulinterventionbymanagementintheearningsprocess,usuallytosatisfyselfishobjectives(Schipper,1989).Earningsmanagementtechniquescanbeseparatedintothosethatarecosmetic(withoutcashflowconsequences)andthosethatarereal(withcashflowconsequences).Themanagementofacompanywishestoincreaseearningsthisperiod.Listthreecosmeticandthreerealtechniquesthatcanbeusedtoachievethisobjectiveandexplainwhytheywillachievetheobjective.ProblemTwo:EarningsManagementCosmetic(non-cashflow)techniqueswouldbe:●Decreaseestimatedbaddebtexpense●Decreaseestimatedwarranteeexpense●Increaseinestimatedsalvagevalueofdepreciableassets●Increasediscountrateonpensionplans●Increaseexpectedrateofreturnonpensionassets●Changefromaccelerateddepreciationtostraightlinedepreciation●CapitalizeexpensessuchassoftwaredevelopmentandR&DRealchangeswouldbe:●DecreaseR&Dexpenditures●Decreaseadvertisingexpenditures●Decreasemaintenancespending●ChangingaccountingprinciplefromLIFOtoFIFO(assumingrisingprices).Notethatthiswillhaveataxeffect,asonecannotuseFIFOforfinancialreportingpurposesandLIFOfortaxpurposes.●Channelloading(i.e.borrowingsalesfromthenextperiod,whichifrepeatedusuallyescalatesinfutureperiods)74.ProblemSix:FairValueAccountingABCCo.startsitsbusinessraising$110,000incash;$60,000fromissuingequityand$50,000fromissuing6%bondsatpar.ABCusedthewholeamountofcashtobuyabuilding,whichitrentsoutfor$10,000peryear.GivenbelowistheopeningbalancesheetofABCCo.forthefirstyearofoperations.AttheendofYear1,thebuildingisvaluedat$150,000.Also,themarketvalueofbondshasfallento$49,000.Assumetheusefullifeofthebuildingis30yearsanditssalvagevalueis$50,000attheendofthatperiod.Therentalincomeisreceivedonthelastdayoftheyear.Interestonbondsisalsopaidonthisday.Preparetheyear-endbalancesheetandincomestatementofABCCo.basedonFairvalue.Comparethehistoricalandfairvaluesatyear-end.ProblemSix:FairValueAccountingNoticethatunderfairvaluemethod,allassetsandliabilitiesareconsideredattheirmarketvalue.Fairvalueaccountingdoesnotconsideranydepreciationonfixedassets.Itrecognizesanyunrealizedgainorlossonassetsorlong-termdebtonaccountofchangeinmarketvalue.Chapter379.ProblemThree:BookValuepershareThefollowinginformationwastakenfromWicom'sfinancialstatementsasofDecember31,2006.a.Calculatebookvaluepershareofcommonstock.b.Assumethatthecompanyalsohad$1,000,000worthofconvertiblebonds.Thebondsareconvertibleatone$1,000bondinto150sharesofstock.Therearealsostockoptionstobuy120,000sharesatapriceof$5pershare.Thestockiscurrentlytradingat$30pershare.Recalculateyouranswertoparta)takingintoaccountdilutiveeffectsoftheabove.ProblemThree:BookValuepershareExercise3-3(15minutes)a.Alesseewouldaccountforacapitalleaseasanassetandanobligationattheinceptionofthelease.Rentalpaymentsduringtheyearwouldbeallocatedbetweenareductionintheobligationandinterestexpense.Theassetwouldbeamortizedinamannerconsistentwiththelessee'snormaldepreciationpolicyforownedassets,exceptthatinsomecircumstancestheperiodofamortizationwouldbetheleaseterm.b.Noassetorobligationwouldberecordedattheinceptionofthelease.Normally,rentalonanoperatingleasewouldbechargedtoexpenseovertheleasetermasitbecomespayable.Ifrentalpaymentsarenotmadeonastraight-linebasis,rentalexpenseneverthelesswouldberecognizedonastraight-linebasisunlessanothersystematicorrationalbasisismorerepresentativeofthetimepatterninwhichusebenefitisderivedfromtheleasedproperty,inwhichcasethatbasiswouldbeused.Chapter463.ProblemOne:CalculatingCOGSandInventoryunderLIFOandFIFODonuldCompanysellsmanyproducts.Solisoneofitspopularitems.BelowisananalysisoftheinventorypurchasesandsalesofSolforthemonthofSeptember.DonuldCompanyusestheperiodicinventorysystem.INSTRUCTIONSa.UsingtheFIFOassumption,calculatetheamountchargedtocostofgoodssoldforSeptember.(Showcomputations)b.UsingtheLIFOassumption,calculatetheamountassignedtotheinventoryonhandonSeptember31.(Showcomputations)c.CalculatetheLIFOreservethatwouldbereportedinthecompany'sbooksonSeptember31ifusingLIFO.ProblemOne:CalculatingCOGSandInventoryunderLIFOandFIFO66.Problem