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ACCT 2220 Lecture Notes - Lecture 2: Accounts Payable, Current Liability, Financial Statement

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graytoad906
28 Feb 2016
School
University of Guelph
Department
Accounting
Course
ACCT 2220
Professor
Joseph Radocchia

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Document Summary

Chapter 2: a further look at financial statements. Displays a snapshot of a company"s financial position its assets, liabilities and shareholders" equity at a point in time. Companies group similar types of assets and similar types of liabilities together. A classified statement of financial position generally contains the standard classifications, ordered as shown: These help readers determine whether the company has enough assets to pay its debts as they come due and the claims of short-term and long- term creditors and lenders on the company"s total assets. Assets are resources that a company owns or controls that will provide future economic benefits. Current assets benefits are realized within one year. Non-current assets benefits are realized over more than one year. Expected to be converted into cash or will be sold or used up within one year of the company"s financial statement date/operating cycle (whichever is longer)

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Related Questions

2. The following are the summarised statements of the financial position of Daffodils Berhad and Camellia Berhad as at 30 June 20X9:

                                                                   Daffodils                   Camellia

                                                                       RM                            RM

Assets                           

Non-current assets

Tangible                                                      360,000                     135,000 Investments                                                300,000                           - Current assets                                             315,000                      210,000

Total assets                                                  975,000                      345,000

 

Equities and Liabilities

Ordinary shares of RM1 each                     504,000                       150,000 Share premium                                            36,000                          15,000 Retained earnings                                      240,000                          75,000 Current liabilities                                        195,000                        105,000

Total equity and liabilities                           975,000                        345,000

Required:

Prepare a statement of the consolidated financial position of Daffodils Berhad and its subsidiary, Camellia Berhad at 30 June 20x9 under the assumption that Daffodils Berhad acquired 150,000 shares in Camellia Berhad for RM2 per share on 30 June 20X9. The investment account contains the cost of shares in Camellia Berhad and non-group investments. 

Case 10-1

Swisscom AG, the principal provider of telecommunications inSwitzerland, prepares consolidated financial statements inaccordance with IFRS. Until 2007, Swisscom also reconciled its netincome and stockholders’ equity to US GAAP. Swisscom consolidatedfinancial statements from a recent annual report are presented intheir original format in Column 1 of the following worksheet. Note27, Differences between IFRS and GAAP, which includes Swisscom’s USGAAP reconciliation, also is provided.

Required

Use the information in Note 27 to restate Swisscom’sconsolidated financial statements in accordance with US GAAP. Beginby constructing debit/credit entries for each reconciliation item,and then post these entries to columns 2 and 3 in the worksheetsprovided.

Calculate each of the following ratios under both IFRS and GAAPand determine the percentage differences between them, using IFRSratios as the base:

Net income/net revenue

Operating income/net revenues

Operating income/total assets

Net income/shareholders’ equity

Operating income/total shareholders’ equity

Current assets/current liabilities

Total liabilities/total shareholders’ equity

Which of these ratios is most (least) affected by the accountingstandards used?

Worksheet for theRestatement of Swisscom's Financial Statements from IFRS to USGAAP
Reconciling Adjustment
IFRS DR CR US GAAP
Consolidated Statement of Operations
Net revenue 9,842
Capitalized cost and changes ininventory 277
Total 10,119
Goods and services purchased 1,666
Personnel expenses 2,584
Other operating expenses 2,090
Depreciation and amortization 1,739
Restructuring charges 1,726
Total operating expenses 9,805
Operating income 314
Interest expense (428)
Financial income 25
Income(loss) before incometaxes and equity in net loss of affiliated companies (89)
Income tax expense 1
Income(loss) before equity innet loss of affiliated companies (90)
Equity in net loss of affiliatedcompanies (325)
Net income(loss) (415)
Consolidated Retained EarningsStatement
Retained earnings, 1/1 (151)
Net loss (415)
Profit distribution declared (1,282)
Conversion of loan payable to equity 3,200
Retained earnings, 12/31 1,352
Assets
Current assets
Cash and equivalents 256
Securities available for sale 51
Trade accounts receivable 2,052
Inventories 169
Other current assets 34
Total current assets 2,562
Noncurrent assets
Property, plant and equipment 11,453
Investments 1,238
Other noncurrent assets 220
Total noncurrent assets 12,911
Total assets 15,473
Current liabilities
Short-term debt 1,178
Trade accounts payable 889
Accrued pension cost 789
Other current liabilities 2,213
Total current liabilities 5,069
Long-term liabilities
Long-term debt 6,200
Finance lease obligation 439
Accrued pension cost 1,488
Accrued liabilities 709
Other long-term liabilities 338
Total long-term liabilities 9,174
Total liabilities 14,243
Shareholders' equity
Retained earnings 1,352
Unrealized market valueadjustment on securities available for sale 39
Cumulative translation adjustment (161)
Total shareholders' equity 1,230
Total liabilities and shareholders'equity 15,473

27. Differences between IFRS and GAAP

The consolidated financial statements of Swisscom have beenprepared in accordance with IFRS, which differ in certain respectsfrom GAAP in the US. Application of US GAAP would have affected thebalance sheet and net income (loss) to the extent described below.A description of the material differences between IFRS and GAAP asthey relate to Swisscom are discussed in further detail below.

Reconciliation of net income (loss) from IFRS toGAAP

The following schedule illustrates the significant adjustmentsto reconcile net income (loss) in accordance with US GAAP to theamounts determined under IFRS, for the current year ended December31.

(CHF in millions)
Net income (loss) according toIFRS (415)
US GAAP adjustments:
Capitalization of interest cost 8
Restructuring charges 205
Depreciation expense -5
Capitalization of software 182
Restructuring charges byaffiliates 50
Net income according to GAAP 25

Reconciliation of shareholders’ equity from IFRS toGAAP

The following is a reconciliation of the significant adjustmentsnecessary to reconcile shareholders’ equity in accordance with USGAAP to the amounts determined under IFRS as at December 31 of thecurrent year.

(CHF in millions)
Shareholders' equity accordingto IFRS 1230
US GAAP adjustments:
Capitalization of interest cost 54
Restructuring charges 205
Depreciation expense -5
Capitalization of software 475
Restructuring charges byaffiliates 50
Shareholders' equity accordingto GAAP 2009

Capitalization of interest cost

Swisscom expenses all interest costs as incurred. US GAAPrequires interest costs incurred during the construction ofproperty, plant and equipment to be capitalized. Under US GAAP,Swisscom would have capitalized CHF 13 million and amortized CHF 5million for the current year.

Restructuring charges

During the current year, Swisscom recognized under IFRSrestructuring charges totaling CHF 1726 million. The followingschedule illustrates adjustments necessary to reconcile thesecharges to amounts determined under US GAAP.

Restructuringcharges in accordance with IFRS
Personnel restructuringcharges 1326
Write-down of long-livedassets 316
Misc. restructuring charges 84
Total in accordance with IFRS 1726
Adjustments to restructuringcharges to accord with GAAP (205)
Restructuring charges inaccordance with GAAP 1521

Reconciliation of restructuring charges
Restructuring chargesaccording to US GAAP consist of the following:
Personnel restructuringcharges 1228
Write-down of long-livedassets 209
Misc. restructuring charges 84
Restructuring charges inaccordance with GAAP 1521

Depreciation expense

Due to the difference in carrying value of long-lived assetsafter write-downs describe in (b), there is a difference in theamount of depreciation expense taken under IFRS and GAAP. Anadjustment is made for the current year to record an additional CHF5 million of depreciation under US GAAP.

Capitalization of software

Swisscom has expensed software costs as incurred. For US GAAPpurposes, external consultant costs incurred I the development ofsoftware for internal use has been capitalized. These costs arebeing amortized over a 3 year period. The capitalization ofsoftware costs accords with common practice in the UStelecommunications industry.

Swisscom has capitalized, as disclosed in the reconciliation ofnet income (loss) and shareholders’ equity to US GAAP, CHF 220million and amortized CHF 37 million in the previous year andcapitalized CHF 370 million and amortized CHF 188 million in thecurrent year.

Restructuring charges of affiliates

During the current year, Swisscom’s share of personnel and otherrestructuring charges recorded by affiliates amounted to CHF 50million. These restructuring charges do not meet all therecognition criteria contained in EITF 94-3 and therefore cannot beexpensed in the current year, under US GAAP.

Basic Financial Ratios

The accounting staff of CCB Enterprises has completed the financial statements for the 2016 calendar year. The statement of income for the current year and the comparative statements of financial position for 2016 and 2015 follow.

CCB Enterprises
Statement of Income
For the Year Ended December 31, 2016
(thousands omitted)
Revenue:
Net sales $794,620
Other 58,420
Total revenue $853,040
Expenses:
Cost of goods sold $530,320
Research and development 24,480
Selling and administrative 155,320
Interest 19,600
Total expenses $729,720
Income before income taxes $123,320
Income taxes 49,328
Net income $73,992


CCB Enterprises
Comparative Statements of Financial Position
December 31, 2016 and 2015
(thousands omitted)
2016 2015
Assets
Current assets:
Cash and short-term investments $25,910 $20,860
Receivables, less allowance for doubtful accounts
($1,130 in 2016 and $1,410 in 2015) 48,190 50,300
Inventories, at lower of FIFO cost or market 64,860 62,100
Prepaid items and other current assets 5,220 3,280
Total current assets $144,180 $136,540
Other assets:
Investments, at cost $105,880 $105,880
Deposits 10,160 7,980
Total other assets $116,040 $113,860
Property, plant, and equipment:
Land $12,100 $12,100
Buildings and equipment, less accumulated depreciation
($126,330 in 2016 and $122,240 in 2015) 268,840 247,870
Total property, plant, and equipment $280,940 $259,970
Total assets $541,160 $510,370
Liabilities and Owners’ Equity
Current liabilities:
Short-term loans $22,180 $23,900
Accounts payable 72,240 71,070
Salaries, wages, and other 26,300 26,780
Total current liabilities $120,720 $121,750
Long-term debt $160,620 $171,030
Total liabilities $281,340 $292,780
Owners’ equity:
Common stock, at par $43,840 $42,010
Paid-in capital in excess of par 64,020 61,260
Total paid-in capital $107,860 $103,270
Retained earnings 151,960 114,320
Total owners’ equity $259,820 $217,590
Total liabilities and owners’ equity $541,160 $510,370

Required:

1. Calculate the following financial ratios for 2016 for CCB Enterprises:

Round items h, j, and k to the nearest whole number. Round all other answers to two decimal places. Assume a 360-day year.

a. Times interest earned to 1
b. Return on total assets %
c. Return on common stockholders' equity %
d. Debt-to-equity ratio (at December 31, 2016) to 1
e. Current ratio (at December 31, 2016) to 1
f. Quick (acid-test) ratio (at December 31, 2016) to 1
g. Accounts receivable turnover ratio (Assume that all sales are on credit.) times
h. Number of days' sales in receivables days
i. Inventory turnover ratio (Assume that all purchases are on credit.) times
j. Number of days' sales in inventory days
k. Number of days in cash operating cycle days

2. Which of the following statements pertaining to ratio analysis of CCB Enterprises is true?
All of these are true.