Identification of Current Liabilities, Contingencies, andCommitments LO3 P 1. Listed below are common types of currentliabilities, contingencies, and commitments:
a. Accounts payable
b. Bank loans and commercial paper
c. Notes payable
d. Dividends payable
e. Sales and excise taxes payable
f. Current portion of long-term debt
g. Payroll liabilities
h. Unearned revenues
i. Income taxes payable
j. Property taxes payable
k. Promotional costs
l. Product warranty liability
m. Vacation pay liability
n. Contingent liability
o. Commitment
Required
1. For each of the following statements, identify the categoryabove to which it gives rise or with which it is most closelyassociated:
1. A company agrees to replace parts of a product ifthey fail.
2. An employee earns one day off for each monthworked.
3. A company signs a contract to lease a buildingfor five years.
4. A company puts discount coupons in thenewspaper.
5. A company agrees to pay insurance costs foremployees.
6. A portion of a mortgage on a building is due thisyear.
7. The board of directors declares a dividend.
8. A company has trade payables.
9. A company has a pending lawsuit against it.
10. A company arranges for a line of credit.
11. A company signs a note due in 60 days.
12. A company operates in a state that has a sales tax.
13. A company earns a profit that is taxable.
14. A company owns buildings that are subject to propertytaxes.
2. Of the items listed from a to o above, which oneswould you not expect to see listed on the balance sheet with adollar amount? Of those items that would be listed on the balancesheet with a dollar amount, which ones would you con- sider toinvolve the most judgment or discretion on the part ofmanagement?
Identification of Current Liabilities, Contingencies, andCommitments LO3 P 1. Listed below are common types of currentliabilities, contingencies, and commitments:
a. Accounts payable
b. Bank loans and commercial paper
c. Notes payable
d. Dividends payable
e. Sales and excise taxes payable
f. Current portion of long-term debt
g. Payroll liabilities
h. Unearned revenues
i. Income taxes payable
j. Property taxes payable
k. Promotional costs
l. Product warranty liability
m. Vacation pay liability
n. Contingent liability
o. Commitment
Required
1. For each of the following statements, identify the categoryabove to which it gives rise or with which it is most closelyassociated:
1. A company agrees to replace parts of a product ifthey fail.
2. An employee earns one day off for each monthworked.
3. A company signs a contract to lease a buildingfor five years.
4. A company puts discount coupons in thenewspaper.
5. A company agrees to pay insurance costs foremployees.
6. A portion of a mortgage on a building is due thisyear.
7. The board of directors declares a dividend.
8. A company has trade payables.
9. A company has a pending lawsuit against it.
10. A company arranges for a line of credit.
11. A company signs a note due in 60 days.
12. A company operates in a state that has a sales tax.
13. A company earns a profit that is taxable.
14. A company owns buildings that are subject to propertytaxes.
2. Of the items listed from a to o above, which oneswould you not expect to see listed on the balance sheet with adollar amount? Of those items that would be listed on the balancesheet with a dollar amount, which ones would you con- sider toinvolve the most judgment or discretion on the part ofmanagement?
Related questions
Case 2.3 Walgreens Co. and Subsidiaries
The following excerpts are from the 2013 Walgreen Co. Form 10-K:
| CONSOLIDATED BALANCE SHEETS | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Walgreens Co. and Subsidiaries at August 31,2013 and 2012 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions, except shares and per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2012 | 2013 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current Assests | $2,106 | $1,297 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $2,632 | $2,167 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounts Rec, net | $6,852 | $7,036 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Inventories | $284 | $260 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other current assets | $11,874 | $10,760 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Current Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncurrent Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property & equipment, at cost,less accumulated deprec & amortization | $12,138 | $12,038 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity investment in Alliance Boots | $2,410 | $2,161 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Alliance Boots call option | $6,261 | $6,140 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill | $839 | $866 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other noncurrent assets | $1,959 | $1,497 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Assets | $23,607 | $22,702 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $35,481 | $33,462 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities and Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Short-term borrowings | $570 | $1,319 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Trade accounts payable | $4,635 | $4,384 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued expenses and other liabilities | $3,577 | $3,019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Taxes | $101 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Current Liabilites | $8,883 | $8,722 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncurrent liabilites | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Long-term debt | $4,477 | $4,073 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred income taxes | $600 | $545 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other noncurrent liabilities | $2,067 | $1,866 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total noncurrent liabilites | $7,144 | $6,504 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and contingencies(see note) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock, $.0625 per value; authorized 32 million shares; | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| issued 1,028,180,150 shares in 2013 and 2012 | $80 | $80 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Paid-in capital | $1,074 | $936 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Employee stock loan recievable | ($11) | ($19) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retained Earnings | $21,523 | $20,156 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated other comprehensive (loss) income | ($98) | $68 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury Stock at cost, 81,584,572 shares in 2013 and | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 84,124,816 shares in 2012 | ($3,114) | ($2,985) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Shareholders' Equity | $19,454 | $18,236 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Liabilites and Shareholder's Equity | $35,481 | $33,462 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The accompanying Notes to Consolidated Financial Statements are integral parts of these statments. Notes to Consolidated financial Statements 1.Summary of Major Accounting Policies Description of Business The company is principally in the retail drugstore business and its operations are within one reportable segment. At August 31,2013 there was 8,582 drugstore and other locations in 50 states, the District of Columbia, Guam, and Puerto Rico. Prescription sales were 62.9% of total sales for fiscal 2013 compared to 63.2% in 2012 and 64.7% in 2011. Allowance for Doubtful Accounts The provision for bad debt is based on both historical write-off percentages and specifically identified receivables. Activity in the allowance for doubtful accounts was as follows (In millions):
Inventories Inventories are valued on a lower of last-in, first-out (LIFO) cost or market basis. At August 31, 2013 and 2012, inventories would have been greater by $2.1 billion and $1.9 billion, respectively, if they had been valued on a lower of first-in, first-out (FIFO) cost or market basis. As a result of declining inventory levels, the fiscal 2013 and 2012 LIFO provisions were reduced by $194 million and $268 million of LIFO liquidation, respectively. Inventory includes product costs, inbound freight, warehousing costs, and vendor allowances not classified as a reduction of advertising expense. 3.Leases The company owns 20.2% of its operating locations; the remaining locations are leased premises. Initial terms are typically 20 to 25 years, followed by additional terms containing renewal options at five-year intervals, and may include rent escalation clauses. The commencement date of all lease terms is the earlier of the date the company becomes legally obligated to make rent payments or the date the Company has to right to control the property. The Company recognizes rent expense on a straight-line basis over the term of the lease. In addition to minimum fixed rentals, some leases provide for contingent rentals based upon a portion of sales. Minimum rental commitments at August 31, 2013, under all leases having an initial or remaining non-cancelable term of more than one year are shown below (in Millions):
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The capital lease amoutn includes $155 million of imputed interest and executory costs. Total minimum lease payments have not been reduced by minimum sublease rentals of approximately $140 million on leases due in the future under non-cancelable subleases.
The Company remains secondarily liable on 26 assigned leases. The maiximum potential undiscounted future payments are $18 million at August 31, 2013. Lease option dates vary, with some extending to 2041.
| WALGREEN CO. INFORMATION FROM CONSOLIDATED | ||||||||
| STATEMENTS OF COMPREHENSIVE INCOME | ||||||||
| For the Years Ended August 31,2013 and 2012 (in millions) | ||||||||
| 2013 | 2012 | |||||||
| Sales | $72,217 | $71,633 | ||||||
| Net Income | $2,450 | $2,127 | ||||||
Required:
a. Using the consolidated balance sheets for Walgreen Co. for August 31,2013 and 2012, prepare a common-size balance sheet.
b. Which current asset is the most significant? Which noncurrent asset is the most significant? Are the relative proportions of current and noncurrent assets what you would expect for a drug store?
c. Analyze accounts recievable and allowance for doubtful accounts.
d. What inventory is used to value inventories? Has Walgreen experienced inflation or deflation? Explain your answer. Explain the reference in the inventory note to the LIFO liquidation and what this means with regard to net income reported.
e. Assess the level of debt and risk that Walgreen has by looking only at the balnce sheet.
f. Estimate the dollar amount of dividends Walgreens paid in 2013.
g. Does Walgreen use off-balance sheet fiancing? Explain your answer.
h. Evaluate the creidtworthiness of Walgreen based on the Balance sheet and the excerpts from the notes.
