200910 Chapter 2: Financing -week 2 - Google Docs

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nellyxo20

6 Jun 2018

School

UWS

Department

University of Western Sydney

Course

200910

Professor

Neha

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Week2Financialstatementsandcashflow  

dividendshareofaftertaxesprofitdistributedtoshareholders(ownersof

firm)

preferencepreferencetobepaiddividendsfirstaccumulateddividends

paidwhen



constantdividendintereststeamconstantdividendeachyear.

Ordinaryreceivedividendsonlyifmanagementdecidestopaya

dividendinsteadofreinvestingthefirmsprofits



2.Interestexpensecostofborrowingmoneyfromabankerorlender.

usuallyafixedinterestratewithaloan.



Interestisexpenseinincomestatement.dividendsaredistributionsofprofit

toshareholdersthereforenotexpenses.



2.1)describethecontentoffourbasicfinancialstatementsanddiscussthe

importanceoffinancialmanagementanalysisforthemanager



1.incomestatementrevenuefirmedearnedoverspec.periodoftime

quarterorfullyear

expensesincurred



2.balancesheetcontainsinfoasofthedateofitspreparationsnapshotof

a,l,oeforspecificdate.



3.cashflowstatement

cashreceivedandspentbyfirmoverspecificperiodoftime



4.statementofchangesinequity

detailedaccountofthefirmsactivitiesintheordinaryandpreference

sharedaccounts,retainedearnings,reserves



2.2evaluatefirmprobabilityusingincomestatement



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2.3usethebalancesheettodescribeafirmsinvestmentsinassets

andthewayithasfinancedthem



2.4identifythesourcesandusesofcashforafirmusingthefirms

cashflowstatement

sourcesofcashbringscashintothefirm

Decreaseinanassetaccount,increaseinliability,increasedinearnings,



3basicfinancialfinancialstatementsincomestatement

balancesheet

cashflowstatement



WhystudyfinancialstatementsAMP

1.Analysecurrentperformanceassessfinancialconditionofthefirmbeing

analysed

2.Monitoroperationsperformanceofthefirmisreportedusingaccounting

measuresthatcomparethepricesofthefirmsproductswithcostof

providingthem.

Performancemeasuresdeterminedexecutivebonusesandcreditors

whethertoextendcompanyloans



3.Planandforecastfutureperformance

universallyunderstoodformatfordescribingafirmsoperationsfinancial

planningmodelsarebuiltusingfinancialstatementsasaprototype



Accountingprinciplesusedtopreparefinancialstatements

Accrualbasisrevenuesarerecgonisedwhenearned

expensesrecognisedwhenincurred

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Related Questions

8. Your company issued bonds at a premium. Which of the following statements is NOT true?
A. The contra account, premium on bonds payable, is amortized each year by shifting part of its balance to interest expense.
B. On the date of issuance, the stated interest rate was greater than the market interest rate.
C. As the current date approaches the maturity date, the carrying value of the bond approaches the face value of the bond.
D. The account used to record the premium has a normal debit balance.

9. Which of the following would help a company improve its quick ratio without necessarily lowering the liability risk to a creditor?
A. Borrowing money on a long-term note just before the end of the accounting period.
B. Shifting resources from long-term assets to short-term assets such as supplies and inventory.
C. Shifting obligations from long-term liabilities to short-term liabilities.
D. Acquiring inventory by issuing a long-term note.

10. Which of the following is not used to calculate the times interest earned ratio?
A. Net income.
B. Income tax expense.
C. Interest earned on investments.
D. Interest expense.

11. Which of the following statements regarding treasury stock is true?
A. When a company reissues treasury stock for more than it originally paid for the stock, it does not report a gain.
B. When a company purchases treasury stock or pays a dividend, it increases total stockholders' equity.
C. Treasury stock is reported as an asset on the balance sheet.
D. Treasury stock is reported as issued and outstanding stock.

16. Typically, all other things equal, a profitable company that pays little or no dividends:
A. is a bad investment.
B. will reinvest profits which can lead to greater growth potential.
C. will experience relatively stable stock prices over time.
D. will appeal to investors who desire distributions of profit.

17. If a corporation declares and distributes a 10% stock dividend on its common shares, the account debited is:
A. Dividends Payable.
B. Common Stock.
C. Share Capital.
D. Retained Earnings.

20. Limited Liability Companies (LLCs) are like general partnerships in that:
A. income tax is not paid by the company itself.
B. the business has a separate legal identity.
C. liability is limited.
D. amounts paid to the owners are recorded as salaries expense.

21. Which of the following statements regarding financing activities is NOT true?
A. Cash dividends paid to a company's stockholders are reported as cash outflows from financing activities.
B. When a company issues stock for cash, it reports a cash inflow from financing activities.
C. When a company repurchases stock with cash, it reports a cash outflow for financing activities.
D. When a company repays a loan, it reports a cash outflow from investing activities.

22. Which of the following statements regarding quality of income ratio is NOT true?
A. A quality of income ratio will increase if a company's working capital management allows current assets such as inventory to increase out of control.
B. Variations in the ratio can be seasonal and are the result of sales fluctuations rather than reasons for alarm.
C. The quality of income ratio measures the portion of income that was generated in cash.
D. The quality of income ratio is useful when compared to industry competitors or to prior periods.

23. Which of the following types of information is not provided by the statement of cash flows?
A. Company management of current assets and liabilities.
B. Expenditures on long-term assets.
C. Current profitability as measured by specific revenues and expenses.
D. Reliance on external financing.

24. Cash and cash equivalents include:
A. assets that have stable long-term value.
B. assets that are short-term, highly liquid, and are purchased within three months of maturity.
C. assets that consistently grow in value over the long run.
D. assets that are expected to be used up within a year.

Selected transactions completed by Primo Discount Corporationduring the current fiscal year are as follows:

Jan.	9	Split the common stock The stock outstanding when a corporation has issued only oneclass of stock. 3 for 1 and reduced the par A dollar amount assigned to each share of stock. from $75 to $25 per share. After the split, there were 1,201,500common shares outstanding.
Feb.	28	Purchased 40,200 shares of the corporationâs own common stockat $27, recording the stock Shares of ownership of a corporation. at cost.
May	1	Declared semiannual dividends Distribution of a corporationâs earnings to stockholders. of $0.70 on 70,500 shares of preferred stock A class of stock with preferential rights over common stock. and $0.14 on the common stock to stockholders The owners of a corporation. of record on June 1, payable on July 10.
Jul.	10	Paid the cash dividends A cash distribution of earnings by a corporation to itsshareholders. .
Sep.	7	Sold 31,600 shares of treasury stock Stock that a corporation has once issued and thenreacquires. at $33, receiving cash.
Oct.	1	Declared semiannual dividends of $0.70 on the preferred stockand $0.14 on the common stock (before the stock dividend). Inaddition, a 2% common stock dividend A distribution of shares of stock to its stockholders. was declared on the common stock outstanding. The fair market valueof the common stock is estimated at $38.
Dec.	1	Paid the cash dividends and issued the certificates for thecommon stock dividend.

Journalize the transactions. If no entry is required, simplyskip to the next transaction. Refer to the Chart of Accounts forexact wording of account titles.

CHART OF ACCOUNTS

Primo Discount Corporation

General Ledger

	ASSETS
110	Cash
120	Accounts Receivable
131	Notes Receivable
132	Interest Receivable
141	Merchandise Inventory
145	Office Supplies
151	Prepaid Insurance
181	Land
193	Equipment
194	Accumulated Depreciation-Equipment

	LIABILITIES
210	Accounts Payable
221	Notes Payable
226	Interest Payable
231	Cash Dividends Payable
236	Stock Dividends Distributable
241	Salaries Payable
261	Mortgage Note Payable

Paid-In Capital in Excess of Par-Common Stock

Paid-In Capital in Excess of Par-Preferred Stock

331

Paid-In Capital from Sale of Treasury Stock

Journalize the transactions. If no entry is required, simplyskip to the next transaction. Refer to the Chart of Accounts forexact wording of account titles.

PAGE 10

JOURNAL

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18

	REVENUE
410	Sales
610	Interest Revenue

	EXPENSES
510	Cost of Merchandise Sold
515	Credit Card Expense
520	Salaries Expense
531	Advertising Expense
532	Delivery Expense
533	Selling Expenses
534	Rent Expense
535	Insurance Expense
536	Office Supplies Expense
537	Organizational Expenses
562	Depreciation Expense-Equipment
590	Miscellaneous Expense
710	Interest Expense

skylouse705

Topics 1 to 3 - Consolidation: Principles, accounting requirements, intra-group transactions and non-controlling interests

Parent Ltd acquired 80% of the issued shares of Subsidiary Ltd on 1 July 2014. At the acquisition date, the equity of Subsidiary Ltd consisted of Share Capital of $200,000; Retained Earnings of $ 74,000 and General Reserve of $6,000.

Parent Ltd uses the full goodwill method. The fair value of non-controlling interest at 1 July 2014 was $63,000.

All the identifiable net assets of Subsidiary Ltd were recorded at fair value at the date of acquisition, except for the following assets:4

	Carrying amount	Fair value
	$	$
Plant (cost $150,000)	100,000	110,000
Land	60,000	76,000

The plant has a further 10-year life, with benefits expected to be received evenly over that period. The land was sold on 1 February 2015 for $80,000. Any valuation reserve in relation to the land is transferred to retained earnings on consolidation.

Three years after acquisition, the financial information at 30 June 2017 of the two companies appears as follows:

	Parent Ltd	Subsidiary Ltd
	$	$
Sales	632,000	440,000
Other revenue:
Debenture interest	10,000	-
Management and consulting fees	10,000	-
Dividends from Subsidiary Ltd	24,000	-
Total revenue	676,000	440,000
Cost of sales	260,000	170,000
Manufacturing expenses	180,000	120,000
Depreciation on plant	30,000	30,000
Administrative expenses	30,000	16,000
Financial expenses	22,000	10,000
Other expenses	28,000	24,000
Total expenses	550,000	370,000
Profit before tax	126,000	70,000
Income tax expense	(50,000)	(34,000)
Operating profit after tax	76,000	36,000
Retained earnings 1 July 2016	100,000	90,000
	176,000	126,000
Transfer to general reserve	6,000	-
Interim dividend paid	20,000	20,000
Final dividends declared	20,000	10,000
	46,000	30,000
Retained earnings 30 June 2017	130,000	96,000
General reserve	100,000	20,000
Other components of equity	26,000	20,000
Share capital	600,000	200,000
Debentures	400,000	200,000
Current tax liability	50,000	34,000
Dividend payable	20,000	10,000
Deferred tax liability	-	14,000
Other liabilities	180,000	24,000
	1,506,000	618,000
Assets
Financial assets	100,000	120,000
Debentures in Subsidiary Ltd	200,000	-
Shares in Subsidiary Ltd	263,200	-
Plant (cost)	240,000	204,000
Accumulated depreciation â plant	(130,000)	(110,000)
Other depreciable assets	152,000	110,000
Accumulated depreciation	(80,000)	(50,000)
Inventory	180,000	170,000
Deferred tax asset	170,800	60,000
Land	402,000	114,000
Dividend receivable	8,000	-
	1,506,000	618,000

Additional information:

(a) The inventory on hand of Subsidiary Ltd on 1 July 2016 included a quantity priced at $20,000 that was transferred from Parent Ltd during the prior financial year. This inventory had cost Parent Ltd $15,000. This entire inventory was sold by Subsidiary Ltd to parties external to the group during the current financial year.

(b) Subsidiary Ltd sold inventory to Parent Ltd for $120,000 during the year. This inventory had an original cost to Subsidiary Ltd of $110,000. This entire inventory was held by Parent Ltd during the year.

(c) On 1 January 2016, Subsidiary Ltd sold an item from its inventory to Parent Ltd for $40,000. Parent Ltd had treated this item as an addition to its plant. The item was put into service as soon as received by Parent Ltd and depreciation charged at 20% p.a. The cost of that item to Subsidiary Ltd was $30,000.

(d) The management and consulting fees of Parent Ltd were all paid by Subsidiary Ltd and represented charges made for administration $4,400 and technical services $5,600. The latter were recognised as manufacturing expenses by Subsidiary Ltd.

(e) All debentures issued by Subsidiary Ltd are held by Parent Ltd. The related interest has been recorded by Parent Ltd accordingly and Subsidiary Ltd recorded the interest paid in financial expenses.

(f) Other components of equity relate to movements in the fair values of the financial assets. The balance of these accounts on 1 July 2016 was $20,000 for Parent Ltd and $16,000 for Subsidiary Ltd.

(g) The tax rate is 30%.

Required:

Prepare an acquisition analysis and the consolidation journal entries necessary for preparation of the consolidated financial statements for the year ending 30 June 2017 for the group comprising Parent Ltd and Subsidiary Ltd.

Note: show all necessary workings and narrations.

Question 1	Max. marks allocated
Acquisition analysis	5
Consolidation entries - accuracy	35
Total	40

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