AFM101 Chapter Notes - Chapter 10: Current Liability, Contingent Liability, Promissory Note

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scarletpanda765

25 Aug 2016

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM101

Professor

Duane Kennedy

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AFM101 Full Course Notes

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Liabilities: debts/obligations arising from past transactions that will be paid with assets or services. Chapter 10 - reporting and interpreting current liabilities. When a liability is first recorded, it is measured in terms of its current cash equivalent, which is the cash amount that a creditor would accept to settle the liability immediately. Interest payable in the future is not included in the amount of the liability because it accrues and becomes a liability. Current liabilities: st obligations paid within the normal operating cycle or 1 year (longer) Because most companies have an operating cycle that is shorter than one year, current liabilities usually are due within one year. Liquidity is the ability to pay current obligations. Does the company currently have the resources to pay its short-term debt? indicator of the amount of current assets available to satisfy current liabilities. Current ratio = current assets current liabilities.

Related Questions

Match the following:

1. Acid-test ratio

2. Current portion of long-term debt

3. Recording a contingent liability

4. Commercial paper

5. Deferred revenues

6. Line of credit

7. Accrual accounting

8. Interest expense

9. The riskiness of a business's obligations

10. Disclosure of a contingent liability

A Cash, short-term investments, and accounts receivable alldivided by current liabilities.

B Loss is probable and amount is reasonably estimable.

C Gift cards

D Long-term debt maturing within one year.

E Informal agreement that permits a company to borrow up to aprearranged limit.

F Interest expense is recorded in the period interest isincurred rather than in the period interest is paid

G Loss is reasonably possible and amount is reasonablyestimable

H Incurred on a notes payable

I obligations Unsecured notes sold in minimum denominations of$25,000 with maturities up to 270 days

J Classifying liabilities as either current or long-term helpsinvestors and creditors assess this.

amaranthwasp103

BradburnCorporation was formed 5 years ago through a public subscription ofcommon stock. Daniel Brown,

who owns

15%

owns 15% of the common stock, was one of theorganizers of Bradburn and is its

current president. The companyhas been successful, but it currently is experiencing a shortage offunds. On

June 10, Daniel Brownapproached the Topeka National Bank, asking for a 24-monthextension on two

$35,000

notes, which are due on June30, 2013, and September 30, 2013. Another note of

$6,000

is due

on March 31, 2014, but heexpects no difficulty in paying this note on its due date. Brownexplained that

Bradburnâs cash flow problemsare due primarily to the companyâs desire to finance a

$300,000

plant

expansion over the next 2fiscal years through internally generated funds.

The commercialloan officer of Topeka National Bank requested financial reportsfor the last 2 fiscal years.

BRADBURN CORPORATION

Statement of FinancialPosition

Accounts receivable (net)

131,800

125,500

Inventories (at cost)

105,000

50,000

Plant & equipment (net ofdepreciation)

Liabilities and Owners'Equity

Common stock (130,000 shares,$10 par)

Total liabilities and owners'equity

$1,852,000

$1,740,500

^aCash dividends were paid at the rate of $1.00 per sharein fiscal year 2012
and $2.00 per share in fiscal year 2013.

SANDBURG CORPORATION

Income Statement

For The Fiscal Year EndedMarch 31

Income before incometaxes

Net income after incometaxes

$366,000

$297,000

Depreciation charges on theplant and equipment of

$100,000

and

$102,500

for the fiscal years endedMarch 31, 2012 and 2013, respectively, are included in cost ofgoods sold.

Instructions:

Fill in the provided matrixand utilize it as the matrix for "VLOOKUP" formulas within thecells below.

Average inventory - 2011

Total Assets = Mar 31, 2009

1,688,500

Total Assets = Mar 31, 2010

1,740,500

Total Assets = Mar 31, 2011

Inventories = EOY 2010

Amount

Inventories = EOY 2011

Amount

Net income after taxes

(a) Compute the followingitems for Bradburn Corporation:

(1) Current ratio for fiscalyears 2012 and 2013.

Note: The formulas in somecell formulas are "live" and need values placed in their sourcecells.

2012 Current ratio =

Currentassets
----------------------- =
Current liabilities

Currentassets
----------------------- =
Current liabilities

(2) Acid-test (quick) ratiofor fiscal years 2012 and 2013.

2012 Quick ratio =

Current assets -Inventories
----------------------- =
Current liabilities

Current assets -Inventories
----------------------- =
Current liabilities

(3) Inventory turnover forfiscal year 2013.

2013 Inventory Turnover =

Cost of goodssold
------------------------------------ =
Average inventory

(4) Return on assets forfiscal years 2012 and 2013. (Assume total assets were

$1,688,500

at March 31, 2011.)

2012 Return on assets =

Net income
----------------------- =
Average total assets

Formula

---------------- =

Formula

2013 Return on assets =

Net income
----------------------- =
Average total assets

Formula

---------------- =

Formula

(5)Percentage change in sales, cost of goods sold, gross margin, andnet income after taxes from fiscal year
2012 to 2013. Omit "000" from thevalues.

Net income after taxes

#VALUE!

Formula

Note: The formulas in somecell formulas are "live" and need values placed in their sourcecells.

(b)Identify and explain what other financial reports and/or financialanalyses might be helpful to the
commercial loan officer of Topeka NationalBank in evaluating Daniel Brownâs request for a timeextension
on Bradburnâs notes.

Otherfinancial reports and financial analyses which might be helpful tothe commercial loan officer of Spokane National Bank include:

Enter text answeras appropriate.

(c)Assume that the percentage changes experienced in fiscal year 2013as compared with fiscal year 2012
for sales and cost of goods sold will berepeated in each of the next 2 years. Is Bradburnâs desire to
finance the plant expansion frominternally generated funds realistic? Discuss.

Entertext answer as appropriate.

Funds available for plant expansion

Assumptions: Complete as appropriate.

Sales increase at a rate of

Cost of goods sold increases at rate of

despite depreciation remaining constant.

Other operating expenses increase at the same rateexperienced from 2012 to 2013;

i.e., at

Depreciation remains constant at

Dividends remain at

per share.

Plant expansion is financed equally over the twoyears(

each year).

Loan extension is granted.

(d)Should Topeka National Bank grant the extension on Bradburnâs notesconsidering Daniel Brownâs statement
about financing the plant expansionthrough internally generated funds? Discuss.

Enter text answer as appropriate.

ochreoyster815

Comparative financial statement data for Carmono Company follow:

	This Year		Last Year
Assets
Cash	$	7.50	$	14.00
Accounts receivable		50.00		43.00
Inventory		92.50		79.20

Total current assets		150.00		136.20

Property, plant, and equipment		231.00		194.00
Less accumulated depreciation		45.60		34.20

Net property, plant, and equipment		185.40		159.80

Total assets	$	335.40	$	296.00

Liabilities and Stockholdersâ Equity
Accounts payable	$	55.50	$	46.00
Common stock		118.00		91.00
Retained earnings		161.90		159.00

Total liabilities and stockholdersâ equity	$	335.40	$	296.00

For this year, the company reported net income as follows:


Sales	$	850.00
Cost of goods sold		510.00

Gross margin		340.00
Selling and administrative expenses		320.00

Net income	$	20.00

This year Carmono declared and paid a cash dividend. There were no sales of property, plant, and equipment during this year. The company did not repurchase any of its own stock this year.

Carmono CompanyStatement of Cash Flows - Indirect MethodFor This Year Ended December 31Operating activities:Net income$20.00Adjustments to convert net income to a cash basis:Depreciation$11.40Increase in accounts receivable(7.00)Increase in inventory(13.30)Increase in accounts payable9.500.60Net cash provided by operating activities20.60Investing activities:Increase in plant and equipment(37.00)Net cash used in investing activities(37.00)Financing activities:Increase in common stock27.00Cash dividends(17.10)Net cash provided by financing activities9.90Net decrease in cash(6.50)Beginning cash and cash equivalents14.00Ending cash and cash equivalents$7.50

2.	Compute Carmonoâs free cash flow for this year. (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to 2 decimal places.)

Free cash flow$

Changes in various accounts and gains and losses on the sale of assets during the year for Argon Company are given below:

Item		Amount
Accounts receivable	$	79,000	decrease
Inventory	$	120,000	increase
Prepaid expenses	$	3,500	decrease
Accounts payable	$	41,000	decrease
Accrued liabilities	$	9,600	increase
Income taxes payable	$	15,700	increase
Sale of equipment	$	8,100	gain
Sale of long-term investments	$	12,200	loss

Required:

For each item, indicate whether the dollar amount should be added to or deducted from net income under the indirect method when computing the net cash provided by operating activities for the year.

Item	Amount	Effect
Accounts receivable
Inventory
Prepaid expenses
Accounts payable
Accrued liabilities
Income taxes payable
Sale of equipment
Sale of long-term investments

Apex Company prepared the statement of cash flows for the current year that is shown below:

Apex Company Statement of Cash FlowsâIndirect Method
Operating activities:
Net income			$	41,500
Adjustments to convert net income to cash basis:
Depreciation	$	20,100
Increase in accounts receivable		(61,500)
Increase in inventory		(25,100)
Decrease in prepaid expenses		9,400
Increase in accounts payable		54,300
Decrease in accrued liabilities		(10,100)
Increase in income taxes payable		3,300		(9,600)

Net cash provided by operating activities				31,900
Investing activities:
Proceeds from the sale of equipment		15,200
Loan to Thomas Company		(41,900)
Additions to plant and equipment		(121,800)

Net cash used for investing activities				(148,500)
Financing activities:
Increase in bonds payable		88,800
Increase in common stock		38,700
Cash dividends		(28,400)

Net cash provided by financing activities				99,100

Net decrease in cash				(17,500)
Beginning cash balance				27,200

Ending cash balance			$	9,700

Required:

Compute Apex Companyâs free cash flow for the current year. (Negative amount should be indicated by a minus sign.)

Free Cash Flow

For the just completed year, Hanna Company had net income of $95,000. Balances in the companyâs current asset and current liability accounts at the beginning and end of the year were as follows:

	December 31
	End of Year		Beginning of Year
Current assets:
Cash	$	59,000	$	80,000
Accounts receivable	$	164,000	$	184,000
Inventory	$	448,000	$	346,000
Prepaid expenses	$	11,500	$	15,000
Current liabilities:
Accounts payable	$	366,000	$	392,000
Accrued liabilities	$	8,000	$	13,000
Income taxes payable	$	32,000	$	25,000

The Accumulated Depreciation account had total credits of $42,000 during the year. Hanna Company did not record any gains or losses during the year.

Required:

Use the indirect method to determine the net cash provided by (or used in) operating activities for the year. (List any deduction in cash and cash outflows as negative amounts.)

redgrasshopper904

AFM101 Chapter Notes - Chapter 10: Current Liability, Contingent Liability, Promissory Note

AFM101 Full Course Notes

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