ADM 1340 Chapter 2: Chapter 2
ADM 1340 Full Course Notes
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2. Balance sheet
The balance sheet provides a snapshot of the financial conditionof a company. Investors and analysts use the information given onthe balance sheet and other financial statements to make severalinterpretations regarding the companyâs financial condition andperformance.
Blue Hamster Manufacturing Inc. is a hypothetical company.Suppose it has the following balance sheet items reported at theend of its first year of operation. For the second year, some partsare still incomplete. Use the information given to complete thebalance sheets for Blue Hamster Manufacturing Inc. for the yearsending December 31, Year 2 and 1, respectively.
Blue Hamster Manufacturing Inc. | |||||
|---|---|---|---|---|---|
Balance Sheet | |||||
For the Year ended December 31 | |||||
| Year 2 | Year 1 | Year 2 | Year 1 | ||
| Assets | Liabilities and equity | ||||
| Current assets: | Current liabilities: | ||||
| Cash and equivalents | $55,350 | Accounts payable | $0 | $0 | |
| Accounts receivable | $25,312 | $20,250 | Accruals | $3,516 | $0 |
| Inventories | $74,250 | $59,400 | Notes payable | $19,921 | $18,750 |
| Total current assets | $168,750 | $135,000 | Total current liabilities | $18,750 | |
| Net fixed assets: | Long-term debt | $70,312 | $56,250 | ||
| Net plant and equipment | $165,000 | Total debt | $93,750 | $75,000 | |
| Common equity: | |||||
| Common stock | $182,812 | $146,250 | |||
| Retained earnings | $78,750 | ||||
| Total common equity | $281,250 | $225,000 | |||
| Total assets | $375,000 | $300,000 | Total liabilities and equity | $375,000 | $300,000 |
Given the information in the preceding balance sheetâandassuming that Blue Hamster Manufacturing Inc. has 50 million sharesof common stock outstandingâread each of the following statements,then identify the selection that best interprets the informationconveyed by the balance sheet.
Statement #1: Blue Hamsterâs pool of relatively liquid assets,which are available to support the companyâs current and futuresales, decreased from Year 1 to Year 2.
This statement is , because:
Blue Hamsterâs total current liabilities balance decreased by$33,750 between Year 1 and Year 2.
Blue Hamsterâs total current liabilities balance increased from$20,250 to $25,312 between Year 1 and Year 2.
Blue Hamsterâs total current asset balance actually increasedfrom $135,000 to $168,750 between Year 1 and Year 2.
Blue Hamsterâs total current asset balance decreased from$168,750 to $135,000 between Year 1 and Year 2.
Statement #2: In Year 2, Blue Hamster Manufacturing Inc. wasprofitable.
This statement is , because:
Blue Hamsterâs retained earnings account increased between theend of Years 1 and 2.
The cash and equivalents account increased between Years 1 and2.
Blue Hamsterâs total assets increased between Years 1 and 2.
Statement #3: The book value per share of Blue Hamsterâs stockin Year 2 was $5,625.
This statement is , because:
The per-share book value is calculated by dividing the companyâstotal assets by the number of outstanding shares of commonstock.
The per-share book value is calculated by dividing the companyâstotal debt by the number of outstanding shares of common stock.
The per-share book value is calculated by dividing the companyâstotal common equity by the number of outstanding shares of commonstock.
Based on your understanding of the different items reported onthe balance sheet and the information they provide, if everythingelse remains the same, then the cash and equivalents item on thecurrent balance sheet is likely to if the firm issues$3 million of new common stock.
Based on your understanding of the different items reported inthe balance sheet and the information they provide, which statementregarding Blue Hamster Manufacturing Inc.âs balance sheet isconsistent with U.S. Generally Accepted Accounting Principles(GAAP)?
The companyâs assets should be listed in alphabetical order.
The companyâs assets should be listed in the order in which theyare to be converted into cash.
The companyâs assets should be listed from those carrying thelargest balance to those with the smallest balance.
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 stockholdersâ 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 Swisscomâs USGAAP reconciliation, also is provided.
Required
Use the information in Note 27 to restate Swisscomâsconsolidated 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/shareholdersâ equity
Operating income/total shareholdersâ equity
Current assets/current liabilities
Total liabilities/total shareholdersâ 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 shareholdersâ equity from IFRS toGAAP
The following is a reconciliation of the significant adjustmentsnecessary to reconcile shareholdersâ 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 shareholdersâ 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, Swisscomâs 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.
| Problem 13-18A Common-Size Statements and Financial Ratios for a Loan Application [LO13-1, LO13-2, LO13-3, LO13-4]
During the past year, the company introduced several new product lines and raised the selling prices on a number of old product lines in order to improve its profit margin. The company also hired a new sales manager, who has expanded sales into several new territories. Sales terms are 2/10, n/30. All sales are on account. 2. | For both this year and last year: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| a. | Present the balance sheet in common-size format. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).) |
| Sabin Electronics |
| Common-Size Balance Sheets |
| This Year | Last Year | |||
| Assets | ||||
| Current Assets: | ||||
| Cash | % | % | ||
| Marketable securities | ||||
| Account receivable, net | ||||
| Inventory | ||||
| Prepaid expenses | ||||
| Total current assets | ||||
| Plant and equipment, net | ||||
| Total assets | % | % | ||
| Liabilities and Stockholders' Equity | ||||
| Liabilities: | ||||
| Current Liabilities | % | % | ||
| Bonds payable, 12% | ||||
| Total Liabilities | ||||
| Stockholders' equity: | ||||
| Common stock, $15 par | ||||
| Retained earnings | ||||
| Total stockholders' equity | ||||
| Total liabilities and equity | % | % |
| b. | Present the income statement in common-size format down through net income. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)
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