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ACCT 1220 Lecture 2: 2017-09-15 Lecture 2 - Financial statements

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School
University of Guelph
Department
Accounting
Course
ACCT 1220
Professor
Philippe Lassou

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Document Summary

Chapter 2: a further look at financial statements. Lo 1: identify the sections of a classified statement of a financial position. Need income statement: to calculate the total return, classified statement. Assets resources controlled/owned by the company: current assets, cash, accounts receivable inventory, non-current assets, property, plant, and equipment. Liabilities a(cid:374)d sha(cid:396)eholde(cid:396)"s e(cid:395)uity: current liabilities, non-current liabilities, shareholde(cid:396)"s e(cid:395)uity, current assets. Expected to be turned into cash, sold or used in the business within one year or one operating cycle (whoever is longer: operating cycle average time it takes to go from cash to cash in producing revenue. [selling pens: need cash to buy and sell pens, pay employees, sell pens / receive cash, usually happens within a year, may take longer, until someone buys it, its considered an asset (inventory) Usually listed in order of liquidity: reverse order of liquidity also possible.

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Related Questions

Silver ComputerCorporation
Use the financial statementsbelow to complete a financial ratio analysis.
The ratios should becalculated on the ratio worksheet. Make sure to reference
amounts from the statementsonto your ratios. Be sure that your answer
uses the correct format forthat ratio: times, percentage, days, dollar amount.
RatioFormat:
Show with your answer whetherthe ratio is times, perentage, or dollar amount.
For example:
o Current ratio is times, so it would be shown as anumber compared to one.
(ie. 2.08 to 1 or 2.08:1 )
o Working capital is a dollar amount, so it would beshown as currency.
(ie. $11, 190 )
o Net margin is a percentage, so it would be shownwith a % sign.
(ie. 12.7% )
Take a look at the ratiodescriptions in the textbook to determine if the ratio is
times, percentage, or dollaramount.
Decimal Places onRatios
The following are typicallyaccepted rules for decimal places on ratios:
o Ratios: two decimal places
o Dollars: two decimal places (the book showed threedecimal places for
earnings per share but we don't need to do that forthis class)
o Days: one decimal place
o Percentages: one decimal place (the textbook showedpercentages to two
decimal places but I think that is overkill)
o Price-Earnings ratio: two decimal places
o Times: two decimal places
Silver ComputerCorporation
IncomeStatement
For the Year EndedDecember 31, 2016
Sales $ 47,240
Cost of goods sold 18,920
Gross profit 28,320
Operating expenses
Utilities $ 6,430
Wages 8,310
Rent 1,730 16,470
Operating income 11,850
Other revenue and expense
Interest revenue $ 940
Interest expense 1,190 2,130
Income before incometaxes 9,720
Income taxes 3,730
Net income $ 5,990
Silver ComputerCorporation
Comparative BalanceSheets
As of December 31,2016 and 2015
Change
2016 2015 Amount Percent
Assets
Current assets
Cash $ 3,290 $ 6,230 $ (2,940) -47.2%
Marketable securities 1,120 1,920 (800) -41.7%
Accounts receivable 3,980 6,790 (2,810) -41.4%
Merchandise inventory 6,880 5,110 1,770 34.6%
Supplies 1,270 2,130 (860) -40.4%
Total current assets 16,540 22,180 (5,640) -25.4%
Plant and equipment
Equipment 10,560 6,450 4,110 63.7%
Truck 26,310 18,310 8,000 43.7%
Total plant and equipment 36,870 24,760 12,110 48.9%
Total assets $ 53,410 $ 46,940 $ 6,470 13.8%
Liabilities
Current liabilities
Accounts payable $ 6,940 $ 4,390 $ 2,550 58.1%
Wages payable 990 1,510 (520) -34.4%
Accrued liabilities 2,420 1,920 500 26.0%
Total current liabilities 10,350 7,820 2,530 32.4%
Long-term liabilities
Long-term notes payable 9,900 6,300 3,600 57.1%
Total liabilities 20,250 14,120 6,130 43.4%
Stockholder's Equity
Common stock 8,460 6,610 1,850 28.0%
Retained earnings 29,700 26,210 3,490 13.3%
Total stockholder'sequity 38,160 32,820 5,340 16.3%
Total liabilities &equity $ 58,410 $ 46,940 $ 11,470 24.4%
Notes for preparationof financial ratios:
o All of Silver Corporations sales were onaccount.
o 1,692 shares of common stock were outstanding atthe end of 2016.
o $2.50 of dividends per share were paid in2016.
o The market price per share of Silver stock was$34.00 for all of 2016.
Answer this question
SilverComputer Corporation
Liquidity and SolvencyFinancial Ratios
LiquidityRatios
Note - Working Capitalshown as an example to follow on the remainingratios.
Working Capital 16,540
10,350 1.6:1
Current ratio
Quick ratio
* Quick assets are cash,marketable securities, and accounts receivable
Accounts receivableturnover
Average days to collectreceivables
Inventory turnover
Average days to sellinventory
Operating cycle
Solvency Ratios(Long-term credit risk)
Debt ratio
Interest coverage ratio

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.

Problem 13-18A Common-Size Statements and Financial Ratios for a Loan Application [LO13-1, LO13-2, LO13-3, LO13-4]

Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on which he had secured patents. Although the company has been fairly profitable, it is now experiencing a severe cash shortage. For this reason, it is requesting a $540,000 long-term loan from Gulfport State Bank, $120,000 of which will be used to bolster the Cash account and $420,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow:
Sabin Electronics
Comparative Balance Sheet
This Year Last Year
Assets
Current assets:
Cash $ 86,000 $ 190,000
Marketable securities 0 22,000
Accounts receivable, net 529,000 340,000
Inventory 960,000 635,000
Prepaid expenses 22,000 26,000
Total current assets 1,597,000 1,213,000
Plant and equipment, net 1,631,600 1,410,000
Total assets $ 3,228,600 $ 2,623,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities $ 820,000 $ 470,000
Bonds payable, 12% 800,000 800,000
Total liabilities 1,620,000 1,270,000
Stockholders' equity:
Common stock, $15 par 810,000 810,000
Retained earnings 798,600 543,000
Total stockholders’ equity 1,608,600 1,353,000
Total liabilities and equity $ 3,228,600 $ 2,623,000
Sabin Electronics
Comparative Income Statement and Reconciliation
This Year Last Year
Sales $ 5,200,000 $ 4,470,000
Cost of goods sold 3,915,000 3,490,000
Gross margin 1,285,000 980,000
Selling and administrative expenses 661,000 556,000
Net operating income 624,000 424,000
Interest expense 96,000 96,000
Net income before taxes 528,000 328,000
Income taxes (30%) 158,400 98,400
Net income 369,600 229,600
Common dividends 114,000 93,000
Net income retained 255,600 136,600
Beginning retained earnings 543,000 406,400
Ending retained earnings $ 798,600 $ 543,000

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).)

Sabin Electronics
Common-Size Income Statements
This Year Last Year
Sales % %
Cost of goods sold
Gross margin
Selling and administrative expenses
Net operating income
Interest expense
Net income before taxes
Income taxes
Net Income % %