Chapter 6 WWW Cases

Case 6-10Objectives of Financial Statements

Discuss how a company’s primary financial statements are useful to potential investors who are trying to decide whether to buy stock in the company. Support your discussion by citing objectives outlined in the Conceptual Framework.

Case 6-11 Classification of Income Statement Items

You are in charge of reviewing the classification of unusual items that have occurred during for your CPA firm during the current year. The following material items have come to your attention:

  1. A department store incorrectly overstated its ending inventory 2 years ago. Inventory for all other periods is correctly computed.
  2. An automobile dealer sells for $137,000 an extremely rare antique automobile which it purchased for $21,000 10 years ago. The antique auto is the only similar item the dealer owns.
  3. An oil company during extended the estimated useful life of certain drilling equipment during the current year from 8 to 12 years. As a result, depreciation for the current year was materially lowered.
  4. A discount outlet changed its computation for bad debt expense from 1% to of 1% of sales because of changes in its customer clientele.
  5. A mining company sells a foreign subsidiary engaged in uranium mining, although it (the seller) continues to engage in uranium mining in other countries.
  6. A grocery store chain changes from the average cost method to the FIFO method for inventory costing purposes.
  7. A construction company, at great expense, prepared a major proposal for a government loan. The loan is not approved.
  8. A manufacturer has had large losses resulting from a strike by its employees early in the year.
  9. Depreciation for a prior period was incorrectly understated by $2,000,000. The error was discovered in the current year.
  10. A chicken farm suffered a major loss because the state required that all chickens in the state be killed to halt the spread of bird flu. Such a situation has not occurred in the state for 20 years.
  11. A food processor that sells wholesale to supermarket chains and to fast-food restaurants (two distinguishable classes of customers) decides to discontinue the division that sells to one of the two classes of customers.

Case 6-12 Format of Proposed Income Statement

In Phase B of the joint FASB-IASB financial statement presentation project, the Boards are planning to release a plan to recast financial statements into a new format. One possible result is the elimination of the current definition of net income. In its place, financial statement users may find a number of profit figures that correspond to different corporate activities.

Required:

Discuss the proposed new format of the income statement.

Case 6-13 Using Judgment in Applying Accounting Policies

IAS No. 8 states that when a Standard or an Interpretation specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item must be determined by applying the Standard or Interpretation and considering any relevant implementation guidance issued by the IASB for the Standard or Interpretation. However, in the absence of a Standard or an Interpretation that specifically applies to a transaction, judgment should be used in developing and applying an accounting policy that results in information that is relevant and reliable.

Required:

Discuss the sources to be considered when making that decision.

Case 6-14 IAS No. 1

The IASB outlined its requirements for the presentation of the income statement in IAS No. 1, “Framework for the Preparation and Presentation of Financial Statements”

Required:

  1. What is the objective of IAS No. 1?
  2. What income information does IAS No. 1 required to be presented?
  3. What are the allowable methods for presenting that information?

Case 6-15 Financial Analysis

Log onto the World Wide Web and search for the annual reports of three domestic Fortune 1000 companies and three international companies.

Required:

a. Review the income statements for the three domestic companies and answer the following questions for the last reporting year:

i. What income statement format does each company use?

ii. What are the basic and diluted earnings per share for each company?

iii. Have any of the companies disclosed accounting changes?

iv.Have the companies reported any discontinued operations for the last year?

b.Review the income statements for the three domestic companies and answer the following questions for the last reporting year:

i.Do the companies present the income statement in the format suggested in Presentation of Financial Statements?

ii.What are the basic and diluted earnings per share for each company?

iii. Have any of the companies disclosed accounting changes?

iv.Have the companies reported any discontinued operations for the last year?

Financial Analysis Case

Assess investors’ comparative perceptions of the outlook for your company.

Required:

a.Compute the price/earnings ratio for your company and its two competitors for the last day of its latest fiscal year.

b.Comment on the implications of your company’s price/earnings ratio in comparison to its competitors’ and market averages.