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Full Disclosure in
H igh-Quality Financial Reporting—It’s a Necessity
Here are excerpts from leading experts regarding the importance of high-
After studying this chapter, you
quality financial reporting:1 should be able to:
Review the full disclosure
Warren E. Buffett, Chairman and Chief Executive Officer, Berkshire
principle and describe
Hathaway Inc.: problems of
Financial reporting for Berkshire Hathaway, and for me personally, is the begin- implementation.
ning of every decision that we make around here in terms of capital. I’m punching Explain the use of notes
out 10-Ks and 10-Qs every single day. We look at the numbers and try to evaluate in financial statement
the quality of the financial reporting, and then we try to figure out what that means preparation.
for the bonds and stocks that we’re looking at, and thinking of either buying or
selling. Describe the disclosure
requirements for major
Abby Joseph Cohen, Chair, Investment Policy Committee, Goldman, Sachs segments of a business.
& Co.: Describe the accounting
High-quality financial reporting is perhaps the most important thing we can ex- problems associated with
pect from companies. For investors to make good decisions—whether those in- interim reporting.
vestors are buying stocks or bonds or making private investments—they need to Identify the major
know the truth. And we think that when information is as clear as possible and is disclosures found in the
reported as frequently as makes sense, investors can do their jobs as best they can. auditor’s report.
Jeffrey E. Garton, Dean of the Yale School of Management and former Under Understand management’s
Secretary of Commerce for International Trade: responsibilities for
. . . The integrity of the whole society is undermined if financial information is
misrepresented, or if it isn’t accurate or understandable. Because we live in a mar- Identify issues related to
ket society—and increasingly, the world does—unless the markets can be trusted, financial forecasts and
then you have widespread corruption . . . and a market economy that doesn’t projections.
function. Describe the profession’s
Judy C. Lewent, Executive Vice President and Chief Financial Officer, Merck response to fraudulent
& Co., Inc.:
. . . Higher standards, when properly implemented, drive excellence. I can make
a parallel to the pharmaceutical industry. If you look around the world at where
innovations come from, economists have studied and seen that where regulatory
standards are the highest is where innovation is also the highest.
Floyd Norris, Chief Financial Correspondent, the New York Times:
We are in a situation now in our society where the temptations to provide “bad”
financial reporting are probably greater than they used to be. The need to get the
stock price up, or to keep it up, is intense. So, the temptation to play games, the
temptation to manage earnings—some of which can be legitimate and some of
which cannot be—is probably greater than it used to be.
In short, the comments of these respected individuals illustrate why high-quality
financial reporting is important to companies, to investors, and to the capital
markets. At the heart of high-quality financial reporting is full disclosure.
Excerpts taken from video entitled “Financially Correct with Ben Stein,” Financial
Accounting Standards Board (Norwalk, Conn.: FASB, 2002). By permission.
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PREVIEW OF CHAPTER 24
As indicated in the opening story, without transparent, complete, and truthful report-
ing of financial performance our markets will not function properly. That is why it is
so important that all aspects of financial reporting—the financial statements, the notes,
the president’s letter, and management’s discussion and analysis—be read and under-
stood. In this chapter, we cover the full disclosure principle in more detail and exam-
ine disclosures that must accompany financial statements so that they are not mis-
leading. The content and organization of this chapter are as follows.
FULL DISCLOSURE IN FINANCIAL
Full Disclosure Auditor’s and Current Reporting
Notes to Financial
Principle Disclosure Issues Management’s Issues
• Increase in reporting • Accounting policies • Special transactions • Auditor’s report • Reporting on
requirements • Common notes or events • Management’s forecasts and
• Post-balance-sheet reports projections
disclosure events • Internet financial
• Diversified reporting
companies • Fraudulent financial
• Interim reports reporting
• Criteria for
FULL DISCLOSURE PRINCIPLE
FASB Concepts Statement No. 1 notes that some useful information is better provided in
the financial statements, and some is better provided by means of financial reporting
other than in financial statements. For example, earnings and cash flows are readily
available in financial statements—but investors might do better to look at comparisons
to other companies in the same industry, found in news articles or brokerage house
OBJECTIVE Financial statements, notes to the financial statements, and supplementary infor-
Review the full mation are areas directly affected by FASB standards. Other types of information found
disclosure principle in the annual report, such as management’s discussion and analysis, are not subject to
and describe problems FASB standards. Illustration 24-1 indicates the types of financial information presented.
of implementation. As indicated in Chapter 2, the profession has adopted a full disclosure principle
that calls for financial reporting of any financial facts significant enough to influence
the judgment of an informed reader. In some situations, the benefits of disclosure may
be apparent but the costs uncertain. In other instances, the costs may be certain but the
Underlying benefits of disclosure not as apparent.
Concepts For example, the SEC increased the amount of information financial institutions
Here is a good example of the must disclose about their foreign lending practices. With some foreign countries in eco-
trade-off between the nomic straits, the benefits of increased disclosure about the risk of uncollectibility are
cost/benefit constraint and the fairly obvious to the investing public. The exact costs of disclosure in these situations
full disclosure principle. cannot be quantified, though they would appear to be relatively small.
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Full Disclosure Principle • 1273
ILLUSTRATION 24-1 Types of Financial Information
All Information Useful for Investment, Credit, and Similar Decisions
Area Directly Affected by Existing FASB Standards
Basic Financial Statements
Notes to the Other Means of
Financial Supplementary Other
Statements Information Information
• Balance Sheet Examples: Examples: Examples: Examples:
• Statement of • Accounting • Changing Prices • Management • Discussion of
Income Policies Disclosures Discussion and Competition and
• Contingencies • Oil and Gas Analysis Order Backlog in
• Statement of SEC Forms
Cash Flows • Inventory Reserves • Letters to
Methods Information Stockholders • Analysts' Reports
• Statement of (FASB
• Number of • Economic
Changes in Statement Statistics
Stockholders' Shares of Stock No. 69)
Outstanding • News Articles
of items carried
On the other hand, the cost of disclosure can be substantial in some cases and the
benefits difficult to assess. For example, the Wall Street Journal reported that, at one
time, if segment reporting were adopted, a company like Fruehauf would have had to Underlying
increase its accounting staff 50 percent, from 300 to 450 individuals. In this case, the Concepts
cost of disclosure is apparent, but the benefits are less well defined. Some would even The AICPA’s Special Committee
argue that the reporting requirements are so detailed and substantial that users will on Financial Reporting notes
that business reporting is not
have a difficult time absorbing the information. These critics charge the profession with
free, and improving it requires
engaging in information overload.
considering the relative costs
The difficulty of implementing the full disclosure principle is highlighted by such and benefits of information,
financial disasters as Enron, PharMor, WorldCom, and Global Crossing. Why were just as costs and benefits are
investors not aware of potential problems—Was the information presented about these key to determining the features
companies not comprehensible? Was it buried? Was it too technical? Was it properly included in any product. Undis-
presented and fully disclosed as of the financial statement date, but the situation later ciplined expansion of man-
deteriorated? Or was it simply not there? dated reporting could result in
large and needless costs.
Increase in Reporting Requirements
Disclosure requirements have increased substantially. One survey showed that in a sam-
ple of 25 large, well-known companies over a recent 10-year period, the average num-
ber of pages of notes to the financial statements increased from 9 to 17 pages, and the
average number of pages for management’s discussion and analysis grew from 7 to 12
pages. This result is not surprising because as illustrated throughout this textbook, the
FASB has issued many standards in the last 10 years that have substantial disclosure
provisions.2 The reasons for this increase in disclosure requirements are varied. Some
of them are:
Complexity of the Business Environment. The difficulty of distilling economic
events into summarized reports has been magnified by the increasing complexity
The survey results were taken from Ray J. Groves, “Financial Disclosure: When More Is
Not Better,” Financial Executive (May/June 1994).
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1274 • Chapter 24 Full Disclosure in Financial Reporting
of business operations in such areas as derivatives, leasing, business combinations,
pensions, financing arrangements, revenue recognition, and deferred taxes. As a
result, notes to the financial statements are used extensively to explain these trans-
actions and their future effects.
Necessity for Timely Information. Today, more than ever before, users are de-
manding information that is current and predictive. For example, more complete
interim data are required. And published financial forecasts, long avoided and even
feared by management, are recommended by the SEC.
Accounting as a Control and Monitoring Device. The government has recently
sought more information and public disclosure of such phenomena as management
compensation, off-balance-sheet financing arrangements, and related party trans-
actions. An “Enronitis” concern is expressed in many of these newer disclosure
requirements, and accountants and auditors have been selected as the agents to as-
sist in controlling and monitoring these concerns.
Supersize that, please!
General Electric’s 2001 annual report is 93 pages and has 30 percent more financial
information than the year before. Primarily GE provided more specific data about 26
individual businesses, including its industrial units as well as GE Capital, compared
What do the with just 12 business segments for 2000. Other companies such as International Busi-
numbers mean? ness Machines and Sun Trust Banks have promised greater disclosure in reports, as
investors seem now to want more corporate nitty-gritty, hoping it will protect them from
Enron-like surprises. Williams Companies, a natural gas and energy trading company,
may take the prize for having the largest annual report—it’s 1,234 pages, three times as
large as the previous year!
Source: Rachel Emma Silverman, “GE’s Annual Report Bulges With Data in Bid to Address Post-
Enron Concerns,” Wall Street Journal (March 11, 2002).
A trend toward differential disclosure is also occurring. For example, the SEC requires
Underlying that certain substantive information be reported to it that is not found in annual re-
Concepts ports to stockholders. And the FASB, recognizing that certain disclosure requirements
The AICPA Special Committee are costly and unnecessary for certain companies, has eliminated reporting require-
on Financial Reporting indi- ments for nonpublic enterprises in such areas as fair value of financial instruments and
cated that users differ in their segment reporting.3
needs for information, and that Some still complain that the FASB has not gone far enough. They note that certain
not all companies should types of companies (small or nonpublic) should not have to follow complex GAAP re-
report all elements of informa- quirements such as deferred income taxes, leases, or pensions. This issue, often referred
tion. Rather, companies should to as Big GAAP versus Little GAAP, continues to be controversial. The FASB takes
report only information that the position that one set of GAAP should be used, except in unusual situations.
users and preparers agree is
needed in the particular
NOTES TO THE FINANCIAL STATEMENTS
As you know from your study of this textbook, notes are an integral part of the finan-
OBJECTIVE cial statements of a business enterprise. However, they are often overlooked because
Explain the use of they are highly technical and often appear in small print. Notes are the means of am-
notes in financial
statement preparation. 3
The FASB has had a disclosure-effectiveness project. The revised pension and postretire-
ment benefit disclosures discussed in Chapter 20 (FASB Statement No. 132) are one example of
how disclosures can be streamlined and made more useful.
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Notes to the Financial Statements • 1275
plifying or explaining the items presented in the main body of the statements. In-
formation pertinent to specific financial statement items can be explained in qualita-
tive terms, and supplementary data of a quantitative nature can be provided to expand
the information in the financial statements. Restrictions imposed by financial arrange-
ments or basic contractual agreements also can be explained in notes. Although notes
may be technical and difficult to understand, they provide meaningful information for
the user of the financial statements.
Accounting policies of a given entity are the specific accounting principles and meth-
ods currently employed and considered most appropriate to present fairly the finan-
cial statements of the enterprise. APB Opinion No. 22, “Disclosure of Accounting Poli-
cies,” concluded that information about the accounting policies adopted and followed
by a reporting entity is essential for financial statement users in making economic de-
cisions. It recommended that a statement identifying the accounting policies adopted
and followed by the reporting entity should also be presented as an integral part of
the financial statements. The disclosure should be given as the initial note or in a sep-
arate Summary of Significant Accounting Policies section preceding the notes to the
financial statements. The Summary of Significant Accounting Policies answers such
questions as: What method of depreciation is used on plant assets? What valuation
method is employed on inventories? What amortization policy is followed in regard to
intangible assets? How are marketing costs handled for financial reporting purposes?
Refer to Appendix 5B, pages 202–228, for an illustration of note disclosure of ac-
counting policies (Note 1) and other notes accompanying the audited financial state-
ments of 3M Company. An illustration from OshKosh B’Gosh, Inc. is provided in
OshKosh B’Gosh, Inc. and Subsidiaries Note Disclosure of
(Dollars in thousands, except per share amounts) Accounting Policies
Note 1. Significant Accounting Policies
OshKosh B’Gosh, Inc. and its wholly-owned subsidiaries (the Company) are engaged primarily in the
design, sourcing, and marketing of apparel to wholesale customers and through Company-owned retail
Principles of consolidation
The consolidated financial statements include the accounts of all wholly-owned subsidiaries. All signifi-
cant intercompany accounts and transactions have been eliminated in consolidation.
Cash and cash equivalents
Cash equivalents consist of highly liquid debt instruments such as money market accounts and com-
mercial paper with original maturities of three months or less and other financial instruments that can be
readily liquidated. The Company’s policy is to invest cash in conservative instruments as part of its cash
management program and to evaluate the credit exposure of any investment. Cash equivalents are stated
at cost, which approximates market value.
Investments are classified as available-for-sale securities and are highly liquid debt instruments. These
investments are stated at cost, which approximates market value.
The fair value of financial instruments, primarily accounts receivable and debt, do not materially differ
from their carrying value.
Inventories are stated at the lower of cost or market. Inventories stated on the last-in, first-out (LIFO) ba-
sis represent 99.4% of total 2001 and 99.6% of total 2000 inventories. Remaining inventories are valued
using the first-in, first-out (FIFO) method.
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1276 • Chapter 24 Full Disclosure in Financial Reporting
Property, plant and equipment
Property, plant and equipment are carried at cost or at management’s estimate of fair market value if
considered impaired under the provisions of Statement of Financial Accounting Standards (SFAS) No.
121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,”
less accumulated depreciation. Expenditures for improvements that increase asset values and extend
usefulness are capitalized. Expenditures for maintenance and repairs are expensed as incurred.
Depreciation and amortization for financial reporting purposes are calculated using the straight-line
method based on the following useful lives:
Land improvements 10 to 15
Buildings 10 to 40
Leasehold improvements 5 to 10
Machinery and equipment 3 to 10
Revenue within wholesale operations is recognized at the time merchandise is shipped and title is trans-
ferred to customers. Retail store revenues are recognized at the time of sale.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ from those estimates.
Advertising costs are expensed as incurred and totaled $14,896, $16,318 and $13,803 in 2001, 2000
and 1999, respectively.
Earnings per share
The numerator for the calculation of basic and diluted earnings per share is net income. The denomina-
tor is computed as follows (in thousands):
2001 2000 1999
Denominator for basic earnings per share—
weighted average shares 12,191 12,321 16,112
Employee stock options (treasury stock method) 390 157 208
Denominator for diluted earnings per share 12,581 12,478 16,320
The Company had 26,500, 639,450 and 361,000 employee stock options that were anti-dilutive in 2001,
2000 and 1999, respectively, and, accordingly, are not included in the diluted earnings per share calcu-
The Company’s fiscal year is a 52/53 week year ending on the Saturday closest to December 31. Fiscal
2001 ended on December 29, 2001, fiscal 2000 ended on December 30, 2000 and fiscal 1999 ended
on January 1, 2000, all of which were 52 week years. All references to years in this report refer to the
fiscal years described above.
Underlying Comprehensive income equaled net income in 2001, 2000 and 1999.
The AICPA’s Special Committee Certain prior year amounts have been reclassified to conform with the current year presentation.
on Financial Reporting states
that to meet users’ changing
needs, business reporting
must: (1) Provide more for-
ward-looking information about
plans, opportunities, risks, and
uncertainties. (2) Focus more Analysts examine carefully the summary of accounting policies section to deter-
on the factors that create
mine whether the company is using conservative or liberal accounting practices. For
longer-term value, including
example, depreciating plant assets over an unusually long period of time is considered
nonfinancial measures indicat-
ing how key business liberal. On the other hand, using LIFO inventory valuation in a period of inflation is
processes are performing. generally viewed as following a conservative practice.
(3) Better align information Companies that fail to adopt high-quality reporting policies are now being heav-
reported externally with the ily penalized by the market. For example, when IBM disclosed that it had used the
information reported internally. gain on sale of one of its businesses to lower reported expenses, its shares were slammed
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Notes to the Financial Statements • 1277
in the market. Investors felt that IBM was trying to look better than it really was. In
short, its quality of earnings was viewed as low.
Many of the notes to the financial statements have been discussed throughout this
textbook. Others will be discussed more fully in this chapter. The more common are as
Inventory. The basis upon which inventory amounts are stated (lower of cost or
market) and the method used in determining cost (LIFO, FIFO, average cost, etc.)
should be reported. Manufacturers should report the inventory composition (fin-
ished goods, work in process, raw materials) either in the balance sheet or in a
separate schedule in the notes. Unusual or significant financing arrangements re-
lating to inventories that may require disclosure include transactions with related
parties, product financing arrangements, firm purchase commitments, involun-
tary liquidation of LIFO inventories, and pledging of inventories as collateral.
Chapter 9 (pages 441–442) illustrates these disclosures.
Property, Plant, and Equipment. The basis of valuation for property, plant, and
equipment should be stated. It is usually historical cost. Pledges, liens, and other
commitments related to these assets should be disclosed. In the presentation of
depreciation, the following disclosures should be made in the financial statements
or in the notes: (1) depreciation expense for the period; (2) balances of major
classes of depreciable assets, by nature and function, at the balance sheet date; (3)
accumulated depreciation, either by major classes of depreciable assets or in to-
tal, at the balance sheet date; and (4) a general description of the method or meth-
ods used in computing depreciation with respect to major classes of depreciable
assets. Any major impairments should be explained. Chapter 11 (pages 541–542)
illustrates these disclosures.
Credit Claims. An investor normally finds it extremely useful to determine the
nature and cost of creditorship claims. However, the liabilities section in the bal-
ance sheet can provide the major types of liabilities outstanding only in the ag-
gregate. Note schedules regarding such obligations provide additional informa-
tion about how the company is financing its operations, the costs that will have
to be borne in future periods, and the timing of future cash outflows. Financial
statements must disclose for each of the 5 years following the date of the finan-
cial statements the aggregate amount of maturities and sinking fund requirements
for all long-term borrowings. Chapter 14 (pages 691–692) illustrates these disclo-
Equity Holders’ Claims. Many companies present in the body of the balance sheet
the number of shares authorized, issued, and outstanding and the par value for
each type of equity security. Such data may also be presented in a note. Beyond
that, the most common type of equity note disclosure relates to contracts and sen-
ior securities outstanding that might affect the various claims of the residual eq-
uity holders—for example, the existence of outstanding stock options, outstand-
ing convertible debt, redeemable preferred stock, and convertible preferred stock.
In addition, it is necessary to disclose to equity claimants certain types of re-
strictions currently in force. Generally, these types of restrictions involve the
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1278 • Chapter 24 Full Disclosure in Financial Reporting
amount of earnings available for dividend distribution. Examples of these types
of disclosures are illustrated in Chapter 15 (pages 747–749) and Chapter 16 (pages
Contingencies and Commitments. An enterprise may have gain or loss contingen-
cies that are not disclosed in the body of the financial statements. These contin-
Underlying gencies include litigation, debt and other guarantees, possible tax assessments,
renegotiation of government contracts, sales of receivables with recourse, and so
The AICPA Special Committee on. In addition, commitments that relate to dividend restrictions, purchase agree-
on Financial Reporting notes ments (through-put and take-or-pay), hedge contracts, and employment contracts
that standards setters should
are also disclosed. Disclosures of items of this nature are illustrated in Chapter 7
address disclosures and ac-
counting requirements for off-
(pages 337–338), Chapter 9 (pages 430–432), and Chapter 13 (pages 640–643).
balance-sheet financial Deferred Taxes, Pensions, and Leases. Extensive disclosure is required in these three
arrangements to ensure that areas. Chapter 19 (pages 980–983), Chapter 20 (pages 1043–1045), and Chapter 21
business reporting faithfully re- (pages 1114–1116) discuss each of these disclosures in detail. It should be empha-
ports the risks, opportunities,
sized that notes to the financial statements should be given a careful reading for
resources, and obligations that
result from those arrange-
information about off-balance-sheet commitments, future financing needs, and the
ments, consistent with users’ quality of a company’s earnings.
needs for information. Changes in Accounting Principles. The profession defines various types of ac-
counting changes and establishes guides for reporting each type. Either in the
summary of significant accounting policies or in the other notes, changes in ac-
counting principles (as well as material changes in estimates and corrections of
errors) are discussed. See Chapter 22 (pages 1154–1158 and 1162–1165).
The disclosures listed above have been discussed in earlier chapters. Four additional dis-
Additional Examples of closures of significance—special transactions or events, subsequent events, segment re-
Major Disclosures porting, and interim reporting—are illustrated in the following sections of this chapter.
More pages, but better?
The biggest overall change in annual reports recently is that companies are now dis-
closing debt-rating triggers buried in their financing arrangements. These triggers can
require a company to pay off a loan immediately if the debt rating folds; they are one
What do the of the reasons Enron crumbled so quickly. But few Enron stockholders knew about them
numbers mean? until the gun had gone off. Companies are also telling more about their bank credit lines,
liquidity, and any special purpose entities, which were major villains in the Enron drama.
Source: Gretchen Morgenson, “Annual Reports: More Pages, But Better?” New York Times (March
Disclosure of Special Transactions or Events
Related party transactions, errors and irregularities, and illegal acts pose especially sen-
sitive and difficult problems. The accountant/auditor who has responsibility for re-
porting on these types of transactions has to be extremely careful that the rights of
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Disclosure Issues • 1279
the reporting company and the needs of users of the financial statements are properly
Related party transactions arise when a business enterprise engages in transac-
tions in which one of the transacting parties has the ability to influence significantly
the policies of the other, or in which a nontransacting party has the ability to influence
the policies of the two transacting parties.4 Transactions involving related parties can-
not be presumed to be carried out on an “arm’s-length” basis because the requisite con-
ditions of competitive, free-market dealings may not exist. Transactions such as bor- International
rowing or lending money at abnormally low or high interest rates, real estate sales at Insight
amounts that differ significantly from appraised value, exchanges of nonmonetary as- In Switzerland there are no re-
sets, and transactions involving enterprises that have no economic substance (“shell quirements to disclose related
corporations”) suggest that related parties may be involved. party transactions. In Italy and
The economic substance rather than the legal form of these transactions should be Germany related parties do not
reported in order to make adequate disclosures. FASB Statement No. 57 requires the fol- include a company’s directors.
lowing disclosures of material related party transactions.
The nature of the relationship(s) involved.
A description of the transactions (including transactions to which no amounts or
nominal amounts were ascribed) for each of the periods for which income state-
ments are presented.
The dollar amounts of transactions for each of the periods for which income state-
ments are presented.
Amounts due from or to related parties as of the date of each balance sheet
Illustration 24-3 is an example of the disclosure of related party transactions taken
from the annual report of Tyler Technologies, Inc.
Tyler Technologies, Inc. Disclosure of Related
(4) (in part): Related Party Transactions
On September 29, 2000, the Company sold for cash certain net assets of Kofile and another subsidiary,
the Company’s interest in a certain intangible work product, and a building and related building im-
provements to investment entities beneficially owned by a principal shareholder of the Company, who
was also a director at the time (See Note 3).
Errors are defined as unintentional mistakes, whereas irregularities are intentional
distortions of financial statements.5 As indicated in this textbook, when errors are dis-
covered, the financial statements should be corrected. The same treatment should be
Examples of related party transactions include transactions between (a) a parent company
and its subsidiaries; (b) subsidiaries of a common parent; (c) an enterprise and trusts for the ben-
efit of employees (controlled or managed by the enterprise); and (d) an enterprise and its prin-
cipal owners, management, or members of immediate families, and affiliates. Two classic cases
of related party transactions were Enron, with its misuse of special purpose entities, and Tyco
International, with its forgiving of loans to its management team.
“The Auditor’s Responsibility to Detect and Report Errors and Irregularities,” Statement on
Auditing Standards No. 53 (New York, AICPA, 1988).
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1280 • Chapter 24 Full Disclosure in Financial Reporting
given irregularities. The discovery of irregularities, however, gives rise to a whole dif-
ferent set of suspicions, procedures, and responsibilities on the part of the account-
Illegal acts encompass such items as illegal political contributions, bribes, kick-
backs, and other violations of laws and regulations.7 In these situations, the account-
ant/auditor must evaluate the adequacy of disclosure in the financial statements. For
example, if revenue is derived from an illegal act that is considered material in rela-
tion to the financial statements, this information should be disclosed. To deter these il-
legal acts, Congress recently enacted the Sarbanes-Oxley Act of 2002. This acts adds
significant fines and longer jail time for those who improperly sign off on the correct-
ness of financial statements that actually include willing and knowing misstatements.
Many companies are involved in related party transactions; errors and irregulari-
ties, and illegal acts, however, are the exception rather than the rule. Disclosure plays
a very important role in these areas because the transaction or event is more qualita-
tive than quantitative and involves more subjective than objective evaluation. The users
of the financial statements must be provided with some indication of the existence and
nature of these transactions where material, through disclosures, modifications in the
auditor’s report, or reports of changes in auditors.
Post-Balance-Sheet Events (Subsequent Events)
Notes to the financial statements should explain any significant financial events that
took place after the formal balance sheet date, but before it is finally issued. These
events are referred to as post-balance-sheet events, events subsequent to the balance
sheet date, or just plain subsequent events. The subsequent events period is time-
diagrammed as shown in Illustration 24-4.
Time Periods for
Subsequent Events Balance Financial
Date Issue Date
Financial Statement Period Subsequent Events Period
Jan. 1, Dec. 31, Mar. 3,
2004 2004 2005
A period of several weeks, and sometimes months, may elapse after the end of the
year before the financial statements are issued. Taking and pricing the inventory, rec-
onciling subsidiary ledgers with controlling accounts, preparing necessary adjusting
entries, ensuring that all transactions for the period have been entered, obtaining an
audit of the financial statements by independent certified public accountants, and print-
ing the annual report all take time. During the period between the balance sheet date
and its distribution to stockholders and creditors, important transactions or other events
may occur that materially affect the company’s financial position or operating situa-
The profession became so concerned with certain management frauds that affect financial
statements that it established a National Commission on Fraudulent Financial Reporting. The
major purpose of this organization was to determine how fraudulent reporting practices can be
constrained. Fraudulent financial reporting is discussed later in this chapter.
“Illegal Acts by Clients,” Statement on Auditing Standards No. 54 (New York, AICPA, 1988).
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Disclosure Issues • 1281
Many who read a recent balance sheet believe the balance sheet condition is con-
stant and they project it into the future. However, readers must be told if the company
has sold one of its plants, acquired a subsidiary, suffered extraordinary losses, settled
significant litigation, or experienced any other important event in the post-balance-
sheet period. Without an explanation in a note, the reader might be misled and draw
Two types of events or transactions occurring after the balance sheet date may have
a material effect on the financial statements or may need to be considered to interpret
these statements accurately: Underlying
Events that provide additional evidence about conditions that existed at the bal-
ance sheet date, affect the estimates used in preparing financial statements, and The periodicity or time period
assumption implies that eco-
therefore result in needed adjustments: All information available prior to the is-
nomic activities of an enter-
suance of the financial statements is used to evaluate estimates previously made.
prise can be divided into artifi-
To ignore these subsequent events is to pass up an opportunity to improve the ac- cial time periods for purpose
curacy of the financial statements. This first type encompasses information that of analysis.
would have been recorded in the accounts had it been known at the balance sheet
For example, if a loss on an account receivable results from a customer’s bank-
ruptcy subsequent to the balance sheet date, the financial statements are adjusted
before their issuance. The bankruptcy stems from the customer’s poor financial
health existing at the balance sheet date.
The same criterion applies to settlements of litigation. The financial state-
ments must be adjusted if the events that gave rise to the litigation, such as per-
sonal injury or patent infringement, took place prior to the balance sheet date. If
the event giving rise to the claim took place subsequent to the balance sheet date,
no adjustment is necessary, but disclosure is. To illustrate, a loss resulting from
a customer’s fire or flood after the balance sheet date is not indicative of condi-
tions existing at that date. Thus, adjustment of the financial statements is not nec-
Events that provide evidence about conditions that did not exist at the balance
sheet date but arise subsequent to that date and do not require adjustment of
the financial statements: Some of these events may have to be disclosed to keep
the financial statements from being misleading. These disclosures take the form of
notes, supplemental schedules, or even pro forma (“as if”) financial data prepared
as if the event had occurred on the balance sheet date. Below are examples of such
events that require disclosure (but do not result in adjustment):
(a) Sale of bonds or capital stock; stock splits or stock dividends.
(b) Business combination pending or effected.
(c) Settlement of litigation when the event giving rise to the claim took place sub-
sequent to the balance sheet date.
(d) Loss of plant or inventories from fire or flood.
(e) Losses on receivables resulting from conditions (such as customer’s major ca-
sualty) arising subsequent to the balance sheet date.
(f) Gains or losses on certain marketable securities.8
An example of subsequent events disclosure, excerpted from the Annual Report of
Krispy Kreme Doughnuts, Inc. is presented in Illustration 24-5.
“Subsequent Events,” Statement on Auditing Standards No. 1 (New York: AICPA, 1973),
pp. 123–124. Accounting Trends and Techniques—2001 listed the following types of subsequent
events and their frequency of occurrence among the 600 companies surveyed: debt incurred,
reduced, or refinanced, 72; business combinations pending or effected, 63; discontinued opera-
tions, 33; litigation, 31; and capital stock issued or repurchased, 16.
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1282 • Chapter 24 Full Disclosure in Financial Reporting
Disclosure of Subse- Krispy Kreme Doughnuts, Inc.
quent Events Note 21. Subsequent Events
In February 2001, the Company completed a follow-on public offering of 5,200,000 shares of common
stock at a price of $33.50 per share with the net proceeds totaling $31.83 per share after underwriters’
commissions. The 5,200,000 shares included a 600,000 share over-allotment option exercised by the un-
derwriters. Of the 5,200,000 shares, 4,656,650 were sold by selling shareholders and 543,350 were sold
by the Company. Net proceeds to the Company were $17,295,000.
On February 2, 2001, the Company acquired the assets of Digital Java, Inc., a Chicago-based cof-
fee company for a purchase price of $389,500 plus an earn-out not to exceed $775,000. Digital Java,
Inc. is a sourcer and micro-roaster of premium quality coffees and offers a broad line of coffee-based
and non-coffee beverages.
On February 5, 2001, the Company purchased a 104,000 square foot manufacturing facility in Winston-
Salem for approximately $3.3 million. The Company will relocate its equipment manufacturing and training
facilities from its current location in Winston-Salem to this new facility.
Many subsequent events or developments are not likely to require either ad-
justment of or disclosure in the financial statements. Typically, these are nonac-
counting events or conditions that managements normally communicate by other
means. These events include legislation, product changes, management changes,
strikes, unionization, marketing agreements, and loss of important customers.
Reporting for Diversified (Conglomerate) Companies
In the last several decades business enterprises at times have had a tendency to diver-
OBJECTIVE sify their operations. Take the case of conglomerate GenCorp. whose products at one
Describe the time had included tires, Penn tennis balls, parts for the MX missile, and linings for dis-
disclosure posable diapers. Its RKO subsidiary owned radio and television stations, made movies,
requirements for major bottled soda pop, ran hotels, and held a big stake in an airline. As a result of such di-
segments of a versification efforts, investors and investment analysts have sought more information
business. concerning the details behind conglomerate financial statements. Particularly, they want
income statement, balance sheet, and cash flow information on the individual segments
that compose the total business income figure.
An illustration of segmented (disaggregated) financial information is presented in
the following example of an office equipment and auto parts company.
OFFICE EQUIPMENT AND AUTO PARTS COMPANY
INCOME STATEMENT DATA
Statement (IN MILLIONS)
Consolidated Equipment Parts
Net sales $78.8 $18.0 $60.8
Inventories, beginning 12.3 4.0 8.3
Materials and services 38.9 10.8 28.1
Wages 12.9 3.8 9.1
Inventories, ending (13.3) (3.9) (9.4)
50.8 14.7 36.1
Selling and administrative expense 12.1 1.6 10.5
Total operating expenses 62.9 16.3 46.6
Income before taxes 15.9 1.7 14.2
Income taxes (9.3) (1.0) (8.3)
Net income $ 6.6 $ 0.7 $ 5.9
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Disclosure Issues • 1283
If only the consolidated figures are available to the analyst, much information re-
garding the composition of these figures is hidden in aggregated totals. There is no
way to tell from the consolidated data the extent to which the differing product lines
contribute to the company’s profitability, risk, and growth potential. For example, in
Illustration 24-6, if the office equipment segment is deemed a risky venture, then seg-
mented reporting provides useful information for purposes of making an informed in-
vestment decision regarding the whole company.
A classic situation that demonstrates the need for segmented data involved
Caterpillar, Inc. Caterpillar was cited by the SEC because it failed to tell investors
that nearly a quarter of its income in 1989 came from a Brazilian unit. This income
was nonrecurring in nature. The company knew that different economic policies in
the next year would probably greatly affect earnings of the Brazilian unit. But Cater-
pillar presented its financial results on a consolidated basis, not disclosing the Brazil-
ian’s operations. The SEC stated that Caterpillar’s failure to include information
about Brazil left investors with an incomplete picture of the company’s financial re-
sults and denied investors the opportunity to see the company “through the eyes of
Companies have always been somewhat hesitant to disclose segmented data for
Without a thorough knowledge of the business and an understanding of such im-
portant factors as the competitive environment and capital investment require-
ments, the investor may find the segmented information meaningless or may even
draw improper conclusions about the reported earnings of the segments.
Additional disclosure may harm reporting firms because it may be helpful to com-
petitors, labor unions, suppliers, and certain government regulatory agencies.
Additional disclosure may discourage management from taking intelligent busi-
ness risks because segments reporting losses or unsatisfactory earnings may cause
stockholder dissatisfaction with management.
The wide variation among firms in the choice of segments, cost allocation, and
other accounting problems limits the usefulness of segmented information.
The investor is investing in the company as a whole and not in the particular seg-
ments, and it should not matter how any single segment is performing if the over-
all performance is satisfactory.
Certain technical problems, such as classification of segments and allocation of seg-
ment revenues and costs (especially “common costs”), are formidable.
On the other hand, the advocates of segmented disclosures offer these reasons in sup-
port of the practice:
Segmented information is needed by the investor to make an intelligent investment
decision regarding a diversified company.
(a) Sales and earnings of individual segments are needed to forecast consolidated
profits because of the differences between segments in growth rate, risk, and
(b) Segmented reports disclose the nature of a company’s businesses and the rel-
ative size of the components as an aid in evaluating the company’s investment
The absence of segmented reporting by a diversified company may put its un-
segmented, single product-line competitors at a competitive disadvantage
because the conglomerate may obscure information that its competitors must
The advocates of segmented disclosures appear to have a much stronger case. Many
users indicate that segmented data are the most useful financial information provided,
aside from the basic financial statements. As a result, the FASB has issued extensive re-
porting guidelines in this area.
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1284 • Chapter 24 Full Disclosure in Financial Reporting
Objective of Reporting Segmented Information
The objective of reporting segmented financial data is to provide information about the
different types of business activities in which an enterprise engages and the differ-
ent economic environments in which it operates, in order to help users of financial
statements do the following.
(a) Better understand the enterprise’s performance.
(b) Better assess its prospects for future net cash flows.
(c) Make more informed judgments about the enterprise as a whole.
A company might meet the segmented reporting objective by providing complete sets
of financial statements that are disaggregated in several ways. For example, financial
statements can be disaggregated by products or services, by geography, by legal entity,
or by type of customer. However, it is not feasible to provide all of that information in
every set of financial statements. FASB Statement No. 131 requires that general purpose
financial statements include selected information on a single basis of segmentation. The
method chosen is referred to as the management approach.9 The management ap-
proach is based on the way that management segments the company for making
operating decisions. Consequently, the segments are evident from the company’s or-
ganization structure. It focuses on information about components of the business that
management uses to make decisions about operating matters. These components are
called operating segments.
Identifying Operating Segments
An operating segment is a component of an enterprise:
(a) That engages in business activities from which it earns revenues and incurs
(b) Whose operating results are regularly reviewed by the company’s chief operating
decision maker to assess segment performance and allocate resources to the
(c) For which discrete financial information is available that is generated by or based
on the internal financial reporting system.
Information about two or more operating segments may be aggregated only if the
segments have the same basic characteristics in each of the following areas.
(a) The nature of the products and services provided.
(b) The nature of the production process.
(c) The type or class of customer.
(d) The methods of product or service distribution.
(e) If applicable, the nature of the regulatory environment.
After the company decides on the segments for possible disclosure, a quantitative
materiality test is made to determine whether the segment is significant enough to war-
rant actual disclosure. An operating segment is regarded as significant and therefore
identified as a reportable segment if it satisfies one or more of the following quantita-
Its revenue (including both sales to external customers and intersegment sales or
transfers) is 10 percent or more of the combined revenue of all the enterprise’s op-
“Disclosures about Segments of an Enterprise and Related Information,” Statement of
Financial Accounting Standards No. 131 (Norwalk, Conn.: FASB, 1997).
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Disclosure Issues • 1285
The absolute amount of its profit or loss is 10 percent or more of the greater, in ab-
solute amount, of
(a) the combined operating profit of all operating segments that did not incur a
(b) the combined loss of all operating segments that did report a loss.
Its identifiable assets are 10 percent or more of the combined assets of all operat-
In applying these tests, two additional factors must be considered. First, segment
data must explain a significant portion of the company’s business. Specifically, the seg-
mented results must equal or exceed 75 percent of the combined sales to unaffiliated
customers for the entire enterprise. This test prevents a company from providing lim-
ited information on only a few segments and lumping all the rest into one category.
Second, the profession recognizes that reporting too many segments may over-
whelm users with detailed information. The FASB decided that 10 is a reasonable up-
per limit for the number of segments that a company should be required to disclose.
To illustrate these requirements, assume a company has identified six possible re-
porting segments (000 omitted):
Total Revenue Operating Identifiable
Data for Different
Segments (Unaffiliated) Profit (Loss) Assets
A $ 100 $10 $ 60 Segments
B 50 2 30
C 700 40 390
D 300 20 160
E 900 18 280
F 100 (5) 50
$2,150 $85 $970
The respective tests may be applied as follows:
Revenue test: 10% $2,150 $215; C, D, and E meet this test.
Operating profit (loss) test: 10% $90 $9 (note that the $5 loss is ignored); A,
C, D, and E meet this test. Underlying
Identifiable assets tests: 10% $970 $97; C, D, and E meet this test. Concepts
The AICPA Special Committee
The segments are therefore A, C, D, and E, assuming that these four segments have on Financial Reporting notes
enough sales to meet the 75 percent of combined sales test. The 75 percent test is com- that multi-segment companies
operate diverse businesses
puted as follows.
that are subject to different
75% of combined sales test: 75% $2,150 $1,612.50. The sales of A, C, D, and opportunities and risks. Many
E total $2,000 ($100 $700 $300 $900); therefore, the 75% test is met. users view business segments
as the engines that generate
Measurement Principles future earnings or cash flows
The accounting principles to be used for segment disclosure need not be the same as and thereby drive returns on
investments. Segment informa-
the principles used to prepare the consolidated statements. This flexibility may at first
tion provides additional insight
appear inconsistent. But, preparing segment information in accordance with generally
about the opportunities and
accepted accounting principles would be difficult because some principles are not ex- risks of investments and
pected to apply at a segment level. Examples are accounting for the cost of company- sharpens predictions. Because
wide employee benefit plans, accounting for income taxes in a company that files a of its predictive value, improv-
consolidated tax return, and accounting for inventory on a LIFO basis if the pool in- ing segment reporting is of the
cludes items in more than one segment. highest priority.
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1286 • Chapter 24 Full Disclosure in Financial Reporting
Allocations of joint, common, or company-wide costs solely for external reporting
purposes are not required. Common costs are those incurred for the benefit of more
than one segment and whose interrelated nature prevents a completely objective divi-
sion of costs among segments. For example, the company president’s salary is difficult
to allocate to various segments. Allocations of common costs are inherently arbitrary
and may not be meaningful if they are not used for internal management purposes.
There is a presumption that allocations to segments are either directly attributable or
Segmented Information Reported
The FASB requires that an enterprise report the following.
General information about its operating segments. This includes factors that man-
agement considers most significant in determining the company’s operating seg-
ments, and the types of products and services from which each operating segment
derives its revenues.
Segment profit and loss and related information. Specifically, the following infor-
mation about each operating segment must be reported if the amounts are included
in the determination of segment profit or loss.
(a) Revenues from transactions with external customers.
(b) Revenues from transactions with other operating segments of the same
(c) Interest revenue.
(d) Interest expense.
(e) Depreciation, depletion, and amortization expense.
(f) Unusual items.
(g) Equity in the net income of investees accounted for by the equity method.
(h) Income tax expense or benefit.
(i) Extraordinary items.
(j) Significant noncash items other than depreciation, depletion, and amortization
Segment assets. An enterprise must report each operating segment’s total assets.
Reconciliations. An enterprise must provide a reconciliation of the total of the seg-
ments’ revenues to total revenues, a reconciliation of the total of the operating seg-
ments’ profits and losses to its income before income taxes, and a reconciliation of
the total of the operating segments’ assets to total assets.
Information about products and services and geographic areas. For each operating
segment that has not been determined based on geography, the enterprise must re-
port (unless it is impracticable): (1) revenues from external customers, (2) long-lived
assets, and (3) expenditures during the period for long-lived assets. This informa-
tion, if material, must be reported (a) in the enterprise’s country of domicile and
(b) in each other country.
Major customers. If 10 percent or more of the revenues is derived from a single
customer, the enterprise must disclose the total amount of revenues from each such
customer by segment.
Illustration of Disaggregated Information
The segment disclosure for Johnson & Johnson is shown in Illustration 24-8.
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Disclosure Issues • 1287
Johnson & Johnson
Segments of Business
Sales to Customers
(dollars in millions) 2001 2000 1999
Consumer—Domestic $ 3,789 $ 3,760 $ 3,670
International 3,173 3,144 3,194
Total 6,962 6,904 6,864
Pharmaceutical—Domestic 10,240 8,441 6,955
International 4,611 4,220 4,275
Total 14,851 12,661 11,230
Medical Devices & Diagnostics—Domestic 6,175 5,506 5,296
International 5,016 4,775 4,617
Total 11,191 10,281 9,913
Worldwide total $33,004 $29,846 $28,007
Operating Profit Identifiable Assets
(dollars in millions) 2001 2000 1999 2001 2000 1999
Consumer $ 1,004 $ 867 $ 683 $ 4,209 $ 4,761 $ 4,901
Pharmaceutical 4,928 4,394 3,735 11,568 9,209 8,797
Medical Devices & Diagnostics 2,001 1,696 1,632 13,645 12,745 12,458
Segments total 7,933 6,957 6,050 29,422 26,715 26,156
Expenses not allocated to segments (35) (89) (173)
General corporate 9,066 7,530 4,908
Worldwide total $ 7,898 $ 6,868 $ 5,877 $38,488 $34,245 $31,064
Additions to Property, Depreciation and
Plant & Equipment Amortization
(dollars in millions) 2001 2000 1999 2001 2000 1999
Consumer $ 230 $ 336 $ 412 $ 263 $ 275 $ 277
Pharmaceutical 749 627 760 492 474 407
Medical Devices & Diagnostics 621 665 576 801 801 786
Segments total 1,600 1,628 1,748 1,556 1,550 1,470
General corporate 131 61 74 49 42 40
Worldwide total $ 1,731 $ 1,689 $ 1,822 $ 1,605 $ 1,592 $ 1,510
Sales to Customers Long-Lived Assets
(dollars in millions) 2001 2000 1999 2001 2000 1999
United States $20,204 $17,707 $15,921 $11,922 $10,043 $10,033
Europe 6,853 6,365 6,711 3,632 3,551 3,698
Western Hemisphere excluding U.S. 2,142 2,084 2,023 640 653 550
Asia-Pacific, Africa 3,805 3,690 3,352 433 427 439
Segments total 33,004 29,846 28,007 16,627 14,674 14,720
General corporate 319 255 282
Other non long-lived assets 21,542 19,316 16,062
Worldwide total $33,004 $29,846 $28,007 $38,488 $34,245 $31,064
One further source of information for the investor is interim reports. As noted earlier,
interim reports are those reports that cover periods of less than one year. At one time,
interim reports were referred to as the “forgotten reports”; this is no longer the case.
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1288 • Chapter 24 Full Disclosure in Financial Reporting
The stock exchanges, the SEC, and the accounting profession have taken an active role
OBJECTIVE in developing guidelines for the presentation of interim information.
Describe the The SEC mandates that certain companies file a Form 10-Q, which requires a com-
accounting problems pany to disclose quarterly data similar to that disclosed in the annual report. It also re-
associated with quires those companies to disclose selected quarterly information in notes to the an-
interim reporting. nual financial statements. Illustration 24-9 presents the disclosure of selected quarterly
data for Tootsie Roll Industries, Inc. In addition to this requirement, the APB issued
Opinion No. 28, which attempted to narrow the reporting alternatives related to interim
Disclosure of Selected Tootsie Roll Industries, Inc.
Quarterly Data For the Year Ended December 31, 2001
(Thousands of dollars except per share data)
First Second Third Fourth Total
Net sales $82,621 $86,882 $158,781 $95,212 $423,496
Gross margin 42,958 43,517 76,304 44,060 206,839
Net earnings 12,385 13,902 27,010 12,390 65,687
Net earnings per share 0.25 0.28 0.54 0.25 1.32
High Low Dividends
1st Qtr $51.10 $43.31 $0.0680
2nd Qtr 48.89 38.54 0.0700
3rd Qtr 40.55 35.08 0.0700
4th Qtr 39.44 36.35 0.0700
Because of the short-term nature of the information in these reports, however, there
is considerable controversy as to the general approach that should be employed. One
Underlying group, which holds the discrete view, believes that each interim period should be
Concepts treated as a separate accounting period; deferrals and accruals would therefore follow
For information to be relevant, the principles employed for annual reports. In this view, accounting transactions should
it must be available to decision be reported as they occur, and expense recognition should not change with the period
makers before it loses its of time covered. Another group, which holds the integral view, believes that the in-
capacity to influence their
terim report is an integral part of the annual report and that deferrals and accruals
decisions (timeliness). Interim
should take into consideration what will happen for the entire year. In this approach,
reporting is an excellent
example of this concept. estimated expenses are assigned to parts of a year on the basis of sales volume or some
other activity base. At present, many companies follow the discrete approach for cer-
tain types of expenses and the integral approach for others, because the standards cur-
rently employed in practice are vague and lead to differing interpretations.
Interim Reporting Requirements
Generally, the same accounting principles used for annual reports should be em-
ployed for interim reports. Revenues should be recognized in interim periods on the
same basis as they are for annual periods. For example, if the installment-sales method
is used as the basis for recognizing revenue on an annual basis, then the installment
basis should be applied to interim reports as well. Also, costs directly associated with
revenues (product costs), such as materials, labor and related fringe benefits, and man-
ufacturing overhead, should be treated in the same manner for interim reports as for
“Interim Financial Reporting,” Opinions of the Accounting Principles Board No. 28 (New York:
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Disclosure Issues • 1289
Companies should use the same inventory pricing methods (FIFO, LIFO, etc.) for
interim reports that they use for annual reports. However, the following exceptions are
appropriate at interim reporting periods.
Companies may use the gross profit method for interim inventory pricing, but
disclosure of the method and adjustments to reconcile with annual inventory are
When LIFO inventories are liquidated at an interim date and are expected to be re-
placed by year-end, cost of goods sold should include the expected cost of replac-
ing the liquidated LIFO base and not give effect to the interim liquidation.
Inventory market declines should not be deferred beyond the interim period un-
less they are temporary and no loss is expected for the fiscal year.
Planned variances under a standard cost system which are expected to be absorbed
by year-end ordinarily should be deferred.
Costs and expenses other than product costs, often referred to as period costs, are
often charged to the interim period as incurred. But they may be allocated among in-
terim periods on the basis of an estimate of time expired, benefit received, or activity
associated with the periods. Considerable latitude is exercised in accounting for these
costs in interim periods, and many believe more definitive guidelines are needed.
Regarding disclosure, the following interim data should be reported as a minimum.
Sales or gross revenues, provision for income taxes, extraordinary items, cumula-
tive effect of a change in accounting principles or practices, and net income.
Basic and diluted earnings per share where appropriate.
Seasonal revenue, cost, or expenses.
Significant changes in estimates or provisions for income taxes.
Disposal of a component of a business and extraordinary, unusual, or infrequently
Changes in accounting principles or estimates.
Significant changes in financial position.
Companies are encouraged but not required to publish a balance sheet and a state-
ment of cash flows. When this information is not presented, significant changes in such
items as liquid assets, net working capital, long-term liabilities, and stockholders’ eq-
uity should be disclosed.
Unique Problems of Interim Reporting
In APB Opinion No. 28, the Board indicated that it favored the integral approach. How-
ever, within this broad guideline, a number of unique reporting problems develop re-
lated to the following items.
Advertising and Similar Costs. The general guidelines are that costs such as advertis-
ing should be deferred in an interim period if the benefits extend beyond that pe-
riod; otherwise they should be expensed as incurred. But such a determination is dif-
ficult, and even if they are deferred, how should they be allocated between quarters?
Because of the vague guidelines in this area, accounting for advertising varies widely.
At one time, some companies in the food industry, such as RJR Nabisco and Pills-
bury, charged advertising costs as a percentage of sales and adjusted to actual at year-
end, whereas General Foods and Kellogg expensed these costs as incurred.
The same type of problem relates to such items as Social Security taxes, research
and development costs, and major repairs. For example, should the company expense
Social Security costs (payroll taxes) on highly paid personnel early in the year, or allo-
cate and spread them to subsequent quarters? Should a major repair that occurs later
in the year be anticipated and allocated proportionately to earlier periods?
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1290 • Chapter 24 Full Disclosure in Financial Reporting
Expenses Subject to Year-End Adjustment. Bad debts, executive bonuses, pension costs,
and inventory shrinkage are often not known with a great deal of certainty until year-
end. These costs should be estimated and allocated in the best possible way to interim
periods. Companies use a variety of allocation techniques to accomplish this objective.
Income Taxes. Not every dollar of corporate taxable income is assessed at the same
rate; the tax rate is progressive. This aspect of business income taxes poses a problem
in preparing interim financial statements. Should the income to date be annualized
and the proportionate income tax accrued for the period to date (annualized approach)?
Or should the first amount of income earned be taxed at the lower rate of tax applica-
ble to such income (marginal principle approach)? At one time, companies generally
followed the latter approach and accrued the tax applicable to each additional dollar
The marginal principle was especially applicable to businesses having a seasonal
or uneven income pattern, because the interim accrual of tax was based on the actual
results to date. The profession now, however, uses the annualized approach requiring
that “at the end of each interim period the company should make its best estimate of
the effective tax rate expected to be applicable for the full fiscal year. The rate so de-
termined should be used in providing for income taxes on income for the quarter.”11
Because businesses did not uniformly apply this guideline in accounting for simi-
lar situations, the FASB issued Interpretation No. 18. This interpretation requires that the
estimated annual effective tax rate be applied to the year-to-date “ordinary” income
at the end of each interim period to compute the year-to-date tax. Further, the interim
period tax related to “ordinary” income shall be the difference between the amount so
computed and the amounts reported for previous interim periods of the fiscal period.12
Extraordinary Items. Extraordinary items consist of unusual and nonrecurring mate-
rial gains and losses. In the past, they were handled in interim reports in one of three
ways: (1) absorbed entirely in the quarter in which they occurred; (2) prorated over the
four quarters; or (3) disclosed only by note. The required approach is to charge or
credit the loss or gain in the quarter that it occurs instead of attempting some arbi-
trary multiple-period allocation. This approach is consistent with the way in which
extraordinary items are currently handled on an annual basis. No attempt is made to
prorate the extraordinary items over several years.
Some favor the omission of extraordinary items from the quarterly net income.
They believe that inclusion of extraordinary items that may be large in proportion to
interim results distorts the predictive value of interim reports. Many, however, consider
such an omission inappropriate because it deviates from actual results.
Changes in Accounting. What happens if a company decides to change an accounting
principle in the third quarter of a fiscal year? Should the cumulative effect adjustment
be charged or credited to that quarter? Presentation of a cumulative effect in the third
quarter may be misleading because of the inherent subjectivity associated with the first
two quarters’ reported income. In addition, a question arises as to whether such a
change might not be used to manipulate a given quarter’s income.
As a result, FASB Statement No. 3 was issued, indicating that if a cumulative effect
change occurs in other than the first quarter, no cumulative effect should be recog-
“Interim Financial Reporting,” Opinions of the Accounting Principles Board No. 28 (New York:
AICPA, 1973), par. 19. The estimated annual effective tax rate should reflect anticipated tax cred-
its, foreign tax rates, percentage depletion, capital gains rates, and other available tax planning
“Accounting for Income Taxes in Interim Periods,” FASB Interpretation No. 18 (Stamford,
Conn.: FASB, March 1977), par. 9. “Ordinary” income (or loss) refers to “income (or loss) from
continuing operations before income taxes (or benefits)” excluding extraordinary items, discon-
tinued operations, and cumulative effects of changes in accounting principles.
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Disclosure Issues • 1291
nized in those quarters.13 Rather, the cumulative effect at the beginning of the year
should be computed and the first quarter restated. Subsequent quarters would not re-
port a cumulative effect adjustment.
Earnings per Share. Interim reporting of earnings per share has all the problems in-
herent in computing and presenting annual earnings per share, and then some. If shares
are issued in the third period, EPS for the first two periods will not be indicative of
year-end EPS. If an extraordinary item is present in one period and new equity shares
are sold in another period, the EPS figure for the extraordinary item will change for
the year. On an annual basis only one EPS figure is associated with an extraordinary
item and that figure does not change; the interim figure is subject to change. For pur-
poses of computing earnings per share and making the required disclosure deter-
minations, each interim period should stand alone. That is, all applicable tests should
be made for that single period.
Seasonality. Seasonality occurs when sales are compressed into one short period of
the year while certain costs are fairly evenly spread throughout the year. For example,
the natural gas industry has its heavy sales in the winter months. In contrast, the bev-
erage industry has its heavy sales in the summer months.
The problem of seasonality is related to the matching concept in accounting. Ex-
penses should be matched against the revenues they create. In a seasonal business,
wide fluctuations in profits occur because off-season sales do not absorb the company’s
fixed costs (for example, manufacturing, selling, and administrative costs that tend to
remain fairly constant regardless of sales or production).
To illustrate why seasonality is a problem, assume the following information.
Selling price per unit $1 Data for Seasonality
Annual sales for the period (projected and actual)
100,000 units @ $1 $100,000
Variable 10¢ per unit
Fixed 20¢ per unit or $20,000 for the year
Variable 10¢ per unit
Fixed 30¢ per unit or $30,000 for the year
Sales for four quarters and the year (projected and actual) were:
Percent of Sales
Sales Data for Seasonality
1st Quarter $ 20,000 20% Example
2nd Quarter 5,000 5
3rd Quarter 10,000 10
4th Quarter 65,000 65
Total for the year $100,000 100%
Under the present accounting framework, the income statements for the quarters
might be shown as in Illustration 24-12.
“Reporting Accounting Changes in Interim Financial Statements,” Statement of the Finan-
cial Accounting Standards Board No. 3 (Stamford, Conn.: FASB, 1974). This standard also provides
guidance related to a LIFO change and accounting changes made in the fourth quarter of a fis-
cal year in which interim data are not presented.
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1292 • Chapter 24 Full Disclosure in Financial Reporting
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year
Interim Net Income for
Seasonal Business— Sales $20,000 $ 5,000 $10,000 $65,000 $100,000
Discrete Approach Manufacturing costs
Variable (2,000) (500) (1,000) (6,500) (10,000)
Fixeda (4,000) (1,000) (2,000) (13,000) (20,000)
14,000 3,500 7,000 45,500 70,000
Variable (2,000) (500) (1,000) (6,500) (10,000)
Fixedb (7,500) (7,500) (7,500) (7,500) (30,000)
Net income $ 4,500 $(4,500) $ (1,500) $31,500 $ 30,000
The fixed manufacturing costs are inventoried, so that equal amounts of fixed costs do not appear during each quarter.
The fixed nonmanufacturing costs are not inventoried, so equal amounts of fixed costs appear during each quarter.
An investor who uses the first quarter’s results can be misled. If the first quarter’s
earnings are $4,500, should this figure be multiplied by four to predict annual earnings
of $18,000? Or, as the analysis suggests, inasmuch as $20,000 in sales is 20 percent of
the predicted sales for the year, net income for the year should be $22,500 ($4,500 5).
Either figure is obviously wrong, and after the second quarter’s results occur, the in-
vestor may become even more confused.
The problem with the conventional approach is that the fixed nonmanufacturing
costs are not charged in proportion to sales. Some enterprises have adopted a way of
avoiding this problem by making all fixed nonmanufacturing costs follow the sales pat-
tern, as shown in Illustration 24-13.
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year
Interim Net Income for
Seasonal Business— Sales $20,000 $ 5,000 $10,000 $65,000 $100,000
Integral Approach Manufacturing costs
Variable (2,000) (500) (1,000) (6,500) (10,000)
Fixed (4,000) (1,000) (2,000) (13,000) (20,000)
14,000 3,500 7,000 45,500 70,000
Variable (2,000) (500) (1,000) (6,500) (10,000)
Fixed (6,000) (1,500) (3,000) (19,500) (30,000)
Net income $ 6,000 $ 1,500 $ 3,000 $19,500 $ 30,000
This approach solves some of the problems of interim reporting: Sales in the first
quarter are 20 percent of total sales for the year, and net income in the first quarter is
20 percent of total income. In this case, as in the previous example, the investor can-
not rely on multiplying any given quarter by four, but can use comparative data or rely
on some estimate of sales in relation to income for a given period.
International The greater the degree of seasonality experienced by a company, the greater the
Insight possibility of distortion. Because no definitive guidelines are available for handling
IASB GAAP requires that interim such items as the fixed nonmanufacturing costs, variability in income can be substan-
financial statements use the tial. To alleviate this problem, the profession recommends that companies subject to
discrete method, except for the material seasonal variations disclose the seasonal nature of their business and consider
tax charge. supplementing their interim reports with information for 12-month periods ended at
the interim date for the current and preceding years.
The two illustrations above highlight the difference between the discrete and in-
tegral viewpoints. The fixed nonmanufacturing expenses are expensed as incurred un-
der the discrete viewpoint. They are charged to expense on the basis of some measure
of activity under the integral method.
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Auditor’s and Management’s Reports • 1293
Continuing Controversy. The profession has developed some standards for interim re-
porting, but much still has to be done. As yet, it is unclear whether the discrete, inte-
gral, or some combination of these two methods will be settled on. Underlying
Discussion also persists concerning the independent auditor’s involvement in in- Concepts
terim reports. Many auditors are reluctant to express an opinion on interim financial The AICPA Special Committee
information, arguing that the data are too tentative and subjective. Conversely, an in- on Financial Reporting indi-
cates that users would benefit
creasing number of individuals advocate some type of examination of interim reports.
from separate fourth-
A compromise may be a limited review of interim reports that provides some assurance
quarter reporting, including
that an examination has been conducted by an outside party and that the published in- management’s analysis of
formation appears to be in accord with generally accepted accounting principles.14 fourth-quarter activities and
Analysts want financial information as soon as possible, before it’s old news. We events. Also, quarterly segment
may not be far from a continuous database system in which corporate financial records reporting was demanded.
can be accessed via the Internet. Investors might be able to access a company’s finan- Under FASB Statement No.
cial records whenever they wish and put the information in the format they need. Thus, 131, companies now provide
they could learn about sales slippage, cost increases, or earnings changes as they hap- quarterly segment data.
pen, rather than waiting until after the quarter has ended.15
A steady stream of information from the company to the investor could be very
positive because it might alleviate management’s continual concern with short-run in-
terim numbers. Today many contend that U.S. management is too short-run oriented.
The truth of this statement is echoed by the words of the president of a large company
who decided to retire early: “I wanted to look forward to a year made up of four sea-
sons rather than four quarters.”
I want it faster
The SEC has decided that timeliness of information is of extreme importance. First the
SEC has said that public companies will have only 60 days to complete their annual
reports, down from 90 days. And quarterly reports must be done within 35 days of the
close of the quarter, instead of 45. In addition, corporate executives and shareholders What do the
with more than 10 percent of a company’s outstanding stock will have 2 days to dis- numbers mean?
close their sale or purchase of stock.
Also, in a bid to encourage Internet disclosure, the SEC encourages companies to
post current, quarterly, and annual reports on their Web sites—or explain why they
don’t. The Internet postings would have to be made by the day the company submits
the information to the SEC, rather than within 24 hours as current rules allow.
AUDITOR’S AND MANAGEMENT’S REPORTS
Another important source of information that is often overlooked is the auditor’s report.
An auditor is an accounting professional who conducts an independent examination OBJECTIVE
of the accounting data presented by a business enterprise. If the auditor is satisfied that Identify the major
the financial statements present the financial position, results of operations, and cash disclosures found in
the auditor’s report.
The AICPA has been involved in developing guidelines for the review of interim reports.
“Limited Review of Interim Financial Statements,” Statement on Auditing Standards No. 24 (New
York: AICPA, 1979) sets standards for the review of interim reports.
A step in this direction is the SEC’s mandate for companies to file their financial state-
ments electronically with the SEC. The system, called EDGAR (electronic data gathering and re-
trieval) provides interested parties with computer access to financial information such as peri-
odic filings, corporate prospectuses, and proxy materials.
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1294 • Chapter 24 Full Disclosure in Financial Reporting
flows fairly in accordance with generally accepted accounting principles, an unquali-
fied opinion is expressed, as shown in Illustration 24-14.16
Auditor’s Report Boeing Company
Independent Auditors’ Report
Board of Directors and Shareholders, The Boeing Company:
We have audited the accompanying consolidated statements of financial position of The Boeing Com-
pany and subsidiaries (the “Company”) as of December 31, 2001 and 2000, and the related consolidated
statements of operations, shareholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of the Company’s man-
agement. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable as-
surance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
In Germany, auditors’ opinions An audit also includes assessing the accounting principles used and significant estimates made by man-
address whether the state- agement, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
ments have been prepared in
In our opinion, the financial statements referred to above present fairly, in all material respects, the fi-
accordance with German law—
nancial position of The Boeing Company and subsidiaries as of December 31, 2001 and 2000, and the
a statutory audit. results of their operations and their cash flows for each of the three years in the period ended December
31, 2001, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 23 to the consolidated financial statements, in 2001 the Company changed its
method of accounting for derivative financial statements to confirm to Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Financial Instruments and Hedging Activities, as amended.
Deloitte & Touche LLP
January 28, 2002
In preparing this report, the auditor follows these reporting standards.
The report shall state whether the financial statements are presented in accordance
with generally accepted accounting principles.
The report shall identify those circumstances in which such principles have not
been consistently observed in the current period in relation to the preceding period.
Informative disclosures in the financial statements are to be regarded as reasonably
adequate unless otherwise stated in the report.
The report shall contain either an expression of opinion regarding the financial
statements taken as a whole or an assertion to the effect that an opinion cannot be
expressed. When an overall opinion cannot be expressed, the reasons why should
be stated. In all cases where an auditor’s name is associated with financial state-
ments, the report should contain a clear-cut indication of the character of the au-
ditor’s examination, if any, and the degree of responsibility being taken.
In most cases, the auditor issues a standard unqualified or clean opinion. That is,
the auditor expresses the opinion that the financial statements present fairly, in all
material respects, the financial position, results of operations, and cash flows of the en-
This auditor’s report is in exact conformance with the specifications contained in “Reports
on Audited Financial Statements,” Statement on Auditing Standards No. 58 (New York: AICPA,
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Auditor’s and Management’s Reports • 1295
tity in conformity with generally accepted accounting principles. Certain circumstances,
although they do not affect the auditor’s unqualified opinion, may require the auditor
to add an explanatory paragraph to the audit report. Some of the more important
circumstances are as follows.
Uncertainties. A matter involving an uncertainty is one that is expected to be re-
solved at a future date, at which time sufficient evidence concerning its outcome
is expected to become available. In deciding whether an explanatory paragraph is
needed, the auditor should consider the likelihood of a material loss resulting from
the contingency. If, for example, the possibility that a loss will be incurred is re-
mote, then an explanatory paragraph is not warranted. If the loss is probable but
not estimable, or is reasonably possible and material, then an explanatory para-
graph is warranted.
Lack of Consistency. If there has been a change in accounting principles or in the
method of their application that has a material effect on the comparability of the
company’s financial statements, the auditor should refer to the change in an ex-
planatory paragraph of the report. Such an explanatory paragraph should identify
the nature of the change and refer the reader to the note in the financial statements
that discusses the change in detail. The auditor’s concurrence with a change is im-
plicit unless exception to the change is taken in expressing the auditor’s opinion
as to fair presentation of the financial statements in conformity with generally ac-
cepted accounting principles.
Emphasis of a Matter. The auditor may wish to emphasize a matter regarding the
financial statements, but nevertheless intends to express an unqualified opinion.
For example, the auditor may wish to emphasize that the entity is a component of
a larger business enterprise or that it has had significant transactions with related
parties. Such explanatory information should be presented in a separate paragraph
of the auditor’s report.
In some situations, however, the auditor is required to (1) express a qualified
opinion, (2) express an adverse opinion, or (3) disclaim an opinion. A qualified opin-
ion contains an exception to the standard opinion. Ordinarily the exception is not of
sufficient magnitude to invalidate the statements as a whole; if it were, an adverse
opinion would be rendered. The usual circumstances in which the auditor may de-
viate from the standard unqualified short-form report on financial statements are as
The scope of the examination is limited or affected by conditions or restrictions.
The statements do not fairly present financial position or results of operations be-
(a) Lack of conformity with generally accepted accounting principles and stan-
(b) Inadequate disclosure.
If the auditor is confronted with one of the situations noted above, the opinion must
be qualified. A qualified opinion states that, except for the effects of the matter to which
the qualification relates, the financial statements present fairly, in all material respects,
the financial position, results of operations, and cash flows in conformity with gener-
ally accepted accounting principles.
An adverse opinion is required in any report in which the exceptions to fair pres-
entation are so material that in the independent auditor’s judgment a qualified opin-
ion is not justified. In such a case, the financial statements taken as a whole are not pre-
sented in accordance with generally accepted accounting principles. Adverse opinions
are rare, because most enterprises change their accounting to conform with the audi-
A disclaimer of an opinion is appropriate when the auditor has gathered so little
information on the financial statements that no opinion can be expressed.
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1296 • Chapter 24 Full Disclosure in Financial Reporting
An example of a report in which the opinion is qualified because of the use of an
accounting principle at variance with generally accepted accounting principles is shown
in Illustration 24-15 (assuming the effects are such that the auditor has concluded that
an adverse opinion is not appropriate).
Qualified Auditor’s Helio Company
Independent Auditor’s Report
(Same first paragraph as the standard report)
Helio Company has excluded, from property and debt in the accompanying balance sheets, certain lease
obligations that, in our opinion, should be capitalized in order to conform with generally accepted ac-
counting principles. If these lease obligations were capitalized, property would be increased by $1,500,000
and $1,300,000, long-term debt by $1,400,000 and $1,200,000, and retained earnings by $100,000 and
$50,000 as of December 31, in the current and prior year, respectively. Additionally, net income would
be decreased by $40,000 and $30,000 and earnings per share would be decreased by $.06 and $.04,
respectively, for the years then ended.
In our opinion, except for the effects of not capitalizing certain lease obligations as discussed in the pre-
ceding paragraph, the financial statements referred to above present fairly, in all material respects, the
financial position of Helio Company, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
The profession also requires the auditor to evaluate whether there is substantial
doubt about the entity’s ability to continue as a going concern for a reasonable period
of time (not to exceed one year beyond the date of the financial statements). If the au-
ditor concludes that substantial doubt exists, an explanatory note to the auditor’s re-
port would be added describing the potential problem.17
The audit report should provide useful information to the investor. One investment
banker noted, “Probably the first item to check is the auditor’s opinion to see whether
or not it is a clean one—‘in conformity with generally accepted accounting principles’—
or is qualified in regard to differences between the auditor and company management
in the accounting treatment of some major item, or in the outcome of some major liti-
Management’s Discussion and Analysis
Management’s discussion and analysis (MD&A) section covers three financial aspects
of an enterprise’s business—liquidity, capital resources, and results of operations. It re-
quires management to highlight favorable or unfavorable trends and to identify sig-
nificant events and uncertainties that affect these three factors. This approach obvi-
ously involves a number of subjective estimates, opinions, and soft data. However, the
SEC, which has mandated this disclosure, believes the relevance of this information ex-
ceeds the potential lack of reliability.
“The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern,”
Statement on Auditing Standards No. 59 (New York: AICPA, 1988).
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Auditor’s and Management’s Reports • 1297
The MD&A section (2001 outlook only) of Eastman Kodak’s Annual Report is pre-
sented in Illustration 24-16.
Eastman Kodak Company Management’s
Discussion and Analysis
The Company expects 2002 to be another difficult economic year, with full year revenues level with 2001
and some earnings improvement in the second half of 2002. We do not expect to see any real upturn in
the economy until 2003, with a very gradual return to consumer spending habits and behavior that will
positively affect our business growth. The Company will continue to take actions to minimize the finan-
cial impact of this slowdown. These actions include efforts to better manage production and inventory
levels and reduce capital spending, while at the same time reducing discretionary spending to further
hold down costs. The Company will also complete the implementation of the restructuring programs an-
nounced in 2001 to make its operations more cost competitive and improve margins, particularly in its
health imaging and consumer digital camera businesses.
During 2000, the Company completed an ongoing program of real estate divestitures and portfolio
rationalization that contributed to other income (charges) reaching an annual average of $100 million over Underlying
the past three years. Now that this program is largely complete, the other income (charges) category is Concepts
expected to run in the negative $50 million to negative $100 million range annually. FASB Concepts Statement
The Company expects its effective tax rate to approximate 29% in 2002. The lower rate is attributa- No. 1 notes that management
ble to favorable tax benefits from the elimination of goodwill amortization and expected increased earn- knows more about the enter-
ings from operations in certain lower-taxed jurisdictions outside the U.S.
prise than users and therefore
From a liquidity and capital resource perspective, the Company expects to generate $6 billion in cash
can increase the usefulness of
flow after dividends during the next six years, with approximately $400 million of this being achieved in
2002. This will enable the Company to maintain its dividend, pay down debt and make acquisitions that financial information by identi-
promote profitable growth. Cash flow is defined as net cash flows (after dividends), excluding the impacts fying significant transactions
from debt and transactions in the Company’s own equity, such as stock repurchases and proceeds from that affect the enterprise and
the exercise of stock options. by explaining their financial
The MD&A section also must provide information concerning the effects of infla-
tion and changing prices if material to financial statement trends. No specific numeri-
cal computations are specified, and companies have provided little analysis on chang-
How this section of the annual report can be made even more effective is the sub- Expanded Discussion of
ject of continuing questions such as: Accounting for
Is sufficient forward-looking information being disclosed under current MD&A
Should MD&A disclosures be changed to become more of a risk analysis?
Should the MD&A be audited by independent auditors?
Management’s Responsibilities for Financial Statements OBJECTIVE
Some companies already present a report on management’s responsibilities, including Understand
its responsibilities for, and assessment of, the internal control system. The Sarbanes- management’s
Oxley Act requires the SEC to develop guidelines for providing this information for all responsibilities for
publicly traded companies. An example of the type of disclosure that some companies financials.
are now making is shown in Illustration 24-17.
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1298 • Chapter 24 Full Disclosure in Financial Reporting
Report on Manage- AMR Corporation
Report of Management
The management of AMR Corporation is responsible for the integrity and objectivity of the Company’s
financial statements and related information. The financial statements have been prepared in conformity
with accounting principles generally accepted in the United States and reflect certain estimates and judg-
ments of management as to matters set forth therein.
AMR maintains a system of internal controls designed to provide reasonable assurance, at reason-
able cost, that its financial records can be relied upon in the preparation of financial statements and that
its assets are safeguarded against loss or unauthorized use. An important element of the Company’s
control systems is the ongoing program to promote control consciousness throughout the organization.
Management’s commitment to the program is evidenced by organizational arrangements that provide for
divisions of responsibility, effective communication of policies and procedures, selection of competent fi-
nancial managers and development and maintenance of financial planning and reporting systems.
Management continually monitors the system for compliance. AMR maintains a strong internal audit-
ing program that independently assesses the effectiveness of the internal controls and recommends pos-
sible improvements. Ernst & Young, independent auditors, is engaged to audit the Company’s financial
statements. Ernst & Young obtains and maintains an understanding of the internal control structure and
conducts such tests and other auditing procedures considered necessary in the circumstances to ren-
der the opinion on the financial statements contained in their report.
The Audit Committee of the Board of Directors, composed entirely of independent directors, meets
regularly with the independent auditors, management and internal auditors to review their work and con-
firm that they are properly discharging their responsibilities. In addition, the independent auditors and the
internal auditors meet periodically with the Audit Committee, without the presence of management, to
discuss the results of their work and other relevant matters.
Donald J. Carty
Chairman, President and Chief Executive Officer
Thomas W. Horton
Senior Vice President and Chief Financial Officer
CURRENT REPORTING ISSUES
Reporting on Financial Forecasts and Projections
In recent years, the investing public’s demand for more and better information has
focused on disclosure of corporate expectations for the future.18 These disclosures take
one of two forms:19
Some areas in which companies are using financial information about the future are equip-
ment lease-versus-buy analysis, analysis of a company’s ability to successfully enter new mar-
kets, and examining merger and acquisition opportunities. In addition, forecasts and projections
are also prepared for use by third parties in public offering documents (requiring financial fore-
casts), tax-oriented investments, and financial feasibility studies. Use of forward-looking data
has been enhanced by the increased capability of the microcomputer to analyze, compare, and
manipulate large quantities of data.
“Guide for Prospective Financial Information,” Audit and Accounting Guide (New York:
AICPA, May 1999), pars. 3.04 and 3.05.
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Current Reporting Issues • 1299
Financial Forecast. Prospective financial statements that present, to the best of the
responsible party’s knowledge and belief, an entity’s expected financial position, OBJECTIVE
results of operations, and cash flows. A financial forecast is based on the responsi- Identify issues related
ble party’s assumptions reflecting conditions it expects to exist and the course of to financial forecasts
action it expects to take. and projections.
Financial Projection. Prospective financial statements that present, to the best of
the responsible party’s knowledge and belief, given one or more hypothetical as-
sumptions, an entity’s expected financial position, results of operations, and cash
flows. A financial projection is based on the responsible party’s assumptions re-
flecting conditions it expects would exist and the course of action it expects would
be taken, given one or more hypothetical assumptions.
The difference between a financial forecast and a financial projection is that a forecast
attempts to provide information on what is expected to happen, whereas a projection
may provide information on what is not necessarily expected to happen, but might
Financial forecasts are the subject of intensive discussion with journalists, corpo-
rate executives, the SEC, financial analysts, accountants, and others. Predictably, there
are strong arguments on either side. Listed below are some of the arguments.
Arguments for requiring published forecasts:
Investment decisions are based on future expectations. Therefore information about
the future facilitates better decisions.
Forecasts are already circulated informally, but are uncontrolled, frequently mis-
leading, and not available equally to all investors. This confused situation should
be brought under control.
Circumstances now change so rapidly that historical information is no longer ad-
equate for prediction.
Arguments against requiring published forecasts:
No one can foretell the future. Therefore forecasts, while conveying an impression
of precision about the future, will inevitably be wrong.
Organizations will strive only to meet their published forecasts, not to produce re-
sults that are in the stockholders’ best interest.
When forecasts are not proved to be accurate, there will be recriminations and prob-
ably legal actions.20 Underlying
Disclosure of forecasts will be detrimental to organizations, because forecasts will The AICPA’s Special Committee
fully inform not only investors but also competitors (foreign and domestic). on Financial Reporting indi-
The AICPA has issued a statement on standards for accountants’ services on cates that the current legal
environment discourages com-
prospective financial information. This statement establishes guidelines for the
panies from disclosing
preparation and presentation of financial forecasts and projections.21 It requires ac-
countants to provide (1) a summary of significant assumptions used in the forecast or Companies should not have to
projection and (2) guidelines for minimum presentation. expand reporting of forward-
To encourage management to disclose this type of information, the SEC has a safe looking information until there
harbor rule. This rule provides protection to an enterprise that presents an erroneous are more effective deterrents
forecast as long as the forecast is prepared on a reasonable basis and is disclosed in to unwarranted litigation.
The issue is serious. Over a recent 3-year period, 8 percent of the companies on the NYSE
were sued because of an alleged lack of financial disclosure. Companies complain that they are
subject to lawsuits whenever the stock price drops. And as one executive noted, “You can even
be sued if the stock price goes up—because you did not disclose the good news fast enough.”
“Guide for Prospective Financial Information,” op. cit., par. 1.02.
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1300 • Chapter 24 Full Disclosure in Financial Reporting
good faith.22 However, many companies note that the safe harbor rule does not work
in practice, since it does not cover oral statements, nor has it kept them out of court.
Experience in Great Britain
Great Britain has permitted financial forecasts for years, and the results have been fairly
successful. Some significant differences exist between the English and the American
business and legal environment,23 but probably none that could not be overcome if in-
fluential interests in this country cooperated to produce an atmosphere conducive to
quality forecasting. A typical British forecast adapted from a construction company’s
report to support a public offering of stock is as follows.
Profits have grown substantially over the past 10 years and directors are confident of being able to con-
Financial Forecast of a
tinue this expansion. . . . While the rate of expansion will be dependent on the level of economic activity
British Company in Ireland and England, the group is well structured to avail itself of opportunities as they arise, particu-
larly in the field of property development, which is expected to play an increasingly important role in the
group’s future expansion.
Profits before taxation for the half year ended 30th June 1999 were 402,000 pounds. On the basis of
trading experiences since that date and the present level of sales and completions, the directors expect
that in the absence of unforeseen circumstances, the group’s profits before taxation for the year to 31st
December 1999 will be not less than 960,000 pounds.
No dividends will be paid in respect of the year December 31, 1999. In a full financial year, on the
basis of above forecasts (not including full year profits) it would be the intention of the board, assuming
current rates of tax, to recommend dividends totaling 40% (of after-tax profits), of which 15% payable
would be as an interest dividend in November 2000 and 25% as a final dividend in June 2001.
A general narrative-type forecast issued by a U.S. corporation might appear as
On the basis of promotions planned by the company for the second half of fiscal 2002, net earnings for
Financial Forecast for an
that period are expected to be approximately the same as those for the first half of fiscal 2002, with net
American Company earnings for the third quarter expected to make the predominant contribution to net earnings for the sec-
ond half of fiscal 2002.
Questions of Liability
What happens if a company does not meet its forecasts? Are the company and the au-
ditor going to be sued? If a company, for example, projects an earnings increase of 15
percent and achieves only 5 percent, should stockholders be permitted to have some
judicial recourse against the company?
One court case involving Monsanto Chemical Corporation has provided some
guidelines. In this case, Monsanto predicted that sales would increase 8 to 9 percent
and that earnings would rise 4 to 5 percent. In the last part of the year, the demand
for Monsanto’s products dropped as a result of a business turndown. Therefore, in-
stead of increasing, the company’s earnings declined. The company was sued be-
cause the projected earnings figure was erroneous, but the judge dismissed the suit
because the forecasts were the best estimates of qualified people whose intents were
“Safe-Harbor Rule for Projections,” Release No. 5993 (Washington: SEC, 1979). The Private
Securities Litigation Reform Act of 1995 recognizes that some information that is useful to in-
vestors is inherently subject to less certainty or reliability than other information. By providing
safe harbor for forward-looking statements, Congress has sought to facilitate access to this in-
formation by investors.
The British system, for example, does not permit litigation on forecasted information, and
the solicitor (lawyer) is not permitted to work on a contingent fee basis. See “A Case for Fore-
casting—The British Have Tried It and Find That It Works,” World (New York: Peat, Marwick,
Mitchell & Co., Autumn 1978), pp. 10–13.
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Current Reporting Issues • 1301
As indicated earlier, the SEC’s safe harbor rules are intended to protect enterprises
that provide good-faith projections. However, much concern exists as to how the SEC
and the courts will interpret such terms as “good faith” and “reasonable assumptions”
when erroneous forecasts mislead users of this information.
Internet Financial Reporting
How can companies improve the usefulness of their financial reporting practices? Many
companies are using the power and reach of the Internet to provide more useful
information to financial statement readers. Recent surveys indicate that most large com-
panies have Internet sites, and a large proportion of these companies’ Web sites contain
links to their financial statements and other disclosures.24 The increased popularity of
such reporting is not surprising, since the costs of printing and disseminating paper
reports could be reduced with the use of Internet reporting.
How does Internet financial reporting improve the overall usefulness of a com-
pany’s financial reports? First, dissemination of reports via the Web can allow firms to
communicate with more users than is possible with traditional paper reports. In ad-
dition, Internet reporting allows users to take advantage of tools such as search en-
gines and hyperlinks to quickly find information about the firm and, sometimes, to
download the information for analysis, perhaps in computer spreadsheets. Finally, Int-
ernet reporting can help make financial reports more relevant by allowing compa-
nies to report expanded disaggregated data and more timely data than is possible
through paper-based reporting. For example, some companies voluntarily report
weekly sales data and segment operating data on their Web sites.
Given these benefits and ever-improving Internet tools, will it be long before elec-
tronic reporting replaces paper-based financial disclosure? The main obstacles to achiev-
ing complete electronic reporting are related to equality of access to electronic financial
reporting and the reliability of the information distributed via the Internet. Although
companies may practice Internet financial reporting, they must still prepare traditional
paper reports because some investors may not have access to the Internet. These in-
vestors would receive differential (less) information relative to other “wired” investors
if companies were to eliminate paper reports. In addition, at present, Internet financial
reporting is a voluntary means of reporting. As a result, there are no standards as to the
completeness of reports on the Internet, nor is there the requirement that these reports
be audited. One concern in this regard is that computer “hackers” could invade a com-
pany’s Web site and corrupt the financial information contained therein.
Thus, although Internet financial reporting is gaining in popularity, until issues re-
lated to differential access to the Internet and the reliability of information disseminated
via the Web are solved, we will continue to see traditional paper-based reporting.
Fraudulent Financial Reporting
Fraudulent financial reporting is defined as “intentional or reckless conduct,
whether act or omission, that results in materially misleading financial statements.” OBJECTIVE
Fraudulent reporting can involve gross and deliberate distortion of corporate records Describe the
(such as inventory count tags), or misapplication of accounting principles (failure to profession’s response
disclose material transactions).25 Although frauds are unusual, recent events involv- to fraudulent financial
ing such well-known companies as Enron, WorldCom, Adelphia Communications, reporting.
and Tyco International indicate that more must be done to address this issue.
The FASB has issued a report on electronic dissemination of financial reports. This report
summarizes current practice and research conducted on Internet financial reporting. See Busi-
ness Reporting Research Project, “Electronic Distribution of Business Reporting Information”
(Norwalk, Conn.: FASB, 2000).
“Report of the National Commission on Fraudulent Financial Reporting” (Washington,
D.C., 1987), page 2. Unintentional errors as well as corporate improprieties (such as tax fraud,
employee embezzlements, and so on) which do not cause the financial statements to be mis-
leading are excluded from the definition of fraudulent financial reporting.
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1302 • Chapter 24 Full Disclosure in Financial Reporting
Here’s a fraud
The case of ESM Government Securities, Inc. (ESM) exemplifies the seriousness of
these frauds. ESM was a Fort Lauderdale securities dealer entrusted with monies to in-
vest by municipalities from Toledo, Ohio to Beaumont, Texas. The cities provided the
What do the cash to ESM which they thought was collateralized with government securities. Exam-
numbers mean? ination of ESM’s balance sheet indicated that the company owed about as much as it
expected to collect. Unfortunately, the amount it expected to collect was from insolvent
affiliates which, in effect, meant that ESM was bankrupt. In fact, ESM had been bank-
rupt for more than 6 years, and the fraud was discovered only because a customer ques-
tioned a note to the balance sheet! More than $300 million of losses had been disguised.
Source: For an expanded discussion of this case, see Robert J. Sack and Robert Tangreti, “ESM: Im-
plications for the Profession,” Journal of Accountancy (April 1987).
Causes of Fraudulent Financial Reporting
Fraudulent financial reporting usually occurs because of conditions in the internal or
external environment.26 Influences in the internal environment relate to poor systems
of internal control, management’s poor attitude toward ethics, or perhaps a company’s
liquidity or profitability. Those in the external environment may relate to industry con-
ditions, overall business environment, or legal and regulatory considerations.
General incentives for fraudulent financial reporting are the desire to obtain a
higher stock price or debt offering, to avoid default on a loan covenant, or to make a
personal gain of some type (additional compensation, promotion). Situational pressures
on the company or an individual manager also may lead to fraudulent financial re-
porting. Examples of these situational pressures include:
Sudden decreases in revenue or market share. A single company or an entire in-
dustry can experience these decreases.
Unrealistic budget pressures, particularly for short-term results. These pressures
may occur when headquarters arbitrarily determines profit objectives and budgets
without taking actual conditions into account.
Financial pressure resulting from bonus plans that depend on short-term economic
performance. This pressure is particularly acute when the bonus is a significant
component of the individual’s total compensation.
Opportunities for fraudulent financial reporting are present in circumstances when
the fraud is easy to commit and when detection is difficult. Frequently these opportu-
nities arise from:
The absence of a board of directors or audit committee that vigilantly oversees the
financial reporting process.
Weak or nonexistent internal accounting controls. This situation can occur, for
example, when a company’s revenue system is overloaded as a result of a rapid
expansion of sales, an acquisition of a new division, or the entry into a new,
unfamiliar line of business.
Unusual or complex transactions such as the consolidation of two companies, the
divestiture or closing of a specific operation, and agreements to buy or sell gov-
ernment securities under a repurchase agreement.
Accounting estimates, requiring significant subjective judgment by company man-
agement, such as reserves for loan losses and the yearly provision for warranty
The discussion in this section is based on the Report of the National Commission on Fraud-
ulent Financial Reporting, pp. 23–24.
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Summary of Learning Objectives • 1303
Ineffective internal audit staffs resulting from inadequate staff size and severely
limited audit scope.
A weak corporate ethical climate contributes to these situations. Opportunities for
fraudulent financial reporting also increase dramatically when the accounting princi-
ples followed in reporting transactions are nonexistent, evolving, or subject to varying
The Auditing Standards Board of the AICPA has issued numerous auditing stan-
dards in response to concerns expressed by the accounting profession, by the media,
and by the public.27 For example, the Board issued a new standard that “raises the bar”
on the performance of financial statement audits by explicitly requiring auditors to as-
sess the risk of material financial misstatement due to fraud.28 As indicated earlier, the
Sarbanes-Oxley Act of 2002 now raises the penalty substantially for executives who are
involved in fraudulent financial reporting.
Criteria for Making Accounting and Reporting Choices
Throughout this textbook, we have stressed the need to provide information that is
useful to predict the amounts, timing, and uncertainty of future cash flows. To achieve
this objective, judicious choices between alternative accounting concepts, methods, and Underlying
means of disclosure must be made. You are probably surprised by the large number of
The FASB concept statements
choices that exist among acceptable alternatives.
on objectives of financial
You should recognize, however, as indicated in Chapter 1, that accounting is greatly
reporting, elements of financial
influenced by its environment. Because it does not exist in a vacuum, it seems unreal- statements, qualitative charac-
istic to assume that alternative presentations of certain transactions and events will be teristics of accounting informa-
eliminated entirely. Nevertheless, we are hopeful that the profession, through the de- tion, and recognition and
velopment of a conceptual framework, will be able to focus on the needs of financial measurement are important
statement users and eliminate diversity where appropriate. The profession must con- steps in the right direction.
tinue its efforts to develop a sound foundation upon which financial standards and
practice can be built. As Aristotle said: “The correct beginning is more than half the
SUMMARY OF LEARNING OBJECTIVES
Review the full disclosure principle and describe problems of implementation. The KEY TERMS
full disclosure principle calls for financial reporting of any financial facts significant accounting policies, 1275
enough to influence the judgment of an informed reader. Implementing the full dis- adverse opinion, 1295
closure principle is difficult, because the cost of disclosure can be substantial and the
benefits difficult to assess. Disclosure requirements have increased because of (1) the
auditor’s report, 1293
growing complexity of the business environment, (2) the necessity for timely infor-
common costs, 1286
mation, and (3) the use of accounting as a control and monitoring device.
Explain the use of notes in financial statement preparation. Notes are the accoun- disclosure, 1274
tant’s means of amplifying or explaining the items presented in the main body of the disclaimer of an
statements. Information pertinent to specific financial statement items can be ex- opinion, 1295
plained in qualitative terms, and supplementary data of a quantitative nature can be discrete view, 1288
Because the profession believes that the role of the auditor is not well understood outside
the profession, much attention has been focused on the expectation gap. The expectation gap is
the gap between (1) the expectation of financial statement users concerning the level of assur-
ance they believe the independent auditor provides and (2) the assurance that the independent
auditor actually does provide under generally accepted auditing standards.
“Consideration of Fraud in a Financial Statement Audit,” Statement on Auditing Standards
No. 99 (New York: AICPA, 2002).
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1304 • Chapter 24 Full Disclosure in Financial Reporting
errors, 1279 provided to expand the information in the financial statements. Common note
financial forecast, 1299 disclosures relate to such items as the following: accounting policies; inventories; prop-
financial projection, 1299 erty, plant, and equipment; credit claims; contingencies and commitments; and
fraudulent financial subsequent events.
full disclosure Describe the disclosure requirements for major segments of a business. If only the
principle, 1272 consolidated figures are available to the analyst, much information regarding the com-
illegal acts, 1280 position of these figures is hidden in aggregated figures. There is no way to tell from
integral view, 1288 the consolidated data the extent to which the differing product lines contribute to the
interim reports, 1287 company’s profitability, risk, and growth potential. As a result, segment information
irregularities, 1279 is required by the profession in certain situations.
approach, 1284 Describe the accounting problems associated with interim reporting. Interim reports
management’s discussion cover periods of less than one year. Two viewpoints exist regarding interim reports.
and analysis One view (discrete view) holds that each interim period should be treated as a sepa-
(MD&A), 1296 rate accounting period. Another view (integral view) is that the interim report is an
notes to financial integral part of the annual report and that deferrals and accruals should take into con-
statements, 1277 sideration what will happen for the entire year.
operating segment, 1284 The same accounting principles used for annual reports should be employed for
post-balance-sheet interim reports. A number of unique reporting problems develop related to the fol-
events, 1280 lowing items: (1) advertising and similar costs, (2) expenses subject to year-end
qualified opinion, 1295 adjustment, (3) income taxes, (4) extraordinary items, (5) changes in accounting, (6)
related party earnings per share, and (7) seasonality.
safe harbor rule, 1299 Identify the major disclosures found in the auditor’s report. If the auditor is satisfied
seasonality, 1291 that the financial statements present the financial position, results of operations, and
subsequent events, 1280 cash flows fairly in accordance with generally accepted accounting principles, an un-
unqualified or clean qualified opinion is expressed. A qualified opinion contains an exception to the stan-
opinion, 1294 dard opinion; ordinarily the exception is not of sufficient magnitude to invalidate the
statements as a whole.
An adverse opinion is required in any report in which the exceptions to fair pre-
sentation are so material that a qualified opinion is not justified. A disclaimer of an
opinion is appropriate when the auditor has gathered so little information on the
financial statements that no opinion can be expressed.
Understand management’s responsibilities for financials. Management’s discussion
and analysis section covers three financial aspects of an enterprise’s business: liquid-
ity, capital resources, and results of operations. Management has primary responsi-
bility for the financial statements, and this responsibility is often indicated in a letter
to stockholders in the annual report.
Identify issues related to financial forecasts and projections. The SEC has indicated
that companies are permitted (not required) to include profit forecasts in reports filed
with that agency. To encourage management to disclose this type of information, the
SEC has issued a “safe harbor” rule. The safe harbor rule provides protection to an
enterprise that presents an erroneous forecast as long as the projection was prepared
on a reasonable basis and was disclosed in good faith. However, the safe harbor rule
has not worked well in practice.
Describe the profession’s response to fraudulent financial reporting. Fraudulent
financial reporting is intentional or reckless conduct, whether act or omission, that
results in materially misleading financial statements. Fraudulent financial reporting
usually occurs because of poor internal control, management’s poor attitude toward
ethics, and so on. The recently enacted Sarbanes-Oxley Act has numerous provisions
intended to help prevent fraudulent financial reporting.
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Perspective on Financial Statement Analysis • 1305
What would be important to you in studying a company’s financial statements? The
answer depends on your particular interest—whether you are a creditor, stockholder,
potential investor, manager, government agency, or labor leader. For example, short-
term creditors such as banks are primarily interested in the ability of the firm to pay
its currently maturing obligations. In that case, you would examine the current assets
and their relation to short-term liabilities to evaluate the short-run solvency of the firm.
Bondholders, on the other hand, look more to long-term indicators, such as the enter-
prise’s capital structure, past and projected earnings, and changes in financial position.
Stockholders, present or prospective, also are interested in many of the features con-
sidered by a long-term creditor. As a stockholder, you would focus on the earnings pic-
ture, because changes in it greatly affect the market price of your investment. You also
would be concerned with the financial position of the firm, because it affects indirectly
the stability of earnings.
The management of a company is concerned about the composition of its capital
structure and about the changes and trends in earnings. This financial information has
a direct influence on the type, amount, and cost of external financing that the company
can obtain. In addition, the company finds financial information useful on a day-to-
day operating basis in such areas as capital budgeting, breakeven analysis, variance
analysis, gross margin analysis, and for internal control purposes.
PERSPECTIVE ON FINANCIAL STATEMENT ANALYSIS
Information from financial statements can be gathered by examining relationships
between items on the statements and identifying trends in these relationships. The OBJECTIVE
relationships are expressed numerically in ratios and percentages, and trends are iden-
approach to financial
tified through comparative analysis.
A problem with learning how to analyze statements is that the means may become
an end in itself. There are thousands of possible relationships that could be calculated
and trends that could be identified. If one knows only how to calculate ratios and trends
without understanding how such information can be used, little is accomplished. There-
fore, a logical approach to financial statement analysis is necessary. Such an approach
may consist of the following steps. Concepts
Know the questions for which you want to find answers. As indicated at the be- Because financial statements
ginning of this chapter, various groups have different types of interest in a com- report on the past, they em-
pany. phasize the qualitative charac-
teristic of feedback value. This
Know the questions that particular ratios and comparisons are able to help an-
feedback value is useful be-
swer. These will be discussed in this appendix. cause it can be used to better
Match 1 and 2 above. By such a matching, the statement analysis will have a log- achieve the qualitative charac-
ical direction and purpose. teristic of predictive value.
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1306 • Chapter 24 Full Disclosure in Financial Reporting
Several caveats must be mentioned. Financial statements report on the past. As
such, analysis of these data is an examination of the past. Whenever such information
is incorporated into a decision-making (future-oriented) process, a critical assumption
is that the past is a reasonable basis for predicting the future. This is usually a reason-
able approach, but the limitations associated with it should be recognized. Also, ratio
Insight and trend analyses will help identify present strengths and weaknesses of a company.
They may serve as “red flags” indicating problem areas. In many cases, however, such
Some companies outside the analyses will not reveal why things are as they are. Finding answers about “why” usu-
U.S. provide “convenience” fi- ally requires an in-depth analysis and an awareness of many factors about a company
nancial statements for U.S. read- that are not reported in the financial statements—for instance, the impact of inflation,
ers. These financial statements
actions of competitors, technological developments, a strike at a major supplier’s or
have been translated into Eng-
lish, and they may also translate
buyer’s operations, and so on.
the currency units into U.S. dol- Another caveat is that a single ratio by itself is not likely to be very useful. For
lars. However, the statements example, a current ratio of 2 to 1 (current assets are twice current liabilities) may be
are not restated using U.S. ac- viewed as satisfactory. However, if the industry average is 3 to 1, such a conclusion
counting principles, and financial may be questioned. Even given this industry average, one may conclude that the par-
statement analysis needs to take ticular company is doing well if one knows the previous year‘s ratio was 1.5 to 1. Con-
this fact into account. sequently, to derive meaning from ratios, some standard against which to compare
them is needed. Such a standard may come from industry averages, past years’
amounts, a particular competitor, or planned levels.
Finally, awareness of the limitations of accounting numbers used in an analysis
is important. We will discuss some of these limitations and their consequences later in
Various devices are used in the analysis of financial statement data to bring out the
OBJECTIVE µ comparative and relative significance of the financial information presented. These de-
Identify major analytic vices include ratio analysis, comparative analysis, percentage analysis, and examina-
ratios and describe tion of related data. No one device is more useful than another. Every situation faced
their calculation. by the investment analyst is different, and the answers needed are often obtained only
upon close examination of the interrelationships among all the data provided. Ratio
analysis is the starting point in developing the information desired by the analyst.
Ratios can be classified as follows.
MAJOR TYPES OF RATIOS
LIQUIDITY RATIOS. Measures of the enterprise’s short-run ability to pay its
ACTIVITY RATIOS. Measures of how effectively the enterprise is using the as-
PROFITABILITY RATIOS. Measures of the degree of success or failure of a
given enterprise or division for a given period of time.
COVERAGE RATIOS. Measures of the degree of protection for long-term cred-
itors and investors.1
Other terms may be used to categorize these ratios. For example, liquidity ratios are some-
times referred to as solvency ratios; activity ratios as turnover or efficiency ratios; and coverage
ratios as leverage or capital structure ratios.
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Ratio Analysis • 1307
Discussions and illustrations about the computation and use of these financial ra-
tios have been integrated throughout this book. Illustration 24A-1 summarizes all of
the ratios presented in the book and identifies the specific chapters in which ratio cov-
erage has been presented.
SUMMARY OF RATIOS PRESENTED IN EARLIER CHAPTERS
Summary of Financial
Ratio Formula for Computation Reference Ratios
1. Current ratio Chapter 13, p. 643
2. Quick or acid-test Cash, marketable securities, and
ratio net receivables
Chapter 13, p. 644
3. Current cash debt Net cash provided by
ratio operating activities
Chapter 5, p. 196
Average current liabilities
4. Receivables turnover Chapter 7, p. 338
Average trade receivables (net)
Cost of goods sold
5. Inventory turnover Chapter 9, p. 442
6. Asset turnover Chapter 11, p. 543
Average total assets
7. Profit margin Net income Chapter 11, p. 543
on sales Net sales
8. Rate of return Net income Chapter 11, p. 543
on assets Average total assets
9. Rate of return on
Net income minus preferred dividends
Average common stockholders’ equity Chapter 15, p. 749
Net income minus preferred dividends
10. Earnings per share Chapter 16, p. 801
Weighted shares outstanding
11. Payout ratio Chapter 15, p. 750
12. Debt to total Debt Chapter 14, p. 692
assets ratio Total assets or equities
Income before interest charges
13. Times interest
Interest charges Chapter 14, p. 693
Net cash provided by
14. Cash debt coverage
Average total liabilities Chapter 5, p. 197
15. Book value Common stockholders’ equity Chapter 15, p. 750
per share Outstanding shares
Supplemental coverage of these ratios, accompanied with assignment material, is
contained on the Take Action! CD. This supplemental coverage takes the form of a com- Financial Analysis Primer
prehensive case adapted from the annual report of a large international chemical com-
pany that we have disguised under the name of Anetek Chemical Corporation.
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1308 • Chapter 24 Full Disclosure in Financial Reporting
Limitations of Ratio Analysis
The reader of financial statements must understand the basic limitations associated
OBJECTIVE ¸ with ratio analysis. As analytical tools, ratios are attractive because they are simple and
Explain the limitations convenient. But too frequently, decisions are based on only these simple computations.
of ratio analysis. The ratios are only as good as the data upon which they are based and the informa-
tion with which they are compared.
One important limitation of ratios is that they generally are based on historical
cost, which can lead to distortions in measuring performance. By failing to incorpo-
rate changing price information, many believe that inaccurate assessments of the en-
terprise’s financial condition and performance result.
Also, investors must remember that where estimated items (such as depreciation
and amortization) are significant, income ratios lose some of their credibility. Income
recognized before the termination of the life of the business is an approximation. In
analyzing the income statement, the user should be aware of the uncertainty
surrounding the computation of net income. As one writer aptly noted, “The physicist
has long since conceded that the location of an electron is best expressed by a proba-
bility curve. Surely an abstraction like earnings per share is even more subject to the
rules of probability and risk.”2
Probably the greatest criticism of ratio analysis is the difficult problem of achiev-
ing comparability among firms in a given industry. Achieving comparability among
Underlying firms requires that the analyst (1) identify basic differences existing in their accounting
Concepts principles and procedures and (2) adjust the balances to achieve comparability.
Consistency and comparability Basic differences in accounting usually involve one of the following areas.
are important concepts when
financial statement analysis is Inventory valuation (FIFO, LIFO, average cost).
performed. If the principles Depreciation methods, particularly the use of straight-line versus accelerated
and assumptions used to depreciation.
prepare the financial state-
Capitalization versus expense of certain costs.
ments are continually chang-
ing, it becomes difficult to Pooling versus purchase in accounting for business combinations.
make accurate assessments of Capitalization of leases versus noncapitalization.
a company’s progress. Investments in common stock carried at equity versus fair value.
Differing treatments of postretirement benefit costs.
Questionable practices of defining discontinued operations, impairments, and ex-
The use of these different alternatives can make quite a significant difference in the
ratios computed. For example, in the brewing industry, at one time Anheuser-Busch
noted that if it had used average cost for inventory valuation instead of LIFO, inven-
tories would have increased approximately $33,000,000. Such an increase would have
a substantive impact on the current ratio. Several studies have analyzed the impact of
different accounting methods on financial statement analysis. The differences in income
that can develop are staggering in some cases. The average investor may find it diffi-
cult to grasp all these differences, but investors must be aware of the potential pitfalls
if they are to be able to make the proper adjustments.
Finally, it must be recognized that a substantial amount of important information
is not included in a company’s financial statements. Events involving such things as
industry changes, management changes, competitors’ actions, technological develop-
ments, government actions, and union activities are often critical to a company’s suc-
cessful operation. These events occur continuously, and information about them must
come from careful analysis of financial reports in the media and other sources. Indeed
many argue, under what is known as the efficient market hypothesis, that financial
statements contain “no surprises” to those engaged in market activities. They contend
that the effect of these events is known in the marketplace—and the price of the com-
pany’s stock adjusts accordingly—well before the issuance of such reports.
Richard E. Cheney, “How Dependable Is the Bottom Line?” The Financial Executive (Janu-
ary 1971), p. 12.
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Comparative Analysis • 1309
In comparative analysis the same information is presented for two or more different
dates or periods so that like items may be compared. Ratio analysis provides only a OBJECTIVE ¹
Describe techniques of
single snapshot, the analysis being for one given point or period in time. In a com-
parative analysis, an investment analyst can concentrate on a given item and determine
whether it appears to be growing or diminishing year by year and the proportion of
such change to related items. Generally, companies present comparative financial
In addition, many companies include in their annual reports 5- or 10-year sum-
maries of pertinent data that permit the reader to examine and analyze trends. ARB
No. 43 concluded that “the presentation of comparative financial statements in annual
and other reports enhances the usefulness of such reports and brings out more clearly
the nature and trends of current changes affecting the enterprise.” An illustration of a
5-year condensed statement with additional supporting data as presented by Anetek
Chemical Corporation is presented in Illustration 24A-2.
ANETEK CHEMICAL CORPORATION
CONDENSED COMPARATIVE STATEMENTS
10 Years 20 Years
2004 2003 2002 2001 2000 1994 1984
Sales and other revenue:
Net sales $1,600.0 $1,350.0 $1,309.7 $1,176.2 $1,077.5 $636.2 $170.7
Other revenue 75.0 50.0 39.4 34.1 24.6 9.0 3.7
Total 1,675.0 1,400.0 1,349.1 1,210.3 1,102.1 645.2 174.4
Costs and other charges:
Cost of sales 1,000.0 850.0 827.4 737.6 684.2 386.8 111.0
Depreciation and amortization 150.0 150.0 122.6 115.6 98.7 82.4 14.2
Selling and administrative
expenses 225.0 150.0 144.2 133.7 126.7 66.7 10.7
Interest expense 50.0 25.0 28.5 20.7 9.4 8.9 1.8
Taxes on income 100.0 75.0 79.5 73.5 68.3 42.4 12.4
Total 1,525.0 1,250.0 1,202.2 1,081.1 987.3 587.2 150.1
Net income for the year $ 150.0 $ 150.0 $ 146.9 $ 129.2 $ 114.8 $ 58.0 $ 24.3
Earnings per share on common
stock (in dollars)a $ 5.00 $ 5.00 $ 4.90 $ 3.58 $ 3.11 $ 1.66 $ 1.06
Cash dividends per share on
common stock (in dollars)a 2.25 2.15 1.95 1.79 1.71 1.11 0.25
Cash dividends declared on
common stock 67.5 64.5 58.5 64.6 63.1 38.8 5.7
Stock dividend at approximate
market value 46.8 27.3
Taxes (major) 144.5 125.9 116.5 105.6 97.8 59.8 17.0
Wages paid 389.3 325.6 302.1 279.6 263.2 183.2 48.6
Cost of employee benefits 50.8 36.2 32.9 28.7 27.2 18.4 4.4
Number of employees at year
end (thousands) 47.4 36.4 35.0 33.8 33.2 26.6 14.6
Additions to property 306.3 192.3 241.5 248.3 166.1 185.0 49.0
Adjusted for stock splits and stock dividends.
All 600 companies surveyed in Accounting Trends and Techniques—2001 presented compar-
ative 2000 amounts in their 2001 balance sheets and presented comparative 1999 and 2000
amounts in their 2001 income statements.
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1310 • Chapter 24 Full Disclosure in Financial Reporting
PERCENTAGE (COMMON-SIZE) ANALYSIS
Analysts also use percentage analysis to help them evaluate and compare companies.
OBJECTIVE Percentage analysis consists of reducing a series of related amounts to a series of per-
Describe techniques of centages of a given base. All items in an income statement are frequently expressed as
percentage analysis. a percentage of sales or sometimes as a percentage of cost of goods sold. A balance
sheet may be analyzed on the basis of total assets. This analysis facilitates comparison
and is helpful in evaluating the relative size of items or the relative change in items. A
conversion of absolute dollar amounts to percentages may also facilitate comparison
between companies of different size.
To illustrate, here is a comparative analysis of the expense section of Anetek for the
last 2 years.
ANETEK CHEMICAL CORPORATION
HORIZONTAL COMPARATIVE ANALYSIS
Analysis (000,000 OMITTED)
2004 2003 Difference Inc. (Dec.)
Cost of sales $1,000.0 $850.0 $150.0 17.6%
Depreciation and amortization 150.0 150.0 0 0
Selling and administrative expenses 225.0 150.0 75.0 50.0
Interest expense 50.0 25.0 25.0 100.0
Taxes 100.0 75.0 25.0 33.3
This approach, normally called horizontal analysis, indicates the proportionate
change over a period of time. It is especially useful in evaluating a trend situation, be-
cause absolute changes are often deceiving.
Another approach, called vertical analysis, is the proportional expression of each
item on a financial statement in a given period to a base figure. For example, Anetek
Chemical’s income statement using this approach appears below.
ANETEK CHEMICAL CORPORATION
Analysis (000,000 OMITTED)
Amount Total Revenue
Net sales $1,600.0 96%
Other revenue 75.0 4
Total revenue 1,675.0 100
Cost of goods sold 1,000.0 60
Depreciation and amortization 150.0 9
Selling and administrative expenses 225.0 13
Interest expense 50.0 3
Income tax 100.0 6
Total expenses 1,525.0 91
Net income $ 150.0 9%
Reducing all the dollar amounts to a percentage of a base amount is frequently
called common-size analysis because all of the statements and all of the years are re-
duced to a common size. That is, all of the elements within each statement are expressed
in percentages of some common number and always add up to 100 percent. Common-
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Summary of Learning Objectives for Appendix 24A • 1311
size (percentage) analysis is the analysis of the composition of each of the financial
In the analysis of the balance sheet, common-size analysis answers such questions
as: What is the distribution of equities between current liabilities, long-term debt, and
owners’ equity? What is the mix of assets (percentage-wise) with which the enterprise
has chosen to conduct its business? What percentage of current assets are in inventory,
receivables, and so forth?
The income statement lends itself to common-size analysis because each item in it
is related to a common amount, usually sales. It is instructive to know what propor-
tion of each sales dollar is absorbed by various costs and expenses incurred by the en-
Common-size statements may be used for comparing one company’s statements
from different years to detect trends not evident from the comparison of absolute
amounts. Also, common-size statements provide intercompany comparisons regardless
of size because the financial statements can be recast into a comparable common-size
SUMMARY OF LEARNING OBJECTIVES FOR APPENDIX 24A
Understand the approach to financial statement analysis. Basic financial statement acid-test ratio, 1307
analysis involves examining relationships between items on the statements (ratio and activity ratios, 1306
percentage analysis) and identifying trends in these relationships (comparative analy- asset turnover, 1307
sis). Analysis is used to predict the future, but ratio analysis is limited because the book value per
data are from the past. Also, ratio analysis identifies present strengths and weaknesses share, 1307
of a company, but it may not reveal why they are as they are. Although single ratios cash debt coverage
are helpful, they are not conclusive; they must be compared with industry averages, ratio, 1307
past years, planned amounts, and the like for maximum usefulness. common-size
µ Identify major analytic ratios and describe their calculation. Ratios are classified as comparative
liquidity ratios, activity ratios, profitability ratios, and coverage ratios: (1) Liquidity analysis, 1309
ratio analysis measures the short-run ability of the enterprise to pay its currently ma- coverage ratios, 1306
turing obligations. (2) Activity ratio analysis measures how effectively the enterprise is current cash debt
using its assets. (3) Profitability ratio analysis measures the degree of success or failure ratio, 1307
of an enterprise to generate revenues adequate to cover its costs of operation and pro- current ratio, 1307
vide a return to the owners. (4) Coverage ratio analysis measures the degree of protec-
debt to total assets
tion afforded long-term creditors and investors. ratio, 1307
¸ Explain the limitations of ratio analysis. One important limitation of ratios is that earnings per share, 1307
they are based on historical cost, which can lead to distortions in measuring per- horizontal analysis, 1310
formance. Also, where estimated items (such as depreciation and amortization) are inventory turnover, 1307
significant, income ratios lose some of their credibility. In addition, difficult problems liquidity ratios, 1306
of comparability exist because firms use different accounting principles and proce- payout ratio, 1307
dures. Finally, it must be recognized that a substantial amount of important informa- percentage analysis, 1310
tion is not included in a company’s financial statements. profit margin on
¹ Describe techniques of comparative analysis. Companies present comparative data, profitability ratios, 1306
which generally includes 2 years of balance sheet information and 3 years of income
quick ratio, 1307
statement information. In addition, many companies include in their annual reports
5- to 10-year summaries of pertinent data that permit the reader to examine and an- rate of return on
rate of return on common
Describe techniques of percentage analysis. Percentage analysis consists of reduc- stock equity, 1307
ing a series of related amounts to a series of percentages of a given base. Two receivables turnover, 1307
approaches are often used: Horizontal analysis indicates the proportionate change in times interest
financial statement items over a period of time; such analysis is most helpful in eval- earned, 1307
uating trends. Vertical analysis (common-size analysis) is a proportional expression of vertical analysis, 1310
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1312 • Chapter 24 Full Disclosure in Financial Reporting
each item on the financial statements in a given period to a base amount. It analyzes
the composition of each of the financial statements from different years (a) to detect
trends not evident from the comparison of absolute amounts and (b) to make inter-
company comparisons of different sized enterprises.
Note: All asterisked Questions, Brief Exercises, Exercises, Problems, and Conceptual Cases re-
late to materials contained in the appendix to the chapter.
1. What are the major advantages of notes to the financial how each of the following “subsequent events” would
statements? What types of items are usually reported in be reported.
notes? (a) Collection of a note written off in a prior period.
2. What is the full disclosure principle in accounting? Why (b) Issuance of a large preferred stock offering.
has disclosure increased substantially in the last 10
(c) Acquisition of a company in a different industry.
(d) Destruction of a major plant in a flood.
3. The FASB requires a reconciliation between the effective
tax rate and the federal government’s statutory rate. Of (e) Death of the company’s chief executive officer (CEO).
what benefit is such a disclosure requirement? (f) Additional wage costs associated with settlement of
4. At the beginning of 2004, Beausoleil Inc. entered into an a four-week strike.
8-year nonrenewable lease agreement. Provisions in the (g) Settlement of a federal income tax case at consider-
lease require the client to make substantial recondition- ably more tax than anticipated at year-end.
ing and restoration expenditures at the end of the lease. (h) Change in the product mix from consumer goods to
What type of disclosure do you believe is necessary for industrial goods.
this type of situation?
8. What are diversified companies? What accounting prob-
5. What type of disclosure or accounting do you believe is lems are related to diversified companies?
necessary for the following items?
9. What quantitative materiality test is applied to deter-
(a) Because of a general increase in the number of labor mine whether a segment is significant enough to war-
disputes and strikes, both within and outside the in- rant separate disclosure?
dustry, there is an increased likelihood that a com-
pany will suffer a costly strike in the near future. 10. Identify the segment information that is required to be
disclosed by FASB Statement No. 131.
(b) A company reports an extraordinary item (net of tax)
correctly on the income statement. No other mention 11. What is an operating segment, and when can informa-
is made of this item in the annual report. tion about two operating segments be aggregated?
(c) A company expects to recover a substantial amount 12. The controller for Chang Lee Inc. recently commented,
in connection with a pending refund claim for a prior “If I have to disclose our segments individually, the only
year’s taxes. Although the claim is being contested, people who will gain are our competitors and the only
counsel for the company has confirmed the client’s people that will lose are our present stockholders.” Eval-
expectation of recovery. uate this comment.
6. The following information was described in a note of 13. An article in the financial press entitled “Important In-
Cebar Packing Co. formation in Annual Reports This Year” noted that an-
“During August, A. Belew Products Corporation pur- nual reports include a management discussion and
chased 311,003 shares of the Company’s common stock analysis section. What would this section contain?
which constitutes approximately 35% of the stock out- 14. “The financial statements of a company are manage-
standing. A. Belew has since obtained representation on ment’s, not the accountant’s.” Discuss the implications
the Board of Directors.” of this statement.
“An affiliate of A. Belew Products Corporation acts as 15. Olga Conrad, a financial writer, noted recently, “There
a food broker for the Company in the greater New York are substantial arguments for including earnings pro-
City marketing area. The commissions for such services jections in annual reports and the like. The most com-
after August amounted to approximately $20,000.” pelling is that it would give anyone interested some-
Why is this information disclosed? thing now available to only a relatively select few—like
7. What are the major types of subsequent events? Indicate large stockholders, creditors, and attentive bartenders.”
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Brief Exercises • 1313
Identify some arguments against providing earnings how does it differ from an embezzlement of company
16. The following comment appeared in the financial press: *23. “The significance of financial statement data is not in the
“Inadequate financial disclosure, particularly with re- amount alone.” Discuss the meaning of this statement.
spect to how management views the future and its role *24. A close friend of yours, who is a history major and who
in the marketplace, has always been a stone in the shoe. has not had any college courses or any experience in
After all, if you don’t know how a company views the business, is receiving the financial statements from com-
future, how can you judge the worth of its corporate panies in which he has minor investments (acquired for
strategy?” What are some arguments for reporting earn- him by his now-deceased father). He asks you what he
ings forecasts? needs to know to interpret and to evaluate the financial
17. What are interim reports? Why are balance sheets often statement data that he is receiving. What would you tell
not provided with interim data? him?
18. What are the accounting problems related to the pres- *25. Distinguish between ratio analysis and percentage
entation of interim data? analysis relative to the interpretation of financial state-
19. Mysteries Inc., a closely held corporation, has decided to ments. What is the value of these two types of analysis?
go public. The controller, C. Keene, is concerned with *26. In calculating inventory turnover, why is cost of goods
presenting interim data when a LIFO inventory valua- sold used as the numerator? As the inventory turnover
tion is used. What problems are encountered with LIFO increases, what increasing risk does the business
inventories when quarterly data are presented? assume?
20. What approaches have been suggested to overcome the *27. What is the relationship of the asset turnover ratio to the
seasonality problem related to interim reporting? rate of return on assets?
21. What is the difference between a CPA’s unqualified opin- *28. Explain the meaning of the following terms: (a) common-
ion or “clean” opinion and a qualified one? size analysis, (b) vertical analysis, (c) horizontal analy-
22. Mary Beidler and Lee Pannebecker are discussing the sis, (d) percentage analysis.
recent fraud that occurred at LowRental Leasing, Inc. The *29. Presently, the profession requires that earnings per share
fraud involved the improper reporting of revenue to en- be disclosed on the face of the income statement. What
sure that the company would have income in excess of are some disadvantages of reporting ratios on the finan-
$1 million. What is fraudulent financial reporting, and cial statements?
BE24-1 An annual report of D. Robillard Industries states, “The company and its subsidiaries have long-
term leases expiring on various dates after December 31, 2004. Amounts payable under such commit-
ments, without reduction for related rental income, are expected to average approximately $5,711,000 an-
nually for the next 3 years. Related rental income from certain subleases to others is estimated to average
$3,094,000 annually for the next 3 years.” What information is provided by this note?
BE24-2 An annual report of Ford Motor Corporation states, “Net income a share is computed based
upon the average number of shares of capital stock of all classes outstanding. Additional shares of com-
mon stock may be issued or delivered in the future on conversion of outstanding convertible debentures,
exercise of outstanding employee stock options, and for payment of defined supplemental compensation.
Had such additional shares been outstanding, net income a share would have been reduced by 10¢ in the
current year and 3¢ in the previous year. . . . As a result of capital stock transactions by the company dur-
ing the current year (primarily the purchase of Class A Stock from Ford Foundation), net income a share
was increased by 6¢.” What information is provided by this note?
BE24-3 Linden Corporation is preparing its December 31, 2003, financial statements. Two events that oc-
curred between December 31, 2003, and March 10, 2004, when the statements were issued, are described
1. A liability, estimated at $150,000 at December 31, 2003, was settled on February 26, 2004, at $170,000.
2. A flood loss of $80,000 occurred on March 1, 2004.
What effect do these subsequent events have on 2003 net income?
BE24-4 Bess Marvin, a student of intermediate accounting, was heard to remark after a class discussion
on diversified reporting, “All this is very confusing to me. First we are told that there is merit in pre-
senting the consolidated results, and now we are told that it is better to show segmental results. I wish
they would make up their minds.” Evaluate this comment.
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1314 • Chapter 24 Full Disclosure in Financial Reporting
BE24-5 Roder Corporation has seven industry segments with total revenues as follows.
Genso $600 Sergei $ 225
Konami 650 Takuhi 200
RPG 250 Nippon 700
Red Moon 375
Based only on the revenues test, which industry segments are reportable?
BE24-6 Operating profits and losses for the seven industry segments of Roder Corporation are:
Genso $ 90 Sergei $ (20)
Konami (40) Takuhi 34
RPG 25 Nippon 100
Red Moon 50
Based only on the operating profit (loss) test, which industry segments are reportable?
BE24-7 Identifiable assets for the seven industry segments of Roder Corporation are:
Genso $500 Sergei $ 200
Konami 550 Takuhi 150
RPG 400 Nippon 475
Red Moon 400
Based only on the identifiable assets test, which industry segments are reportable?
*BE24-8 Answer each of the questions in the following unrelated situations.
(a) The current ratio of a company is 5:1 and its acid-test ratio is 1:1. If the inventories and prepaid
items amount to $600,000, what is the amount of current liabilities?
(b) A company had an average inventory last year of $200,000 and its inventory turnover was 5. If
sales volume and unit cost remain the same this year as last and inventory turnover is 8 this year,
what will average inventory have to be during the current year?
(c) A company has current assets of $90,000 (of which $40,000 is inventory and prepaid items) and
current liabilities of $30,000. What is the current ratio? What is the acid-test ratio? If the company
borrows $15,000 cash from a bank on a 120-day loan, what will its current ratio be? What will the
acid-test ratio be?
(d) A company has current assets of $600,000 and current liabilities of $240,000. The board of direc-
tors declares a cash dividend of $180,000. What is the current ratio after the declaration but be-
fore payment? What is the current ratio after the payment of the dividend?
*BE24-9 Aston Martin Company’s budgeted sales and budgeted cost of goods sold for the coming year
are $144,000,000 and $90,000,000 respectively. Short-term interest rates are expected to average 10%. If As-
ton Martin can increase inventory turnover from its present level of 9 times a year to a level of 12 times
per year, compute its expected cost savings for the coming year.
*BE24-10 Ferrari Company’s net accounts receivable were $1,000,000 at December 31, 2003, and $1,200,000
at December 31, 2004. Net cash sales for 2004 were $400,000. The accounts receivable turnover for 2004
was 5.0. Determine Ferrari’s total net sales for 2004.
E24-1 (Post-Balance-Sheet Events) Madrasah Corporation issued its financial statements for the year
ended December 31, 2005, on March 10, 2006. The following events took place early in 2006.
(a) On January 10, 10,000 shares of $5 par value common stock were issued at $66 per share.
(b) On March 1, Madrasah determined after negotiations with the Internal Revenue Service that
income taxes payable for 2005 should be $1,270,000. At December 31, 2005, income taxes payable
were recorded at $1,100,000.
Discuss how the preceding post-balance sheet events should be reflected in the 2005 financial statements.
E24-2 (Post-Balance-Sheet Events) For each of the following subsequent (post-balance-sheet) events,
indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the finan-
cial statements, or (c) neither adjust nor disclose.
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Exercises • 1315
______ 1. Settlement of federal tax case at a cost considerably in excess of the amount expected at
______ 2. Introduction of a new product line.
______ 3. Loss of assembly plant due to fire.
______ 4. Sale of a significant portion of the company’s assets.
______ 5. Retirement of the company president.
______ 6. Prolonged employee strike.
______ 7. Loss of a significant customer.
______ 8. Issuance of a significant number of shares of common stock.
______ 9. Material loss on a year-end receivable because of a customer’s bankruptcy.
______ 10. Hiring of a new president.
______ 11. Settlement of prior year’s litigation against the company.
______ 12. Merger with another company of comparable size.
E24-3 (Segmented Reporting) Carlton Company is involved in four separate industries. The follow-
ing information is available for each of the four industries.
Operating Segment Total Revenue Operating Profit (Loss) Identifiable Assets
W $ 60,000 $15,000 $167,000
X 10,000 3,000 83,000
Y 23,000 (2,000) 21,000
Z 9,000 1,000 19,000
$102,000 $17,000 $290,000
Determine which of the operating segments are reportable based on the:
(a) Revenue test.
(b) Operating profit (loss) test.
(c) Identifiable assets test.
*E24-4 (Ratio Computation and Analysis; Liquidity) As loan analyst for Utrillo Bank, you have been
presented the following information.
Toulouse Co. Lautrec Co.
Cash $ 120,000 $ 320,000
Receivables 220,000 302,000
Inventories 570,000 518,000
Total current assets 910,000 1,140,000
Other assets 500,000 612,000
Total assets $1,410,000 $1,752,000
Liabilities and Stockholders’ Equity
Current liabilities $ 305,000 $ 350,000
Long-term liabilities 400,000 500,000
Capital stock and retained earnings 705,000 902,000
Total liabilities and stockholders’ equity $1,410,000 $1,752,000
Annual sales $ 930,000 $1,500,000
Rate of gross profit on sales 30% 40%
Each of these companies has requested a loan of $50,000 for 6 months with no collateral offered. Inas-
much as your bank has reached its quota for loans of this type, only one of these requests is to be granted.
Which of the two companies, as judged by the information given above, would you recommend as the
better risk and why? Assume that the ending account balances are representative of the entire year.
*E24-5 (Analysis of Given Ratios) Picasso Company is a wholesale distributor of professional equip-
ment and supplies. The company’s sales have averaged about $900,000 annually for the 3-year period
2003–2005. The firm’s total assets at the end of 2005 amounted to $850,000.
The president of Picasso Company has asked the controller to prepare a report that summarizes the
financial aspects of the company’s operations for the past 3 years. This report will be presented to the
board of directors at their next meeting.
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1316 • Chapter 24 Full Disclosure in Financial Reporting
In addition to comparative financial statements, the controller has decided to present a number of rel-
evant financial ratios which can assist in the identification and interpretation of trends. At the request of
the controller, the accounting staff has calculated the following ratios for the 3-year period 2003–2005.
2003 2004 2005
Current ratio 1.80 1.89 1.96
Acid-test (quick) ratio 1.04 0.99 0.87
Accounts receivable turnover 8.75 7.71 6.42
Inventory turnover 4.91 4.32 3.42
Percent of total debt to total assets 51 46 41
Percent of long-term debt to total assets 31 27 24
Sales to fixed assets (fixed asset turnover) 1.58 1.69 1.79
Sales as a percent of 2003 sales 1.00 1.03 1.07
Gross margin percentage 36.0 35.1 34.6
Net income to sales 6.9% 7.0% 7.2%
Return on total assets 7.7% 7.7% 7.8%
Return on stockholders’ equity 13.6% 13.1% 12.7%
In preparation of the report, the controller has decided first to examine the financial ratios independ-
ent of any other data to determine if the ratios themselves reveal any significant trends over the 3-year
(a) The current ratio is increasing while the acid-test (quick) ratio is decreasing. Using the ratios pro-
vided, identify and explain the contributing factor(s) for this apparently divergent trend.
(b) In terms of the ratios provided, what conclusion(s) can be drawn regarding the company’s use of
financial leverage during the 2003–2005 period?
(c) Using the ratios provided, what conclusion(s) can be drawn regarding the company’s net invest-
ment in plant and equipment?
*E24-6 (Ratio Analysis) Edna Millay Inc. is a manufacturer of electronic components and accessories
with total assets of $20,000,000. Selected financial ratios for Millay and the industry averages for firms of
similar size are presented below.
Edna Millay Industry
2002 2003 2004 Average
Current ratio 2.09 2.27 2.51 2.24
Quick ratio 1.15 1.12 1.19 1.22
Inventory turnover 2.40 2.18 2.02 3.50
Net sales to stockholders’ equity 2.71 2.80 2.99 2.85
Net income to stockholders’ equity 0.14 0.15 0.17 0.11
Total liabilities to stockholders’ equity 1.41 1.37 1.44 0.95
Millay is being reviewed by several entities whose interests vary, and the company’s financial ratios
are a part of the data being considered. Each of the parties listed below must recommend an action based
on its evaluation of Millay’s financial position.
Archibald MacLeish Bank. The bank is processing Millay’s application for a new 5-year term note.
Archibald MacLeish has been Millay’s banker for several years but must reevaluate the company’s
financial position for each major transaction.
Robert Lowell Company. Lowell is a new supplier to Millay and must decide on the appropriate credit
terms to extend to the company.
Robert Penn Warren. A brokerage firm specializing in the stock of electronics firms that are sold over-
the-counter, Robert Penn Warren must decide if it will include Millay in a new fund being established
for sale to Robert Penn Warren’s clients.
Working Capital Management Committee. This is a committee of Millay’s management personnel chaired
by the chief operating officer. The committee is charged with the responsibility of periodically reviewing
the company’s working capital position, comparing actual data against budgets, and recommending
changes in strategy as needed.
(a) Describe the analytical use of each of the six ratios presented above.
(b) For each of the four entities described above, identify two financial ratios, from those ratios pre-
sented in Illustration 24A-1 (on page 1307), that would be most valuable as a basis for its deci-
sion regarding Millay.
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Problems • 1317
(c) Discuss what the financial ratios presented in the question reveal about Millay. Support your
answer by citing specific ratio levels and trends as well as the interrelationships between these
P24-1 (Subsequent Events) Your firm has been engaged to examine the financial statements of Sa-
brina Corporation for the year 2005. The bookkeeper who maintains the financial records has prepared
all the unaudited financial statements for the corporation since its organization on January 2, 1999. The
client provides you with the information below.
AS OF DECEMBER 31, 2005
Current assets $1,881,100 Current liabilities $ 962,400
Other assets 5,171,400 Long-term liabilities 1,439,500
An analysis of current assets discloses the following.
Cash (restricted in the amount of $400,000 for plant expansion) $ 571,000
Investments in land 185,000
Accounts receivable less allowance of $30,000 480,000
Inventories (LIFO flow assumption) 645,100
Other assets include:
Prepaid expenses $ 47,400
Plant and equipment less accumulated depreciation of $1,430,000 4,130,000
Cash surrender value of life insurance policy 84,000
Unamortized bond discount 49,500
Notes receivable (short-term) 162,300
Current liabilities include:
Accounts payable $ 510,000
Notes payable (due 2007) 157,400
Estimated income taxes payable 145,000
Premium on common stock 150,000
Long-term liabilities include:
Unearned revenue $ 489,500
Dividends payable (cash) 200,000
8% bonds payable (due May 1, 2010) 750,000
Retained earnings $2,810,600
Capital stock, par value $10; authorized 200,000 shares, 184,000 shares issued 1,840,000
The supplementary information below is also provided.
1. On May 1, 2005, the corporation issued at 93.4, $750,000 of bonds to finance plant expansion. The
long-term bond agreement provided for the annual payment of interest every May 1. The existing
plant was pledged as security for the loan. Use straight-line method for discount amortization.
2. The bookkeeper made the following mistakes.
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1318 • Chapter 24 Full Disclosure in Financial Reporting
(a) In 2003, the ending inventory was overstated by $183,000. The ending inventories for 2004
and 2005 were correctly computed.
(b) In 2005, accrued wages in the amount of $275,000 were omitted from the balance sheet and
these expenses were not charged on the income statement.
(c) In 2005, a gain of $175,000 (net of tax) on the sale of certain plant assets was credited directly
to retained earnings.
3. A major competitor has introduced a line of products that will compete directly with Sabrina’s pri-
mary line, now being produced in a specially designed new plant. Because of manufacturing in-
novations, the competitor’s line will be of comparable quality but priced 50% below Sabrina’s line.
The competitor announced its new line on January 14, 2006. Sabrina indicates that the company
will meet the lower prices that are high enough to cover variable manufacturing and selling ex-
penses, but permit recovery of only a portion of fixed costs.
4. You learned on January 28, 2006, prior to completion of the audit, of heavy damage because of a
recent fire to one of Sabrina’s two plants; the loss will not be reimbursed by insurance. The news-
papers described the event in detail.
Analyze the above information to prepare a corrected balance sheet for Sabrina in accordance with proper
accounting and reporting principles. Prepare a description of any notes that might need to be prepared.
The books are closed and adjustments to income are to be made through retained earnings.
P24-2 (Segmented Reporting) Friendly Corporation is a diversified company that operates in five dif-
ferent industries: A, B, C, D, and E. The following information relating to each segment is available for
A B C D E
Sales $40,000 $ 80,000 $580,000 $35,000 $55,000
Cost of goods sold 19,000 50,000 270,000 19,000 30,000
Operating expenses 10,000 40,000 235,000 12,000 18,000
Total expenses 29,000 90,000 505,000 31,000 48,000
Operating profit (loss) $11,000 $(10,000) $ 75,000 $ 4,000 $ 7,000
Identifiable assets $35,000 $ 60,000 $500,000 $65,000 $50,000
Sales of segments B and C included intersegment sales of $20,000 and $100,000, respectively.
(a) Determine which of the segments are reportable based on the:
(1) Revenue test.
(2) Operating profit (loss) test.
(3) Identifiable assets test.
(b) Prepare the necessary disclosures required by FASB No. 131.
*P24-3 (Ratio Computations and Additional Analysis) Carl Sandburg Corporation was formed 5 years
ago through a public subscription of common stock. Robert Frost, who owns 15% of the common stock,
was one of the organizers of Sandburg and is its current president. The company has been successful, but
it currently is experiencing a shortage of funds. On June 10, Robert Frost approached the Spokane Na-
tional Bank, asking for a 24-month extension on two $35,000 notes, which are due on June 30, 2004, and
September 30, 2004. Another note of $6,000 is due on December 31, 2005, but he expects no difficulty in
paying this note on its due date. Frost explained that Sandburg’s cash flow problems are due primarily
to the company’s desire to finance a $300,000 plant expansion over the next 2 fiscal years through inter-
nally generated funds.
The Commercial Loan Officer of Spokane National Bank requested financial reports for the last 2 fis-
cal years. These reports are reproduced below.
CARL SANDBURG CORPORATION
STATEMENT OF FINANCIAL POSITION
Assets 2004 2003
Cash $ 18,200 $ 12,500
Notes receivable 148,000 132,000
Accounts receivable (net) 131,800 125,500
Inventories (at cost) 95,000 50,000
Plant & equipment (net of depreciation) 1,449,000 1,420,500
Total assets $1,842,000 $1,740,500
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Problems • 1319
Liabilities and Owners’ Equity
Accounts payable $ 69,000 $ 91,000
Notes payable 76,000 61,500
Accrued liabilities 9,000 6,000
Common stock (130,000 shares, $10 par) 1,300,000 1,300,000
Retained earningsa 388,000 282,000
Total liabilities and owners’ equity $1,842,000 $1,740,500
Cash dividends were paid at the rate of $1 per share in fiscal year 2003 and $2 per share
in fiscal year 2004.
CARL SANDBURG CORPORATION
FOR THE FISCAL YEARS ENDED MARCH 31
Sales $3,000,000 $2,700,000
Cost of goods solda 1,530,000 1,425,000
Gross margin $1,470,000 $1,275,000
Operating expenses 860,000 780,000
Income before income taxes $ 610,000 $ 495,000
Income taxes (40%) 244,000 198,000
Net income $ 366,000 $ 297,000
Depreciation charges on the plant and equipment of $100,000 and
$102,500 for fiscal years ended March 31, 2003 and 2004, respectively,
are included in cost of goods sold.
(a) Compute the following items for Carl Sandburg Corporation.
(1) Current ratio for fiscal years 2003 and 2004.
(2) Acid-test (quick) ratio for fiscal years 2003 and 2004.
(3) Inventory turnover for fiscal year 2004.
(4) Return on assets for fiscal years 2003 and 2004. (Assume total assets were $1,688,500 at
(5) Percentage change in sales, cost of goods sold, gross margin, and net income after taxes from
fiscal year 2003 to 2004.
(b) Identify and explain what other financial reports and/or financial analyses might be helpful to
the commercial loan officer of Spokane National Bank in evaluating Robert Frost’s request for a
time extension on Sandburg’s notes.
(c) Assume that the percentage changes experienced in fiscal year 2004 as compared with fiscal year
2003 for sales and cost of goods sold will be repeated in each of the next 2 years. Is Sandburg’s
desire to finance the plant expansion from internally generated funds realistic? Discuss.
(d) Should Spokane National Bank grant the extension on Sandburg’s notes considering Robert Frost’s
statement about financing the plant expansion through internally generated funds? Discuss.
*P24-4 (Horizontal and Vertical Analysis) Presented below are comparative balance sheets for the Eola
EOLA YEVETTE COMPANY
COMPARATIVE BALANCE SHEET
DECEMBER 31, 2004 AND 2003
Cash $ 180,000 $ 275,000
Accounts receivable (net) 220,000 155,000
Short-term investments 270,000 150,000
Inventories 960,000 980,000
Prepaid expense 25,000 25,000
Fixed assets 2,685,000 1,950,000
Accumulated depreciation (1,000,000) (750,000)
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1320 • Chapter 24 Full Disclosure in Financial Reporting
Liabilities and Stockholders’ Equity
Accounts payable $ 50,000 $ 75,000
Accrued expenses 170,000 200,000
Bonds payable 500,000 190,000
Capital stock 2,100,000 1,770,000
Retained earnings 520,000 550,000
(a) Prepare a comparative balance sheet of Yevette Company showing the percent each item is of the
total assets or total liabilities and stockholders’ equity.
(b) Prepare a comparative balance sheet of Yevette Company showing the dollar change and the per-
cent change for each item.
(c) Of what value is the additional information provided in part (a)?
(d) Of what value is the additional information provided in part (b)?
*P24-5 (Dividend Policy Analysis) Dawna Remmers Inc. went public 3 years ago. The board of direc-
tors will be meeting shortly after the end of the year to decide on a dividend policy. In the past, growth
has been financed primarily through the retention of earnings. A stock or a cash dividend has never been
declared. Presented below is a brief financial summary of Dawna Remmers Inc. operations.
2004 2003 2002 2001 2000
Sales $20,000 $16,000 $14,000 $6,000 $4,000
Net income 2,900 1,600 800 900 250
Average total assets 22,000 19,000 11,500 4,200 3,000
Current assets 8,000 6,000 3,000 1,200 1,000
Working capital 3,600 3,200 1,200 500 400
Number of shares
outstanding (000) 2,000 2,000 2,000 20 20
Average market price $9 $6 $4 — —
(a) Suggest factors to be considered by the board of directors in establishing a dividend policy.
(b) Compute the rate of return on assets, profit margin on sales, earnings per share, price-earnings
ratio, and current ratio for each of the 5 years for Dawna Remmers Inc.
(c) Comment on the appropriateness of declaring a cash dividend at this time, using the ratios com-
puted in part (b) as a major factor in your analysis.
C24-1 (General Disclosures, Inventories, Property, Plant, and Equipment) Dan D. Lion Corporation
is in the process of preparing its annual financial statements for the fiscal year ended April 30, 2004.
Because all of Lion’s shares are traded intrastate, the company does not have to file any reports with the
Securities and Exchange Commission. The company manufactures plastic, glass, and paper containers for
sale to food and drink manufacturers and distributors.
Lion Corporation maintains separate control accounts for its raw materials, work-in-process, and fin-
ished goods inventories for each of the three types of containers. The inventories are valued at the lower
of cost or market.
The company’s property, plant, and equipment are classified in the following major categories: land,
office buildings, furniture and fixtures, manufacturing facilities, manufacturing equipment, and leasehold
improvements. All fixed assets are carried at cost. The depreciation methods employed depend upon the
type of asset (its classification) and when it was acquired.
Lion Corporation plans to present the inventory and fixed asset amounts in its April 30, 2004, balance
sheet as shown below.
Property, plant, and equipment (net of depreciation) 6,310,000
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Conceptual Cases • 1321
What information regarding inventories and property, plant, and equipment must be disclosed by Dan
D. Lion Corporation in the audited financial statements issued to stockholders, either in the body or the
notes, for the 2003–2004 fiscal year?
C24-2 (Disclosures Required in Various Situations) Rem Inc. produces electronic components for sale
to manufacturers of radios, television sets, and digital sound systems. In connection with her examina-
tion of Rem’s financial statements for the year ended December 31, 2004, Maggie Zeen, CPA, completed
field work 2 weeks ago. Ms. Zeen now is evaluating the significance of the following items prior to prepar-
ing her auditor’s report. Except as noted, none of these items have been disclosed in the financial state-
ments or notes.
A 10-year loan agreement, which the company entered into 3 years ago, provides that dividend payments
may not exceed net income earned after taxes subsequent to the date of the agreement. The balance of re-
tained earnings at the date of the loan agreement was $420,000. From that date through December 31,
2004, net income after taxes has totaled $570,000 and cash dividends have totaled $320,000. On the basis
of these data, the staff auditor assigned to this review concluded that there was no retained earnings re-
striction at December 31, 2004.
Recently Rem interrupted its policy of paying cash dividends quarterly to its stockholders. Dividends
were paid regularly through 2003, discontinued for all of 2004 to finance purchase of equipment for the
company’s new plant, and resumed in the first quarter of 2005. In the annual report dividend policy is
to be discussed in the president’s letter to stockholders.
A major electronics firm has introduced a line of products that will compete directly with Rem’s primary
line, now being produced in the specially designed new plant. Because of manufacturing innovations, the
competitor’s line will be of comparable quality but priced 50% below Rem’s line. The competitor an-
nounced its new line during the week following completion of field work. Ms. Zeen read the announce-
ment in the newspaper and discussed the situation by telephone with Rem executives. Rem will meet the
lower prices that are high enough to cover variable manufacturing and selling expenses but will permit
recovery of only a portion of fixed costs.
The company’s new manufacturing plant building, which cost $2,400,000 and has an estimated life of
25 years, is leased from Ancient National Bank at an annual rental of $600,000. The company is obligated
to pay property taxes, insurance, and maintenance. At the conclusion of its 10-year noncancellable lease,
the company has the option of purchasing the property for $1. In Rem’s income statement the rental pay-
ment is reported on a separate line.
For each of the items above discuss any additional disclosures in the financial statements and notes that
the auditor should recommend to her client. (The cumulative effect of the four items should not be con-
C24-3 (Disclosures Required in Various Situations) You have completed your audit of Keesha Inc.
and its consolidated subsidiaries for the year ended December 31, 2004, and were satisfied with the re-
sults of your examination. You have examined the financial statements of Keesha for the past 3 years. The
corporation is now preparing its annual report to stockholders. The report will include the consolidated
financial statements of Keesha and its subsidiaries and your short-form auditor’s report. During your au-
dit the following matters came to your attention.
1. A vice president who is also a stockholder resigned on December 31, 2004, after an argument with
the president. The vice president is soliciting proxies from stockholders and expects to obtain suf-
ficient proxies to gain control of the board of directors so that a new president will be appointed.
The president plans to have a note prepared that would include information of the pending proxy
fight, management’s accomplishments over the years, and an appeal by management for the sup-
port of stockholders.
2. The corporation decides in 2004 to adopt the straight-line method of depreciation for plant equip-
ment. The straight-line method will be used for new acquisitions as well as for previously acquired
plant equipment for which depreciation had been provided on an accelerated basis.
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1322 • Chapter 24 Full Disclosure in Financial Reporting
3. The Internal Revenue Service is currently examining the corporation’s 2001 federal income tax re-
turn and is questioning the amount of a deduction claimed by the corporation’s domestic subsidiary
for a loss sustained in 2001. The examination is still in process, and any additional tax liability is
indeterminable at this time. The corporation’s tax counsel believes that there will be no substan-
tial additional tax liability.
(a) Prepare the notes, if any, that you would suggest for the items listed above.
(b) State your reasons for not making disclosure by note for each of the listed items for which you
did not prepare a note.
C24-4 (Disclosures, Conditional and Contingent Liabilities) Presented below are three independent
A company offers a one-year warranty for the product that it manufactures. A history of warranty claims
has been compiled, and the probable amounts of claims related to sales for a given period can be deter-
Subsequent to the date of a set of financial statements, but prior to the issuance of the financial state-
ments, a company enters into a contract that will probably result in a significant loss to the company. The
amount of the loss can be reasonably estimated.
A company has adopted a policy of recording self-insurance for any possible losses resulting from injury
to others by the company’s vehicles. The premium for an insurance policy for the same risk from an in-
dependent insurance company would have an annual cost of $4,000. During the period covered by the
financial statements, there were no accidents involving the company’s vehicles that resulted in injury to
Discuss the accrual or type of disclosure necessary (if any) and the reason(s) why such disclosure is ap-
propriate for each of the three independent sets of facts above.
C24-5 (Post-Balance Sheet Events) At December 31, 2004, Joni Brandt Corp. has assets of $10,000,000,
liabilities of $6,000,000, common stock of $2,000,000 (representing 2,000,000 shares of $1 par common
stock), and retained earnings of $2,000,000. Net sales for the year 2004 were $18,000,000, and net income
was $800,000. As auditors of this company, you are making a review of subsequent events on February
13, 2005, and you find the following.
1. On February 3, 2005, one of Brandt’s customers declared bankruptcy. At December 31, 2004, this
company owed Brandt $300,000, of which $40,000 was paid in January, 2005.
2. On January 18, 2005, one of the three major plants of the client burned.
3. On January 23, 2005, a strike was called at one of Brandt’s largest plants, which halted 30% of its
production. As of today (February 13) the strike has not been settled.
4. A major electronics enterprise has introduced a line of products that would compete directly with
Brandt’s primary line, now being produced in a specially designed new plant. Because of manu-
facturing innovations, the competitor has been able to achieve quality similar to that of Brandt’s
products, but at a price 50% lower. Brandt officials say they will meet the lower prices, which are
high enough to cover variable manufacturing and selling costs but which permit recovery of only
a portion of fixed costs.
5. Merchandise traded in the open market is recorded in the company’s records at $1.40 per unit
on December 31, 2004. This price had prevailed for 2 weeks, after release of an official market
report that predicted vastly enlarged supplies; however, no purchases were made at $1.40. The
price throughout the preceding year had been about $2, which was the level experienced over
several years. On January 18, 2005, the price returned to $2, after public disclosure of an error
in the official calculations of the prior December, correction of which destroyed the expecta-
tions of excessive supplies. Inventory at December 31, 2004, was on a lower of cost or market
6. On February 1, 2005, the board of directors adopted a resolution accepting the offer of an invest-
ment banker to guarantee the marketing of $1,200,000 of preferred stock.
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Conceptual Cases • 1323
State in each case how the 2004 financial statements would be affected, if at all.
C24-6 (Segment Reporting) You are compiling the consolidated financial statements for Vender Cor-
poration International. The corporation’s accountant, Vincent Price, has provided you with the following
Note 7: Major Segments of Business
VCI conducts funeral service and cemetery operations in the United States and Canada. Substantially all revenues of
VCI’s major segments of business are from unaffiliated customers. Segment information for fiscal 2004, 2003, and
Funeral Floral Cemetery Corporate Dried Whey Limousine Consolidated
2004 $302,000 $10,000 $ 83,000 $ — $7,000 $14,000 $416,000
2003 245,000 6,000 61,000 — 4,000 8,000 324,000
2002 208,000 3,000 42,000 — 1,000 6,000 260,000
2004 79,000 1,500 18,000 (36,000) 500 2,000 65,000
2003 64,000 200 12,000 (28,000) 200 400 48,800
2002 54,000 150 6,000 (21,000) 100 350 39,600
2004 26,000 1,000 9,000 400 300 1,000 37,700
2003 28,000 2,000 60,000 1,500 100 700 92,300
2002 14,000 25 8,000 600 25 50 22,700
Depreciation and Amortization
2004 13,000 100 2,400 1,400 100 200 17,200
2003 10,000 50 1,400 700 50 100 12,300
2002 8,000 25 1,000 600 25 50 9,700
2004 334,000 1,500 162,000 114,000 500 8,000 620,000
2003 322,000 1,000 144,000 52,000 1,000 6,000 526,000
2002 223,000 500 78,000 34,000 500 3,500 339,500
Includes $4,520,000, $111,480,000, and $1,294,000 for the years ended April 30, 2004, 2003, and 2002, respectively, for purchases
Determine which of the above segments must be reported separately and which can be combined under
the category “Other.” Then, write a one-page memo to the company’s accountant, Vincent Price, explaining
(a) What segments must be reported separately and what segments can be combined.
(b) What criteria you used to determine reportable segments.
(c) What major items for each must be disclosed.
C24-7 (Segment Reporting—Theory) Presented below is an excerpt from the financial statements of
H. J. Heinz Company.
Segment and Geographic Data
The company is engaged principally in one line of business—processed food products—which represents over
90% of consolidated sales. Information about the business of the company by geographic area is presented in the
There were no material amounts of sales or transfers between geographic areas or between affiliates, and no
material amounts of United States export sales.
(in thousands of United Western
U.S. dollars) Domestic Kingdom Canada Europe Other Total Worldwide
Sales $2,381,054 $547,527 $216,726 $383,784 $209,354 $1,357,391 $3,738,445
Operating income 246,780 61,282 34,146 29,146 25,111 149,685 396,465
Identifiable assets 1,362,152 265,218 112,620 294,732 143,971 816,541 2,178,693
Capital expenditures 72,712 12,262 13,790 8,253 4,368 38,673 111,385
Depreciation expense 42,279 8,364 3,592 6,355 3,606 21,917 64,196
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1324 • Chapter 24 Full Disclosure in Financial Reporting
(a) Why does H. J. Heinz not prepare segment information on its products or services?
(b) What are export sales, and when should they be disclosed?
(c) Why are sales by geographical area important to disclose?
C24-8 (Segment Reporting—Theory) The following article appeared in the Wall Street Journal.
WASHINGTON—The Securities and Exchange Commission staff issued guidelines for companies grap-
pling with the problem of dividing up their business into industry segments for their annual reports.
An industry segment is defined by the Financial Accounting Standards Board as a part of an en-
terprise engaged in providing a product or service or a group of related products or services prima-
rily to unaffiliated customers for a profit.
Although conceding that the process is a “subjective task” that “to a considerable extent, depends on
the judgment of management,” the SEC staff said companies should consider . . . various factors . . . to
determine whether products and services should be grouped together or reported as segments.
(a) What does financial reporting for segments of a business enterprise involve?
(b) Identify the reasons for requiring financial data to be reported by segments.
(c) Identify the possible disadvantages of requiring financial data to be reported by segments.
(d) Identify the accounting difficulties inherent in segment reporting.
C24-9 (Interim Reporting) J. J. Kersee Corporation, a publicly traded company, is preparing the in-
terim financial data which it will issue to its stockholders and the Securities and Exchange Commission
(SEC) at the end of the first quarter of the 2003–2004 fiscal year. Kersee’s financial accounting department
has compiled the following summarized revenue and expense data for the first quarter of the year.
Cost of goods sold 36,000,000
Variable selling expenses 2,000,000
Fixed selling expenses 3,000,000
Included in the fixed selling expenses was the single lump sum payment of $2,000,000 for television ad-
vertisements for the entire year.
(a) J. J. Kersee Corporation must issue its quarterly financial statements in accordance with generally
accepted accounting principles regarding interim financial reporting.
(1) Explain whether Kersee should report its operating results for the quarter as if the quarter
were a separate reporting period in and of itself or as if the quarter were an integral part of
the annual reporting period.
(2) State how the sales, cost of goods sold, and fixed selling expenses would be reflected in
Kersee Corporation’s quarterly report prepared for the first quarter of the 2003–2004 fiscal
year. Briefly justify your presentation.
(b) What financial information, as a minimum, must Kersee Corporation disclose to its stockholders
in its quarterly reports?
C24-10 (Treatment of Various Interim Reporting Situations) The following statement is an excerpt
from Paragraphs 9 and 10 of Accounting Principles Board (APB) Opinion No. 28, “Interim Financial Re-
Interim financial information is essential to provide investors and others with timely information as
to the progress of the enterprise. The usefulness of such information rests on the relationship that it
has to the annual results of operations. Accordingly, the Board has concluded that each interim period
should be viewed primarily as an integral part of an annual period.
In general, the results for each interim period should be based on the accounting principles and
practices used by an enterprise in the preparation of its latest annual financial statements unless a
change in an accounting practice or policy has been adopted in the current year. The Board has con-
cluded, however, that certain accounting principles and practices followed for annual reporting pur-
poses may require modification at interim reporting dates so that the reported results for the interim
period may better relate to the results of operations for the annual period.
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Conceptual Cases • 1325
Listed below are six independent cases on how accounting facts might be reported on an individual com-
pany’s interim financial reports. For each of these cases, state whether the method proposed to be used
for interim reporting would be acceptable under generally accepted accounting principles applicable to
interim financial data. Support each answer with a brief explanation.
(a) B. J. King Company takes a physical inventory at year-end for annual financial statement pur-
poses. Inventory and cost of sales reported in the interim quarterly statements are based on esti-
mated gross profit rates, because a physical inventory would result in a cessation of operations.
King Company does have reliable perpetual inventory records.
(b) Florence Chadwick Company is planning to report one-fourth of its pension expense each quarter.
(c) N. Lopez Company wrote inventory down to reflect lower of cost or market in the first quar-
ter. At year-end the market exceeds the original acquisition cost of this inventory. Conse-
quently, management plans to write the inventory back up to its original cost as a year-end
(d) K. Witt Company realized a large gain on the sale of investments at the beginning of the second
quarter. The company wants to report one-third of the gain in each of the remaining quarters.
(e) Alice Marble Company has estimated its annual audit fee. They plan to prorate this expense
equally over all four quarters.
(f) Lori McNeil Company was reasonably certain it would have an employee strike in the third quar-
ter. As a result, it shipped heavily during the second quarter but plans to defer the recognition of
the sales in excess of the normal sales volume. The deferred sales will be recognized as sales in
the third quarter when the strike is in progress. McNeil Company management thinks this is more
nearly representative of normal second- and third-quarter operations.
C24-11 (Financial Forecasts) An article in Barron’s noted the following.
Okay. Last fall, someone with a long memory and an even longer arm reached into that bureau
drawer and came out with a moldy cheese sandwich and the equally moldy notion of corporate fore-
casts. We tried to find out what happened to the cheese sandwich—but, rats!, even recourse to the
Freedom of Information Act didn’t help. However, the forecast proposal was dusted off, polished
up and found quite serviceable. The SEC, indeed, lost no time in running it up the old flagpole—
but no one was very eager to salute. Even after some of the more objectionable features—compul-
sory corrections and detailed explanations of why the estimates went awry—were peeled off the
Seemingly, despite the Commission’s smiles and sweet talk, those craven corporations were still
afraid that an honest mistake would lead them down the primrose path to consent decrees and class
action suits. To lay to rest such qualms, the Commission last week approved a “Safe Harbor” rule
that, providing the forecasts were made on a reasonable basis and in good faith, protected corpo-
rations from litigation should the projections prove wide of the mark (as only about 99% are apt
(a) What are the arguments for preparing profit forecasts?
(b) What is the purpose of the “safe harbor” rule?
(c) Why are corporations concerned about presenting profit forecasts?
C24-12 (Disclosure of Estimates—Ethics) Patty Gamble, the financial vice-president, and Victoria
Maher, the controller, of Castle Manufacturing Company are reviewing the financial ratios of the com-
pany for the years 2003 and 2004. The financial vice president notes that the profit margin on sales ratio
has increased from 6% to 12%, a hefty gain for the 2-year period. Gamble is in the process of issuing a
media release that emphasizes the efficiency of Castle Manufacturing in controlling cost. Victoria Maher
knows that the difference in ratios is due primarily to an earlier company decision to reduce the estimates
of warranty and bad debt expense for 2004. The controller, not sure of her supervisor’s motives, hesitates
to suggest to Gamble that the company’s improvement is unrelated to efficiency in controlling cost. To
complicate matters, the media release is scheduled in a few days.
(a) What, if any, is the ethical dilemma in this situation?
(b) Should Maher, the controller, remain silent? Give reasons.
(c) What stakeholders might be affected by Gamble’s media release?
(d) Give your opinion on the following statement and cite reasons: “Because Gamble, the vice pres-
ident, is most directly responsible for the media release, Maher has no real responsibility in this
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1326 • Chapter 24 Full Disclosure in Financial Reporting
C24-13 (Reporting of Subsequent Event—Ethics) In June 2004, the board of directors for Holtzman
Enterprises Inc. authorized the sale of $10,000,000 of corporate bonds. Michelle Collins, treasurer for Holtz-
man Enterprises Inc., is concerned about the date when the bonds are issued. The company really needs
the cash, but she is worried that if the bonds are issued before the company’s year-end (December 31,
2004) the additional liability will have an adverse effect on a number of important ratios. In July, she
explains to company president Kenneth Holtzman that if they delay issuing the bonds until after
December 31 the bonds will not affect the ratios until December 31, 2005. They will have to report the
issuance as a subsequent event which requires only footnote disclosure. Collins expects that with expected
improved financial performance in 2005 ratios should be better.
(a) What are the ethical issues involved?
(b) Should Holtzman agree to the delay?
*C24-14 (Effect of Transactions on Financial Statements and Ratios) The transactions listed below re-
late to Botticelli Inc. You are to assume that on the date on which each of the transactions occurred the
corporation’s accounts showed only common stock ($100 par) outstanding, a current ratio of 2.7:1, and a
substantial net income for the year to date (before giving effect to the transaction concerned). On that date
the book value per share of stock was $151.53.
Each numbered transaction is to be considered completely independent of the others, and its related
answer should be based on the effect(s) of that transaction alone. Assume that all numbered transactions
occurred during 2004 and that the amount involved in each case is sufficiently material to distort reported
net income if improperly included in the determination of net income. Assume further that each trans-
action was recorded in accordance with generally accepted accounting principles and, where applicable,
in conformity with the all-inclusive concept of the income statement.
For each of the numbered transactions you are to decide whether it:
a. Increased the corporation’s 2004 net income.
b. Decreased the corporation’s 2004 net income.
c. Increased the corporation’s total retained earnings directly (i.e., not via net income).
d. Decreased the corporation’s total retained earnings directly.
e. Increased the corporation’s current ratio.
f. Decreased the corporation’s current ratio.
g. Increased each stockholder’s proportionate share of total owner’s equity.
h. Decreased each stockholder’s proportionate share of total owner’s equity.
i. Increased each stockholder’s equity per share of stock (book value).
j. Decreased each stockholder’s equity per share of stock (book value).
k. Had none of the foregoing effects.
List the numbers 1 through 10. Select as many letters as you deem appropriate to reflect the effect(s) of
each transaction as of the date of the transaction by printing beside the transaction number the letter(s)
that identifies that transaction’s effect(s).
____ 1. Treasury stock originally repurchased and carried at $127 per share was sold for cash at $153
____ 2. The corporation sold at a profit land and a building that had been idle for some time. Under
the terms of the sale, the corporation received a portion of the sales price in cash immedi-
ately, the balance maturing at 6 month intervals.
____ 3. In January the board directed the writeoff of certain patent rights that had suddenly and un-
expectedly become worthless.
____ 4. The corporation wrote off all of the unamortized discount and issue expense applicable to
bonds that it refinanced in 2004.
____ 5. The board of directors authorized the writeup of certain fixed assets to values established in
a competent appraisal.
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Using Your Judgment • 1327
____ 6. The corporation called in all its outstanding shares of stock and exchanged them for new
shares on a 2-for-1 basis, reducing the par value at the same time to $50 per share.
____ 7. The corporation paid a cash dividend that had been recorded in the accounts at time of dec-
____ 8. Litigation involving Botticelli Inc. as defendant was settled in the corporation’s favor, with
the plaintiff paying all court costs and legal fees. In 2001 the corporation had appropriately
established a special contingency for this court action. (Indicate the effect of reversing the
____ 9. The corporation received a check for the proceeds of an insurance policy from the company
with which it is insured against theft of trucks. No entries concerning the theft had been made
previously, and the proceeds reduce but do not cover completely the loss.
____ 10. Treasury stock, which had been repurchased at and carried at $127 per share, was issued as
a stock dividend. In connection with this distribution, the board of directors of Botticelli Inc.
had authorized a transfer from retained earnings to permanent capital of an amount equal
to the aggregate market value ($153 per share) of the shares issued. No entries relating to this
dividend had been made previously.
USING YOUR JUDGMENT
FINANCIAL REPORTING PROBLEM
In response to the investing public’s demand for greater disclosure of corporate expectations for the
future, safe-harbor rules and legislation have been passed to encourage and protect corporations that
issue financial forecasts and projections. Review 3M’s Analysis of Financial Condition and Results of
Operations—Future Outlook and Forward-Looking Statements sections in Appendix 5B or on the Take
Refer to 3M’s financial statements and the accompanying notes to answer the following questions.
(a) What initiatives has 3M launched in 2001 that will help meet its economic challenges?
(b) What does 3M estimate its earnings per share will be for 2002?
(c) What caveats or other statements that temper its forecasts does 3M make?
(d) What is the difference between a financial forecast and a financial projection?
*FINANCIAL STATEMENT ANALYSIS CASE
Twin Ricky Inc. (TRI) manufactures a variety of consumer products. The company’s founders have run
the company for 30 years and are now interested in retiring. Consequently, they are seeking a purchaser
who will continue its operations, and a group of investors, Donna Inc., is looking into the acquisition of
TRI. To evaluate its financial stability and operating efficiency, TRI was requested to provide the latest fi-
nancial statements and selected financial ratios. Summary information provided by TRI is presented on
the next page.
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1328 • Chapter 24 Full Disclosure in Financial Reporting
FOR THE YEAR ENDED NOVEMBER 30, 2004
Additional Financial Sales (net) $30,500
Statement Analysis Interest income 500
Problems Total revenue 31,000
Costs and expenses
Cost of goods sold 17,600
Selling and administrative expense 3,550
Depreciation and amortization expense 1,890
Interest expense 900
Total costs and expenses 23,940
Income before taxes 7,060
Income taxes 2,900
Net income $ 4,160
STATEMENT OF FINANCIAL POSITION
AS OF NOVEMBER 30
Cash $ 400 $ 500
Marketable securities (at cost) 500 200
Accounts receivable (net) 3,200 2,900
Inventory 5,800 5,400
Total current assets 9,900 9,000
Property, plant, & equipment (net) 7,100 7,000
Total assets $17,000 $16,000
Accounts payable $ 3,700 $ 3,400
Income taxes payable 900 800
Accrued expenses 1,700 1,400
Total current liabilities 6,300 5,600
Long-term debt 2,000 1,800
Total liabilities 8,300 7,400
Common stock ($1 par value) 2,700 2,700
Paid-in capital in excess of par 1,000 1,000
Retained earnings 5,000 4,900
Total shareholders’ equity 8,700 8,600
Total liabilities and shareholders’ equity $17,000 $16,000
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Using Your Judgment • 1329
Selected Financial Ratios
2003 2002 Average
Current ratio 1.61 1.62 1.63
Acid-test ratio .64 .63 .68
Times interest earned 8.55 8.50 8.45
Profit margin on sales 13.2% 12.1% 13.0%
Total debt to net worth .86 1.02 1.03
Asset turnover 1.84 1.83 1.84
Inventory turnover 3.17 3.21 3.18
(a) Calculate a new set of ratios for the fiscal year 2004 for TRI based on the financial statements pre-
(b) Explain the analytical use of each of the seven ratios presented, describing what the investors can
learn about TRI’s financial stability and operating efficiency.
(c) Identify two limitations of ratio analysis.
COMPARATIVE ANALYSIS CASE
The Coca-Cola Company versus PepsiCo, Inc.
Go to the Take Action! CD and use information found there to answer the following questions related to
The Coca-Cola Company and PepsiCo, Inc.
(a) (1) What specific items does Coca-Cola discuss in its Note 1—Accounting Policies? (Prepare a list of
the headings only.)
(2) What specific items does PepsiCo discuss in its Note 1—Summary of Significant Accounting
Policies? (Prepare a list of the headings only.)
(3) Note the similarities and differences between Coca-Cola’s and PepsiCo’s lists.
(b) For what lines of business or segments do Coca-Cola and PepsiCo present segmented information?
(c) Note and comment on the similarities and differences between the auditors’ reports submitted by the
independent auditors of Coca-Cola and PepsiCo for the year 2001.
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1330 • Chapter 24 Full Disclosure in Financial Reporting
Read the article entitled “FASB Is Criticized for Inaction on Off-Balance-Sheet Debt Issue,” by Steve
Liesman, Jonathan Weil, and Scott Paltrow in the January 18, 2002, Wall Street Journal. (Subscribers to
Business Extra can access the article at that site.)
Answer the following questions.
(a) Why has the FASB not set better rules for when a firm should be allowed to keep debt off its balance
(b) Who is helped (in the short term and the long term) by a firm‘s being able to keep debt off its bal-
ance sheet? Who is hurt (short term and long term)?
(c) According to the article, when the FASB proposes new rules that would hurt them, “corporate Amer-
ica and its allies invoke portents of doom as to why we shouldn‘t have honest accounting treatment”
of what’s being proposed. How does this affect the usefulness of financial reporting for investors and
(d) Who has Congress favored in the past in similar situations? Why has Congress favored them?
(e) One of the groups criticizing the FASB for moving too slowly is the Financial Executives International
(FEI), which opposed requiring firms to consolidate the results of all their entities. The FEI also op-
posed the FASB’s proposal to require firms to expense executive stock options. Based on this, would
you consider FEI “part of the solution” or “part of the problem”? Justify your answer.
Companies registered with the Securities and Exchange Commission are required to file a quarterly re-
port on Form 10-Q within 45 days of the end of the first three fiscal quarters.
Use EDGAR or some other source to examine the most recent 10-Q for the company of your choice and
answer the following questions.
(a) What financial information is included in Part I?
(b) Read the notes to the financial statements and identify any departures from the “integral approach.”
(c) Does the 10-Q include any information under Part II? Describe the nature of the information.
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Using Your Judgment • 1331
Financial Statement Analysis
Directions Situation Analysis Explanation Research Resources
In this simulation, you will be asked to evaluate a company’s solvency and going-concern potential. You
will be asked to analyze a set of ratios and indicate possible limitations of ratio analysis.
Prepare responses to all parts.
As the CPA for Packard Clipper, Inc., you have been requested to develop some key ratios from the
comparative financial statements. This information is to be used to convince creditors that Packard
Clipper, Inc. is solvent and to support the use of going-concern valuation procedures in the financial
The data requested and the computations developed from the financial statements follow:
Current ratio 2.6 times 2.1 times
Acid-test ratio .8 times 1.3 times
Property, plant, and equipment to
stockholders’ equity 2.5 times 2.2 times
Sales to stockholders’ equity 2.4 times 2.7 times
Net income Up 32% Down 9%
Earnings per share $3.30 $2.50
Book value per share Up 6% Up 9%
Packard Clipper asks you to prepare a list of brief comments stating how each of these items
supports the solvency and going-concern potential of the business. The company wishes to use
these comments to support its presentation of data to its creditors. You are to prepare the comments
as requested, giving the implications and the limitations of each item separately, and then the collective
inference that may be drawn from them about Packard Clipper’s solvency and going-concern potential.
Having done as the client requested in the Analysis section above, prepare a brief listing of additional
ratio-analysis-type data for this client which you think its creditors are going to ask for to supplement
the analytical data you provided. Explain why you think the additional data will be helpful to these
creditors in evaluating the client’s solvency. What warnings should you offer these creditors about
the limitations of ratio analysis for the purposes stated here?
Remember to check the Take Action! CD
and the book’s companion Web site
to find additional resources for this chapter.
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1332 • Accounting and the Time Value of Money
The following time value of money tables are also presented at the end of Chapter 6,
“Accounting and the Time Value of Money,” in Volume I (pages 302–311). They are pre-
sented here to facilitate your use of Volume II.
TABLE 6-1 FUTURE VALUE OF 1 (FUTURE VALUE OF A SINGLE SUM)
FVFn,i (1 i)n
Periods 2% 21/2% 3% 4% 5% 6%
1 1.02000 1.02500 1.03000 1.04000 1.05000 1.06000
2 1.04040 1.05063 1.06090 1.08160 1.10250 1.12360
3 1.06121 1.07689 1.09273 1.12486 1.15763 1.19102
4 1.08243 1.10381 1.12551 1.16986 1.21551 1.26248
5 1.10408 1.13141 1.15927 1.21665 1.27628 1.33823
6 1.12616 1.15969 1.19405 1.26532 1.34010 1.41852
7 1.14869 1.18869 1.22987 1.31593 1.40710 1.50363
8 1.17166 1.21840 1.26677 1.36857 1.47746 1.59385
9 1.19509 1.24886 1.30477 1.42331 1.55133 1.68948
10 1.21899 1.28008 1.34392 1.48024 1.62889 1.79085
11 1.24337 1.31209 1.38423 1.53945 1.71034 1.89830
12 1.26824 1.34489 1.42576 1.60103 1.79586 2.01220
13 1.29361 1.37851 1.46853 1.66507 1.88565 2.13293
14 1.31948 1.41297 1.51259 1.73168 1.97993 2.26090
15 1.34587 1.44830 1.55797 1.80094 2.07893 2.39656
16 1.37279 1.48451 1.60471 1.87298 2.18287 2.54035
17 1.40024 1.52162 1.65285 1.94790 2.29202 2.69277
18 1.42825 1.55966 1.70243 2.02582 2.40662 2.85434
19 1.45681 1.59865 1.75351 2.10685 2.52695 3.02560
20 1.48595 1.63862 1.80611 2.19112 2.65330 3.20714
21 1.51567 1.67958 1.86029 2.27877 2.78596 3.39956
22 1.54598 1.72157 1.91610 2.36992 2.92526 3.60354
23 1.57690 1.76461 1.97359 2.46472 3.07152 3.81975
24 1.60844 1.80873 2.03279 2.56330 3.22510 4.04893
25 1.64061 1.85394 2.09378 2.66584 3.38635 4.29187
26 1.67342 1.90029 2.15659 2.77247 3.55567 4.54938
27 1.70689 1.94780 2.22129 2.88337 3.73346 4.82235
28 1.74102 1.99650 2.28793 2.99870 3.92013 5.11169
29 1.77584 2.04641 2.35657 3.11865 4.11614 5.41839
30 1.81136 2.09757 2.42726 3.24340 4.32194 5.74349
31 1.84759 2.15001 2.50008 3.37313 4.53804 6.08810
32 1.88454 2.20376 2.57508 3.50806 4.76494 6.45339
33 1.92223 2.25885 2.65234 3.64838 5.00319 6.84059
34 1.96068 2.31532 2.73191 3.79432 5.25335 7.25103
35 1.99989 2.37321 2.81386 3.94609 5.51602 7.68609
36 2.03989 2.43254 2.89828 4.10393 5.79182 8.14725
37 2.08069 2.49335 2.98523 4.26809 6.08141 8.63609
38 2.12230 2.55568 3.07478 4.43881 6.38548 9.15425
39 2.16474 2.61957 3.16703 4.61637 6.70475 9.70351
40 2.20804 2.68506 3.26204 4.80102 7.03999 10.28572
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Future Value of 1 • 1333
TABLE 6-1 FUTURE VALUE OF 1
8% 9% 10% 11% 12% 15% Periods
1.08000 1.09000 1.10000 1.11000 1.12000 1.15000 1
1.16640 1.18810 1.21000 1.23210 1.25440 1.32250 2
1.25971 1.29503 1.33100 1.36763 1.40493 1.52088 3
1.36049 1.41158 1.46410 1.51807 1.57352 1.74901 4
1.46933 1.53862 1.61051 1.68506 1.76234 2.01136 5
1.58687 1.67710 1.77156 1.87041 1.97382 2.31306 6
1.71382 1.82804 1.94872 2.07616 2.21068 2.66002 7
1.85093 1.99256 2.14359 2.30454 2.47596 3.05902 8
1.99900 2.17189 2.35795 2.55803 2.77308 3.51788 9
2.15892 2.36736 2.59374 2.83942 3.10585 4.04556 10
2.33164 2.58043 2.85312 3.15176 3.47855 4.65239 11
2.51817 2.81267 3.13843 3.49845 3.89598 5.35025 12
2.71962 3.06581 3.45227 3.88328 4.36349 6.15279 13
2.93719 3.34173 3.79750 4.31044 4.88711 7.07571 14
3.17217 3.64248 4.17725 4.78459 5.47357 8.13706 15
3.42594 3.97031 4.59497 5.31089 6.13039 9.35762 16
3.70002 4.32763 5.05447 5.89509 6.86604 10.76126 17
3.99602 4.71712 5.55992 6.54355 7.68997 12.37545 18
4.31570 5.14166 6.11591 7.26334 8.61276 14.23177 19
4.66096 5.60441 6.72750 8.06231 9.64629 16.36654 20
5.03383 6.10881 7.40025 8.94917 10.80385 18.82152 21
5.43654 6.65860 8.14028 9.93357 12.10031 21.64475 22
5.87146 7.25787 8.95430 11.02627 13.55235 24.89146 23
6.34118 7.91108 9.84973 12.23916 15.17863 28.62518 24
6.84847 8.62308 10.83471 13.58546 17.00000 32.91895 25
7.39635 9.39916 11.91818 15.07986 19.04007 37.85680 26
7.98806 10.24508 13.10999 16.73865 21.32488 43.53532 27
8.62711 11.16714 14.42099 18.57990 23.88387 50.06561 28
9.31727 12.17218 15.86309 20.62369 26.74993 57.57545 29
10.06266 13.26768 17.44940 22.89230 29.95992 66.21177 30
10.86767 14.46177 19.19434 25.41045 33.55511 76.14354 31
11.73708 15.76333 21.11378 28.20560 37.58173 87.56507 32
12.67605 17.18203 23.22515 31.30821 42.09153 100.69983 33
13.69013 18.72841 25.54767 34.75212 47.14252 115.80480 34
14.78534 20.41397 28.10244 38.57485 52.79962 133.17552 35
15.96817 22.25123 30.91268 42.81808 59.13557 153.15185 36
17.24563 24.25384 34.00395 47.52807 66.23184 176.12463 37
18.62528 26.43668 37.40434 52.75616 74.17966 202.54332 38
20.11530 28.81598 41.14479 58.55934 83.08122 232.92482 39
21.72452 31.40942 45.25926 65.00087 93.05097 267.86355 40
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1334 • Accounting and the Time Value of Money
TABLE 6-2 PRESENT VALUE OF 1 (PRESENT VALUE OF A SINGLE SUM)
PVFn,i (1 i)
(1 i )n
Periods 2% 21/2% 3% 4% 5% 6%
1 .98039 .97561 .97087 .96154 .95238 .94340
2 .96117 .95181 .94260 .92456 .90703 .89000
3 .94232 .92860 .91514 .88900 .86384 .83962
4 .92385 .90595 .88849 .85480 .82270 .79209
5 .90573 .88385 .86261 .82193 .78353 .74726
6 .88797 .86230 .83748 .79031 .74622 .70496
7 .87056 .84127 .81309 .75992 .71068 .66506
8 .85349 .82075 .78941 .73069 .67684 .62741
9 .83676 .80073 .76642 .70259 .64461 .59190
10 .82035 .78120 .74409 .67556 .61391 .55839
11 .80426 .76214 .72242 .64958 .58468 .52679
12 .78849 .74356 .70138 .62460 .55684 .49697
13 .77303 .72542 .68095 .60057 .53032 .46884
14 .75788 .70773 .66112 .57748 .50507 .44230
15 .74301 .69047 .64186 .55526 .48102 .41727
16 .72845 .67362 .62317 .53391 .45811 .39365
17 .71416 .65720 .60502 .51337 .43630 .37136
18 .70016 .64117 .58739 .49363 .41552 .35034
19 .68643 .62553 .57029 .47464 .39573 .33051
20 .67297 .61027 .55368 .45639 .37689 .31180
21 .65978 .59539 .53755 .43883 .35894 .29416
22 .64684 .58086 .52189 .42196 .34185 .22751
23 .63416 .56670 .50669 .40573 .32557 .26180
24 .62172 .55288 .49193 .39012 .31007 .24698
25 .60953 .53939 .47761 .37512 .29530 .23300
26 .59758 .52623 .46369 .36069 .28124 .21981
27 .58586 .51340 .45019 .34682 .26785 .20737
28 .57437 .50088 .43708 .33348 .25509 .19563
29 .56311 .48866 .42435 .32065 .24295 .18456
30 .55207 .47674 .41199 .30832 .23138 .17411
31 .54125 .46511 .39999 .29646 .22036 .16425
32 .53063 .45377 .38834 .28506 .20987 .15496
33 .52023 .44270 .37703 .27409 .19987 .14619
34 .51003 .43191 .36604 .26355 .19035 .13791
35 .50003 .42137 .35538 .25342 .18129 .13011
36 .49022 .41109 .34503 .24367 .17266 .12274
37 .48061 .40107 .33498 .23430 .16444 .11579
38 .47119 .39128 .32523 .22529 .15661 .10924
39 .46195 .38174 .31575 .21662 .14915 .10306
40 .45289 .37243 .30656 .20829 .14205 .09722
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Present Value of 1 • 1335
TABLE 6-2 PRESENT VALUE OF 1
8% 9% 10% 11% 12% 15% Periods
.92593 .91743 .90909 .90090 .89286 .86957 1
.85734 .84168 .82645 .81162 .79719 .75614 2
.79383 .77218 .75132 .73119 .71178 .65752 3
.73503 .70843 .68301 .65873 .63552 .57175 4
.68058 .64993 .62092 .59345 .56743 .49718 5
.63017 .59627 .56447 .53464 .50663 .43233 6
.58349 .54703 .51316 .48166 .45235 .37594 7
.54027 .50187 .46651 .43393 .40388 .32690 8
.50025 .46043 .42410 .39092 .36061 .28426 9
.46319 .42241 .38554 .35218 .32197 .24719 10
.42888 .38753 .35049 .31728 .28748 .21494 11
.39711 .35554 .31863 .28584 .25668 .18691 12
.36770 .32618 .28966 .25751 .22917 .16253 13
.34046 .29925 .26333 .23199 .20462 .14133 14
.31524 .27454 .23939 .20900 .18270 .12289 15
.29189 .25187 .21763 .18829 .16312 .10687 16
.27027 .23107 .19785 .16963 .14564 .09293 17
.25025 .21199 .17986 .15282 .13004 .08081 18
.23171 .19449 .16351 .13768 .11611 .07027 19
.21455 .17843 .14864 .12403 .10367 .06110 20
.19866 .16370 .13513 .11174 .09256 .05313 21
.18394 .15018 .12285 .10067 .08264 .04620 22
.17032 .13778 .11168 .09069 .07379 .04017 23
.15770 .12641 .10153 .08170 .06588 .03493 24
.14602 .11597 .09230 .07361 .05882 .03038 25
.13520 .10639 .08391 .06631 .05252 .02642 26
.12519 .09761 .07628 .05974 .04689 .02297 27
.11591 .08955 .06934 .05382 .04187 .01997 28
.10733 .08216 .06304 .04849 .03738 .01737 29
.09938 .07537 .05731 .04368 .03338 .01510 30
.09202 .06915 .05210 .03935 .02980 .01313 31
.08520 .06344 .04736 .03545 .02661 .01142 32
.07889 .05820 .04306 .03194 .02376 .00993 33
.07305 .05340 .03914 .02878 .02121 .00864 34
.06763 .04899 .03558 .02592 .01894 .00751 35
.06262 .04494 .03235 .02335 .01691 .00653 36
.05799 .04123 .02941 .02104 .01510 .00568 37
.05369 .03783 .02674 .01896 .01348 .00494 38
.04971 .03470 .02430 .01708 .01204 .00429 39
.04603 .03184 .02210 .01538 .01075 .00373 40
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1336 • Accounting and the Time Value of Money
TABLE 6-3 FUTURE VALUE OF AN ORDINARY ANNUITY OF 1
(1 i )n 1
Periods 2% 21/2% 3% 4% 5% 6%
1 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000
2 2.02000 2.02500 2.03000 2.04000 2.05000 2.06000
3 3.06040 3.07563 3.09090 3.12160 3.15250 3.18360
4 4.12161 4.15252 4.18363 4.24646 4.31013 4.37462
5 5.20404 5.25633 5.30914 5.41632 5.52563 5.63709
6 6.30812 6.38774 6.46841 6.63298 6.80191 6.97532
7 7.43428 7.54743 7.66246 7.89829 8.14201 8.39384
8 8.58297 8.73612 8.89234 9.21423 9.54911 9.89747
9 9.75463 9.95452 10.15911 10.58280 11.02656 11.49132
10 10.94972 11.20338 11.46338 12.00611 12.57789 13.18079
11 12.16872 12.48347 12.80780 13.48635 14.20679 14.97164
12 13.41209 13.79555 14.19203 15.02581 15.91713 16.86994
13 14.68033 15.14044 15.61779 16.62684 17.71298 18.88214
14 15.97394 16.51895 17.08632 18.29191 19.59863 21.01507
15 17.29342 17.93193 18.59891 20.02359 21.57856 23.27597
16 18.63929 19.38022 20.15688 21.82453 23.65749 25.67253
17 20.01207 20.86473 21.76159 23.69751 25.84037 28.21288
18 21.41231 22.38635 23.41444 25.64541 28.13238 30.90565
19 22.84056 23.94601 25.11687 27.67123 30.53900 33.75999
20 24.29737 25.54466 26.87037 29.77808 33.06595 36.78559
21 25.78332 27.18327 28.67649 31.96920 35.71925 39.99273
22 27.29898 28.86286 30.53678 34.24797 38.50521 43.39229
23 28.84496 30.58443 32.45288 36.61789 41.43048 46.99583
24 30.42186 32.34904 34.42647 39.08260 44.50200 50.81558
25 32.03030 34.15776 36.45926 41.64591 47.72710 54.86451
26 33.67091 36.01171 38.55304 44.31174 51.11345 59.15638
27 35.34432 37.91200 40.70963 47.08421 54.66913 63.70577
28 37.05121 39.85980 42.93092 49.96758 58.40258 68.52811
29 38.79223 41.85630 45.21885 52.96629 62.32271 73.63980
30 40.56808 43.90270 47.57542 56.08494 66.43885 79.05819
31 42.37944 46.00027 50.00268 59.32834 70.76079 84.80168
32 44.22703 48.15028 52.50276 62.70147 75.29883 90.88978
33 46.11157 50.35403 55.07784 66.20953 80.06377 97.34316
34 48.03380 52.61289 57.73018 69.85791 85.06696 104.18376
35 49.99448 54.92821 60.46208 73.65222 90.32031 111.43478
36 51.99437 57.30141 63.27594 77.59831 95.83632 119.12087
37 54.03425 59.73395 66.17422 81.70225 101.62814 127.26812
38 56.11494 62.22730 69.15945 85.97034 107.70955 135.90421
39 58.23724 64.78298 72.23423 90.40915 114.09502 145.05846
40 60.40198 67.40255 75.40126 95.02552 120.79977 154.76197
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Future Value of an Ordinary Annuity of 1 • 1337
TABLE 6-3 FUTURE VALUE OF AN ORDINARY ANNUITY OF 1
8% 9% 10% 11% 12% 15% Periods
1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1
2.08000 2.09000 2.10000 2.11000 2.12000 2.15000 2
3.24640 3.27810 3.31000 3.34210 3.37440 3.47250 3
4.50611 4.57313 4.64100 4.70973 4.77933 4.99338 4
5.86660 5.98471 6.10510 6.22780 6.35285 6.74238 5
7.33592 7.52334 7.71561 7.91286 8.11519 8.75374 6
8.92280 9.20044 9.48717 9.78327 10.08901 11.06680 7
10.63663 11.02847 11.43589 11.85943 12.29969 13.72682 8
12.48756 13.02104 13.57948 14.16397 14.77566 16.78584 9
14.48656 15.19293 15.93743 16.72201 17.54874 20.30372 10
16.64549 17.56029 18.53117 19.56143 20.65458 24.34928 11
18.97713 20.14072 21.38428 22.71319 24.13313 29.00167 12
21.49530 22.95339 24.52271 26.21164 28.02911 34.35192 13
24.21492 26.01919 27.97498 30.09492 32.39260 40.50471 14
27.15211 29.36092 31.77248 34.40536 37.27972 47.58041 15
30.32428 33.00340 35.94973 39.18995 42.75328 55.71747 16
33.75023 36.97371 40.54470 44.50084 48.88367 65.07509 17
37.45024 41.30134 45.59917 50.39593 55.74972 75.83636 18
41.44626 46.01846 51.15909 56.93949 63.43968 88.21181 19
45.76196 51.16012 57.27500 64.20283 72.05244 102.44358 20
50.42292 56.76453 64.00250 72.26514 81.69874 118.81012 21
55.45676 62.87334 71.40275 81.21431 92.50258 137.63164 22
60.89330 69.53194 79.54302 91.14788 104.60289 159.27638 23
66.76476 76.78981 88.49733 102.17415 118.15524 184.16784 24
73.10594 84.70090 98.34706 114.41331 133.33387 212.79302 25
79.95442 93.32398 109.18177 127.99877 150.33393 245.71197 26
87.35077 102.72314 121.09994 143.07864 169.37401 283.56877 27
95.33883 112.96822 134.20994 159.81729 190.69889 327.10408 28
103.96594 124.13536 148.63093 178.39719 214.58275 377.16969 29
113.28321 136.30754 164.49402 199.02088 241.33268 434.74515 30
123.34587 149.57522 181.94343 221.91317 271.29261 500.95692 31
134.21354 164.03699 201.13777 247.32362 304.84772 577.10046 32
145.95062 179.80032 222.25154 275.52922 342.42945 644.66553 33
158.62667 196.98234 245.47670 306.83744 384.52098 765.36535 34
172.31680 215.71076 271.02437 341.58955 431.66350 881.17016 35
187.10215 236.12472 299.12681 380.16441 484.46312 1014.34568 36
203.07032 258.37595 330.03949 422.98249 543.59869 1167.49753 37
220.31595 282.62978 364.04343 470.51056 609.83053 1343.62216 38
238.94122 309.06646 401.44778 523.26673 684.01020 1546.16549 39
259.05652 337.88245 442.59256 581.82607 767.09142 1779.09031 40
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1338 • Accounting and the Time Value of Money
TABLE 6-4 PRESENT VALUE OF AN ORDINARY ANNUITY OF 1
(1 i )n
Periods 2% 21/2% 3% 4% 5% 6%
1 .98039 .97561 .97087 .96154 .95238 .94340
2 1.94156 1.92742 1.91347 1.88609 1.85941 1.83339
3 2.88388 2.85602 2.82861 2.77509 2.72325 2.67301
4 3.80773 3.76197 3.71710 3.62990 3.54595 3.46511
5 4.71346 4.64583 4.57971 4.45182 4.32948 4.21236
6 5.60143 5.50813 5.41719 5.24214 5.07569 4.91732
7 6.47199 6.34939 6.23028 6.00205 5.78637 5.58238
8 7.32548 7.17014 7.01969 6.73274 6.46321 6.20979
9 8.16224 7.97087 7.78611 7.43533 7.10782 6.80169
10 8.98259 8.75206 8.53020 8.11090 7.72173 7.36009
11 9.78685 9.51421 9.25262 8.76048 8.30641 7.88687
12 10.57534 10.25776 9.95400 9.38507 8.86325 8.38384
13 11.34837 10.98319 10.63496 9.98565 9.39357 8.85268
14 12.10625 11.69091 11.29607 10.56312 9.89864 9.29498
15 12.84926 12.38138 11.93794 11.11839 10.37966 9.71225
16 13.57771 13.05500 12.56110 11.65230 10.83777 10.10590
17 14.29187 13.71220 13.16612 12.16567 11.27407 10.47726
18 14.99203 14.35336 13.75351 12.65930 11.68959 10.82760
19 15.67846 14.97889 14.32380 13.13394 12.08532 11.15812
20 16.35143 15.58916 14.87747 13.59033 12.46221 11.46992
21 17.01121 16.18455 15.41502 14.02916 12.82115 11.76408
22 17.65805 16.76541 15.93692 14.45112 13.16300 12.04158
23 18.29220 17.33211 16.44361 14.85684 13.48857 12.30338
24 18.91393 17.88499 16.93554 15.24696 13.79864 12.55036
25 19.52346 18.42438 17.41315 15.62208 14.09394 12.78336
26 20.12104 18.95061 17.87684 15.98277 14.37519 13.00317
27 20.70690 19.46401 18.32703 16.32959 14.64303 13.21053
28 21.28127 19.96489 18.76411 16.66306 14.89813 13.40616
29 21.84438 20.45355 19.18845 16.98371 15.14107 13.59072
30 22.39646 20.93029 19.60044 17.29203 15.37245 13.76483
31 22.93770 21.39541 20.00043 17.58849 15.59281 13.92909
32 23.46833 21.84918 20.38877 17.87355 15.80268 14.08404
33 23.98856 22.29188 20.76579 18.14765 16.00255 14.23023
34 24.49859 22.72379 21.13184 18.41120 16.19290 14.36814
35 24.99862 23.14516 21.48722 18.66461 16.37419 14.49825
36 25.48884 23.55625 21.83225 18.90828 16.54685 14.62099
37 25.96945 23.95732 22.16724 19.14258 16.71129 14.73678
38 26.44064 24.34860 22.49246 19.36786 16.86789 14.84602
39 26.90259 24.73034 22.80822 19.58448 17.01704 14.94907
40 27.35548 25.10278 23.11477 19.79277 17.15909 15.04630
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Present Value of an Ordinary Annuity of 1 • 1339
TABLE 6-4 PRESENT VALUE OF AN ORDINARY ANNUITY OF 1
8% 9% 10% 11% 12% 15% Periods
1.92593 .91743 .90909 .90090 .89286 .86957 1
1.78326 1.75911 1.73554 1.71252 1.69005 1.62571 2
2.57710 2.53130 2.48685 2.44371 2.40183 2.28323 3
3.31213 3.23972 3.16986 3.10245 3.03735 2.85498 4
3.99271 3.88965 3.79079 3.69590 3.60478 3.35216 5
4.62288 4.48592 4.35526 4.23054 4.11141 3.78448 6
5.20637 5.03295 4.86842 4.71220 4.56376 4.16042 7
5.74664 5.53482 5.33493 5.14612 4.96764 4.48732 8
6.24689 5.99525 5.75902 5.53705 5.32825 4.77158 9
6.71008 6.41766 6.14457 5.88923 5.65022 5.01877 10
7.13896 6.80519 6.49506 6.20652 5.93770 5.23371 11
7.53608 7.16073 6.81369 6.49236 6.19437 5.42062 12
7.90378 7.48690 7.10336 6.74987 6.42355 5.58315 13
8.24424 7.78615 7.36669 6.98187 6.62817 5.72448 14
8.55948 8.06069 7.60608 7.19087 6.81086 5.84737 15
8.85137 8.31256 7.82371 7.37916 6.97399 5.95424 16
9.12164 8.54363 8.02155 7.54879 7.11963 6.04716 17
9.37189 8.75563 8.20141 7.70162 7.24967 6.12797 18
9.60360 8.95012 8.36492 7.83929 7.36578 6.19823 19
9.81815 9.12855 8.51356 7.96333 7.46944 6.25933 20
10.01680 9.29224 8.64869 8.07507 7.56200 6.31246 21
10.20074 9.44243 8.77154 8.17574 7.64465 6.35866 22
10.37106 9.58021 8.88322 8.26643 7.71843 6.39884 23
10.52876 9.70661 8.98474 8.34814 7.78432 6.43377 24
10.67478 9.82258 9.07704 8.42174 7.84314 6.46415 25
10.80998 9.92897 9.16095 8.48806 7.89566 6.49056 26
10.93516 10.02658 9.23722 8.54780 7.94255 6.51353 27
11.05108 10.11613 9.30657 8.60162 7.98442 6.53351 28
11.15841 10.19828 9.36961 8.65011 8.02181 6.55088 29
11.25778 10.27365 9.42691 8.69379 8.05518 6.56598 30
11.34980 10.34280 9.47901 8.73315 8.08499 6.57911 31
11.43500 10.40624 9.52638 8.76860 8.11159 6.59053 32
11.51389 10.46444 9.56943 8.80054 8.13535 6.60046 33
11.58693 10.51784 9.60858 8.82932 8.15656 6.60910 34
11.65457 10.56682 9.64416 8.85524 8.17550 6.61661 35
11.71719 10.61176 9.67651 8.87859 8.19241 6.62314 36
11.77518 10.65299 9.70592 8.89963 8.20751 6.62882 37
11.82887 10.69082 9.73265 8.91859 8.22099 6.63375 38
11.87858 10.72552 9.75697 8.93567 8.23303 6.63805 39
11.92461 10.75736 9.77905 8.95105 8.24378 6.64178 40
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1340 • Accounting and the Time Value of Money
TABLE 6-5 PRESENT VALUE OF AN ANNUITY DUE OF 1
(1 i )n 1
Periods 2% 21/2% 3% 4% 5% 6%
1 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000
2 1.98039 1.97561 1.97087 1.96154 1.95238 1.94340
3 2.94156 2.92742 2.91347 2.88609 2.85941 2.83339
4 3.88388 3.85602 3.82861 3.77509 3.72325 3.67301
5 4.80773 4.76197 4.71710 4.62990 4.54595 4.46511
6 5.71346 5.64583 5.57971 5.45182 5.32948 5.21236
7 6.60143 6.50813 6.41719 6.24214 6.07569 5.91732
8 7.47199 7.34939 7.23028 7.00205 6.78637 6.58238
9 8.32548 8.17014 8.01969 7.73274 7.46321 7.20979
10 9.16224 8.97087 8.78611 8.43533 8.10782 7.80169
11 9.98259 9.75206 9.53020 9.11090 8.72173 8.36009
12 10.78685 10.51421 10.25262 9.76048 9.30641 8.88687
13 11.57534 11.25776 10.95400 10.38507 9.86325 9.38384
14 12.34837 11.98319 11.63496 10.98565 10.39357 9.85268
15 13.10625 12.69091 12.29607 11.56312 10.89864 10.29498
16 13.84926 13.38138 12.93794 12.11839 11.37966 10.71225
17 14.57771 14.05500 13.56110 12.65230 11.83777 11.10590
18 15.29187 14.71220 14.16612 13.16567 12.27407 11.47726
19 15.99203 15.35336 14.75351 13.65930 12.68959 11.82760
20 16.67846 15.97889 15.32380 14.13394 13.08532 12.15812
21 17.35143 16.58916 15.87747 14.59033 13.46221 12.46992
22 18.01121 17.18455 16.41502 15.02916 13.82115 12.76408
23 18.65805 17.76541 16.93692 15.45112 14.16300 13.04158
24 19.29220 18.33211 17.44361 15.85684 14.48857 13.30338
25 19.91393 18.88499 17.93554 16.24696 14.79864 13.55036
26 20.52346 19.42438 18.41315 16.62208 15.09394 13.78336
27 21.12104 19.95061 18.87684 16.98277 15.37519 14.00317
28 21.70690 20.46401 19.32703 17.32959 15.64303 14.21053
29 22.28127 20.96489 19.76411 17.66306 15.89813 14.40616
30 22.84438 21.45355 20.18845 17.98371 16.14107 14.59072
31 23.39646 21.93029 20.60044 18.29203 16.37245 14.76483
32 23.93770 22.39541 21.00043 18.58849 16.59281 14.92909
33 24.46833 22.84918 21.38877 18.87355 16.80268 15.08404
34 24.98856 23.29188 21.76579 19.14765 17.00255 15.23023
35 25.49859 23.72379 22.13184 19.41120 17.19290 15.36814
36 25.99862 24.14516 22.48722 19.66461 17.37419 15.49825
37 26.48884 24.55625 22.83225 19.90828 17.54685 15.62099
38 26.96945 24.95732 23.16724 20.14258 17.71129 15.73678
39 27.44064 25.34860 23.49246 20.36786 17.86789 15.84602
40 27.90259 25.73034 23.80822 20.58448 18.01704 15.94907
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Present Value of an Annuity Due of 1 • 1341
TABLE 6-5 PRESENT VALUE OF AN ANNUITY DUE OF 1
8% 9% 10% 11% 12% 15% Periods
1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1
1.92593 1.91743 1.90909 1.90090 1.89286 1.86957 2
2.78326 2.75911 2.73554 2.71252 2.69005 2.62571 3
3.57710 3.53130 3.48685 3.44371 3.40183 3.28323 4
4.31213 4.23972 4.16986 4.10245 4.03735 3.85498 5
4.99271 4.88965 4.79079 4.69590 4.60478 4.35216 6
5.62288 5.48592 5.35526 5.23054 5.11141 4.78448 7
6.20637 6.03295 5.86842 5.71220 5.56376 5.16042 8
6.74664 6.53482 6.33493 6.14612 5.96764 5.48732 9
7.24689 6.99525 6.75902 6.53705 6.32825 5.77158 10
7.71008 7.41766 7.14457 6.88923 6.65022 6.01877 11
8.13896 7.80519 7.49506 7.20652 6.93770 6.23371 12
8.53608 8.16073 7.81369 7.49236 7.19437 6.42062 13
8.90378 8.48690 8.10336 7.74987 7.42355 6.58315 14
9.24424 8.78615 8.36669 7.98187 7.62817 6.72448 15
9.55948 9.06069 8.60608 8.19087 7.81086 6.84737 16
9.85137 9.31256 8.82371 8.37916 7.97399 6.95424 17
10.12164 9.54363 9.02155 8.54879 8.11963 7.04716 18
10.37189 9.75563 9.20141 8.70162 8.24967 7.12797 19
10.60360 9.95012 9.36492 8.83929 8.36578 7.19823 20
10.81815 10.12855 9.51356 8.96333 8.46944 7.25933 21
11.01680 10.29224 9.64869 9.07507 8.56200 7.31246 22
11.20074 10.44243 9.77154 9.17574 8.64465 7.35866 23
11.37106 10.58021 9.88322 9.26643 8.71843 7.39884 24
11.52876 10.70661 9.98474 9.34814 8.78432 7.43377 25
11.67478 10.82258 10.07704 9.42174 8.84314 7.46415 26
11.80998 10.92897 10.16095 9.48806 8.89566 7.49056 27
11.93518 11.02658 10.23722 9.54780 8.94255 7.51353 28
12.05108 11.11613 10.30657 9.60162 8.98442 7.53351 29
12.15841 11.19828 10.36961 9.65011 9.02181 7.55088 30
12.25778 11.27365 10.42691 9.69379 9.05518 7.56598 31
12.34980 11.34280 10.47901 9.73315 9.08499 7.57911 32
12.43500 11.40624 10.52638 9.76860 9.11159 7.59053 33
12.51389 11.46444 10.56943 9.80054 9.13535 7.60046 34
12.58693 11.51784 10.60858 9.82932 9.15656 7.60910 35
12.65457 11.56682 10.64416 9.85524 9.17550 7.61661 36
12.71719 11.61176 10.67651 9.87859 9.19241 7.62314 37
12.77518 11.65299 10.70592 9.89963 9.20751 7.62882 38
12.82887 11.69082 10.73265 9.91859 9.22099 7.63375 39
12.87858 11.72552 10.75697 9.93567 9.23303 7.63805 40
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