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Financial Statement Analysis Study Guide

3563 words - 15 pages

Financial Statement Analysis
Financial Reporting & Analysis Questions
Professor Mahoney
Spring 2013

Chapter 1: Introduction to Financial Reporting

I. Questions

2. How does the concept of consistency aid in the analysis of financial statements? What type of accounting disclosure is required if this concept is not applied?

Consistency allows for the same accounting principle from period to period. A change in principle requires statement disclosure.

3. The president of your firm, Lesky and Lesky, has little background in accounting. Today, he walked into your office and said, “A year ago we bought a piece of land for $100,000. This year, inflation has driven prices up by ...view middle of the document...

It is still carried on the books at $40,500. (Historical cost)

g. Zero Corporation is being sued for $1 million for breach of contract. Its lawyers believe that the damages will be minimal. Zero reports the possible loss in a note. (Disclosure)

6. Zebra Company has incurred substantial financial losses in recent years. Because of its financial condition, the ability of the company to keep operating is in question. Management prepares a set of financial statements that conform to generally accepted accounting principles. Comment on the use of GAAP under these conditions.

Generally accepted accounting principles do not apply when a firm does not appear to be a going concern. In this case the liquidation values are the appropriate figures.

7. Because of assumptions and estimates that go into the preparation of financial statements, the statements are inaccurate and are, therefore, not a very meaningful tool to determine the profits or losses of an entity or the financial position of an entity. Comment.

With the time period assumption, inaccuracies of accounting for the entity, short of its complete life span, are accepted. The assumption is made that the entity can be accounted for reasonably accurately for a particular period of time. In other words, the decision is made to accept some inaccuracy because of incomplete information about the future in exchange for more timely reporting. The statements are considered to be meaningful because material inaccuracies are not acceptable.

9. Describe the following terns, which indicate the period of time included in the financial statements:

a. Natural business year

A year that ends when operations are at a low ebb for the year.

b. Calender year

The accounting time period is ended on December 31.

c. Fiscal year

A twelve-month accounting period that ends at the end of a month other than December 31.

14. Inventory that has a market value below the historical cost should be written down in order to recognize a loss. Comment.

Yes, inventory that has a market value below the historical cost should be written down in order to recognize a loss. This is done based upon the concept of conservatism. Losses that can be reasonably anticipated should be taken in order to reflect the least favorable effect on net income of the current period.

15. There are other acceptable methods of recognizing revenue when the point of sale is not acceptable. List and discuss the other methods reviewed in this chapter, and indicate when they can be used.

End of production: the realization of revenue at the completion of the production process is acceptable when the price of the item is known and there is a ready market.

Receipt of cash: this method should only be used when the prospects of collection are especially doubtful at the time of sale.

During production: this method is allowed for long-term construction projects because recognizing revenue on long-term construction...

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