财务报表分析答案Ch04文档格式.docx

财务报表分析答案Ch04文档格式.docx

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sfinancialperformanceandprospects.Theaccountingpracticesunderlyingthemeasurementandreportingofcurrentandnoncurrentassetsaredescribed.Wediscusstheaccountingfortheseassetsanditsimplicationsforanalysisoffinancialstatements.Specialattentionisgiventovariousanalyticaladjustmentshelpingusbetterunderstandcurrentandfutureprospects.

OUTLINE

Section1:

CurrentAssets

∙CashandCashEquivalents

AnalyzingCashandCashEquivalents

∙Receivables

ValuationofReceivables

AnalyzingReceivables

∙PrepaidExpenses

∙Inventories

InventoryAccountingandValuation

AnalyzingInventories

Section2:

NoncurrentAssets

∙IntroductiontoLong-LivedAssets

AccountingforLong-LivedAssets

CapitalizingversusExpensing:

FinancialStatementandRatioEffects

∙PlantAssetsandNaturalResources

ValuingPlantAssetsandNaturalResources

DepreciationandDepletion

∙IntangibleAssets

AccountingforIntangibles

AnalyzingIntangibles

Goodwill

UnrecordedIntangiblesandContingencies

ANALYSISOBJECTIVES

∙Definecurrentassetsandtheirrelevanceforanalysis.

∙Explaincashmanagementanditsimplicationsforanalysis.

∙Analyzereceivables,allowancesforbaddebts,andsecuritization.

∙Interprettheeffectsofalternativeinventorymethodsundervaryingbusinessconditions.

∙Explaintheconceptoflong-livedassetsanditsimplicationsforanalysis.

∙Interpretvaluationandcostallocationofplantassetsandnaturalresources.

∙Describeandanalyzeintangibleassetsandtheirdisclosures.

∙Analyzefinancialstatementsforunrecordedandcontingentassets.

QUESTIONS

1.a.No.Whenanalyzingcash,themostliquidofcurrentassets,theanalystisinterestedintheavailabilityofcashinmeetingthecompany'

sobligations.Arestrictionundercompensatingbalancearrangementsdoes,atworst,removethesecashbalancesfromimmediateavailabilityasmeansofpayment.Indeed,useofsuchbalancescanhaverepercussionsforthecompanythatcanaffectitsfutureaccesstobankcredit.

b.Theanalystshouldexcludecashrestrictedundercompensatingbalanceagreementsfromcurrentassets.SECAccountingSeriesRelease148requiresthatacompanythathasborrowedmoneyfromabanksegregateonitsbalancesheetanycashsubjecttowithdrawalorusagerestrictionsundercompensatingbalanceagreementswiththelendingbank.Theserequirementsmay,asisoftenthecaseinsuchsituations,movecompaniesandtheirbankertoaltertheformoftheircontractualagreementswhileretainingtheirsubstance.Theanalystmustbeeveralerttosuchattemptstodistortanalysismeasurementsbypresentationswhoseformisnotatruereflectionoftheirsubstance.Onemeasureofacompany’svulnerabilityinthisareaistheratioofrestrictedcashtototalcash.

2.a.Theoperatingcycleconceptisimportantintheclassificationofassetsandliabilitiesaseithercurrentornoncurrent.Theoperatingcycleencompassestheperiodoftimefromthecommitmentofcashforpurchasesuntilthecollectionofreceivablesresultingfromthesaleofgoodsorservices.ThediagramnearthebeginningofChapter4illustratesthisconcept.

b.Ifthenormalcollectionintervalofareceivablesislongerthanayear（suchaswithlongerterminstallmentreceivables）,thentheirinclusionascurrentassetsisproperprovidedtheoperatingcycleisequaltoorgreaterthantheobligationduedateforthereceivables.Similarly,ifinventories,bybusinessneedorcustom,havetobekeptonaverageformorethan12months,thenthisnormalinventoryholdingperiodbecomespartoftheoperatingcycleandsuchinventoriesareincludedamongcurrentassets.

c.Thelimitationsofthecurrentratio（whichiscomputedfromitemsdefinedasworkingcapital）asameasureofshorttermliquidityarediscussedinChapter11.Still,ifweacceptthepropositionthatitisusefultomeasurethecurrentresourcesavailabletopaycurrentobligations,thenitisdifficulttoseehowextensionof"

current"

fromthecustomary12monthstoperiodsof36monthsorlongercanserveausefulpurpose.Theoperatingcycleconceptmayhelpcompaniesshowthekindofpositivecurrentpositionthattheyotherwisemightnotbeabletoshow,butthisconceptisofdoubtfulvalueorvalidityfromthepointofviewofafinancialanalystthatmustassessacompany’sshorttermliquidity.

d.

（1）TobaccoIndustry.Thetobaccoleafmustgothroughanaging,curing,anddryingprocessextendingoverseveralyears.Thistobaccoinventory（greenleaves）,thatmaynotbeusedintheproductionofasalableproductformanyyears,isclassifiedascurrentundertheoperatingcycleconcept.Thiswouldoccureveniflongtermloans（classifiedamongnoncurrentliabilities）weretakenouttofinancethecarryingofthisinventory.

（2）LiquorIndustry.Theliquorindustryhasanoperatingcycleextendingbeyondthecustomary12months.Inthiscase,theholdingofliquorinventoryforagingpurposesovermanyyearsprovidessufficientjustificationforinclusionofsuchinventoriesamongcurrentassets.

（3）RetailingIndustry.Inretailing,thesaleof"

largeticket"

itemsontheinstallmentplancanextendtheoperatingcycleto,forexample,36monthsorlonger.Assuch,theseinstallmentreceivablesarereportedamongcurrentassets.

3.a.Thetwomostimportantquestionsfacingthefinancialanalystwithrespecttoreceivablesare:

（1）Isthereceivablegenuine,due,andenforceable?

and

（2）Hastheprobabilityofcollectionbeenproperlyassessed?

Whiletheunqualifiedopinionofanindependentauditorlendssomeassurancewithregardtothesequestions,thefinancialanalystmustrecognizethepossibilityofanerrorofjudgmentaswellasthelackofcompleteindependence.

b.Descriptionofthereceivablesinthenotestofinancialstatementsusuallydonotcontainsufficientcluestoallowareliablejudgmentastowhetherareceivableisgenuine,due,andenforceable.Consequently,knowledgeofindustrypracticesandsupplementarysourcesofinformationmustbeusedforadditionalassurance,e.g.:

∙Insomeindustries,suchascompactdiscs,toys,orbooks,asubstantialrightofmerchandisereturnexistsandallowancemustbemadeforthis.

∙Mostprovisionsforuncollectibleaccountsarebasedonpastexperiencealthoughtheyshouldalsomakeallowancesforcurrentandemergingindustryconditions.Inpractice,theaccountantislikelytoattachmoreimportancetotheformerthantothelatter.Theanalystmust,insuchcases,useone’sownjudgmentandknowledgeofindustryconditionstoassesstheadequacyoftheprovisionforuncollectibleaccounts.

∙Informationthatwouldbehelpfulinassessingthegenerallevelofcollectionriskswithreceivablesisnotusuallyfoundinpublishedfinancialstatements.Suchinformationcan,ofcourse,besoughtfromthecompanydirectly.Examplesofsuchinformationare:

（1）Whatiscustomerconcentration?

Whatpercentoftotalreceivablesisduefromoneorafewmajorcustomers?

Wouldfailureofanyonecustomerhaveamaterialimpactonthecompany'

sfinancialcondition?

（2）Whatistheagepatternofthereceivables?

（3）Whatproportionofnotesreceivablerepresentrenewalsofoldnotes?

（4）Haveallowancesbeenmadefortradediscounts,returns,orothercreditstowhichcustomersareentitled?

∙Theanalyst,inassessingcurrentfinancialpositionandacompany'

sabilitytomeetitsobligationscurrently—asexpressedbysuchmeasuresasthecurrentratio—mustrecognizethefullimpactofaccountingconventionsthatrelatetoclassificationofreceivablesas"

current."

Forexample,theoperatingcycleconceptallowstheinclusionofinstallmentreceivables,whichmaynotbefullycollectibleforyears.Inbalancingtheseagainstcurrentobligations,allowanceforsuchdifferencesintimingofcashflowsshouldbemade.

4.a.Factoringorsecuritizationofreceivablesreferstothepracticeofsellingalloraportionofacompany’sreceivablestoathirdparty.

b.

Whenreceivablesaresoldwithrecourse,thethirdpartypurchaserofthereceivablesretainstherighttocollectfromthecompanythatsoldthereceivableifthereceivableprovesuncollectible.Whenreceivablesaresoldwithoutrecourse,thepurchaserofthereceivablesassumesthecollectionrisk.

c.