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.