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Chapter 24: 1Q (page 1445)
What are the major advantages of notes to financial statements? What types of items are usually reported in notes?
The Financial Statement notes may disclose mandatory data on related party exchanges, including outstanding balances and commitments.
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Morlan Corporation is preparing its December 31, 2017, financial statements. Two events that occurred between December 31, 2017, and March 10, 2018, when the statements were authorized for issue, are described below.
Instructions
What effect do these subsequent events have on 2017 net income?
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 forecasts. We tried to find out what happened to the cheese sandwich鈥攂ut, rats!, even recourse to the Freedom of Information Act didn鈥檛 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鈥攂ut no one was very eager to salute. Even after some of the more objectionable features鈥攃ompulsory corrections and detailed explanations of why the estimates went awry鈥攚ere peeled off the original proposal.
Seemingly, despite the Commission鈥檚 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 鈥淪afe Harbor鈥� rule that, providing the forecasts were made on a reasonable basis and in good faith, protected corporations from litigation should the projections prove wide of the mark (as only about 99% are apt to do).
Instructions
Interim reporting under IFRS:
(a) is prepared using the discrete approach.
(b) is prepared using a combination of the discrete and integral approach.
(c) requires a complete set of financial statements for each interim period.
(d) permits companies to omit disclosure of material events subsequent to the interim reporting date.
(Disclosure of Estimates) Nancy Tercek, the financial vice president, and Margaret Lilly, the controller, of Romine Manufacturing Company are reviewing the financial ratios of the company for the years 2017 and 2018. 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. Tercek is in the process of issuing a media release that emphasizes the efficiency of Romine Manufacturing in controlling cost. Margaret Lilly 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 2018. The controller, not sure of her supervisor鈥檚 motives, hesitates to suggest to Tercek that the company鈥檚 improvement is unrelated to efficiency in controlling cost. To complicate matters, the media release is scheduled in a few days.
Instructions
(Ratio Computations and Additional Analysis) Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2018, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two \(35,000 notes, which are due on June 30, 2018, and September 30, 2018. Another note of \)6,000 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburn鈥檚 cash flow problems are due primarily to the company鈥檚 desire to finance a \(300,000 plant expansion over the next 2 fiscal years through internally generated funds. The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years
BRADBURN CORPORATION BALANCE SHEET MARCH 31 | ||
Assets | 2018 | 2017 |
Cash | \) 18,200 | \( 12,500 |
Notes receivable | 148,000 | 132,000 |
Accounts receivable (net) | 131,800 | 125,500 |
Inventories (at cost) | 105,000 | 50,000 |
Plant & Equipment (net of depreciation) | 1,449,000 | 1,420,500 |
Total assets | \)1,852,000 | \(1,740,500 |
Liabilities and Stockholders鈥� Equity | ||
Accounts payable | \) 79,000 | \( 91,000 |
Notes payable | 76,000 | 61,500 |
Accrued liabilities | 9,000 | 6,000 |
Common stock (130,000 shares, \)10 par) | 1,300,000 | 1,300,000 |
Retained earnings* | 388,000 | 282,000 |
Total liabilities and stockholders鈥� equity | \(1,852,000 | \)1,740,500 |
*Cash dividends were paid at the rate of \(1 per share in the fiscal year 2017 and \)2 per share in the fiscal year 2018.
BRADBURN CORPORATION INCOME STATEMENT FOR THE FISCAL YEARS ENDED MARCH 31 | ||
2018 | 2017 | |
Sales revenue | \(3,000,000 | \)2,700,000 |
Cost of goods sold* | 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, 2017, and 2018, respectively, are included in the cost of goods sold.
Instructions
(a). Compute the following items for Bradburn Corporation.
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