Finance 3.1-3.5

Topics: Balance sheet, Inventory, Generally Accepted Accounting Principles Pages: 5 (911 words) Published: September 29, 2014


Questions and Problems (3.1-3.15)

3.1 Balance Sheet: Given the following information about Elkridge Sporting Goods, Inc. construct a balance sheet for June 30, 2011. On that date the firm had cash and marketable securities of $25,135, accounts receivable of $43,758, inventory of $167, 112, net fixed assets of $345, 422, and other assets of $13,125. It had accounts payables of $67,855, notes payables of $36,454, long-term debt of $233,125, and common stock of $150,000. How much retained earnings did the firm have? A= $97,118

3.2 Inventory accounting: Differentiate between FIFO and LIFO. A= FIFO stands for First In, First Out, which means the goods that are unsold are the ones that were most recently added to the inventory. Conversely, LIFO is Last In, First Out, which means goods most recently added to the inventory are sold first so the unsold goods are ones that were added to the inventory the earliest. LIFO accounting is not permitted by the IFRS standards so it is less popular. It does, however, allow the inventory valuation to be lower in inflationary times.

3.3 Inventory accounting: Explain how the choice of FIFO versus LIFO can affect a firm’s balance sheet and income statement. A= FIFO makes sense during times of rising prices because it allows the firm to eliminate the lower-priced inventory first, which results in higher profit margins.

3.4 Market-value accounting: How does the use of market-value accounting help managers? A= Market-value accounting of both assets and liabilities allows managers to have a truer picture of their company's financial condition and to do a better job of estimating cash flows that the assets would generate. However, marking-to-market is not as easy as it sounds because of the difficulties involved in coming up with the correct market value of current assets and liabilities.

3.5 Working Capital: Laurel Electronics reported the following information at its annual meeting: The company had cash and marketable securities worth $1,235,455, accounts payables worth $4,159,357, inventory of $7,121,599, accounts receivable of $3,488,121, short-term notes payable worth $1,151,663, and other current assets of $121,455. What is the company’s net working capital? A= $6,655,610

3.6 Working Capital: The financial information for Laurel Electronics referred to in problem 3.5 is all at book value. Suppose marketing to market reveals that the market value of the firm’s inventory is 20 percent below its book value, and the market value of its current liabilities is identical to the book value. What are the firm’s net working capital using market values? What is the percentage change in net working capital? A= The percentage change would be 20 percent and the net working capital would be the equipment.

3.7 Income Statements: The Oakland Mills Company has disclosed the following financial information in its annual reports for the period ending March 31, 2011: sales of $1.45 million, costs of goods sold of $812,500, depreciation expenses of $175,000, and interest expenses of $89,575. Assume that the firm has a tax rate of 35 percent. What is the company’s net income? Set up an income statement to answer the question. A= $242,401,25

3.8 Cash flows: Describe the organization of the statement of cash flows. A= A statement of cash flows categorizes all cash transactions into one of three types of activities:

1. Operating activities: The cash inflows and outflows related to transactions, which are entered in determining net income.

2. Investing activities: These transactions involve the acquisition and sale of long-term assets that are used by the organization, as well as non-operating investment assets.



3. Financing activities: These transactions include cash inflows and outflows between the business and its creditors and owners, i.e. the sale of stock for cash.

3.9 Cash flows: During 2011 Towson Recording Company increased its investment in marketable...
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