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Question 1FSAC

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Intermediate Accounting (Kieso)
Found in: Page 255

Short Answer

Case 1: Uniroyal Technology Corporation

Uniroyal Technology Corporation (UTC), with corporate offices in Sarasota, Florida, is organized into three operating segments. The high-performance plastics segment is responsible for research, development, and manufacture of a wide variety of products, including orthopedic braces, graffiti-resistant seats for buses and airplanes, and a static-resistant plastic used in the central processing units of microcomputers. The coated fabrics segment manufactures products such as automobile seating, door and instrument panels, and specialty items such as waterproof seats for personal watercraft and stain-resistant, easy-cleaning upholstery fabrics. The foams and adhesives segment develops and manufactures products used in commercial roofing applications.

The following items relate to operations in a recent year.

1. Serious pressure was placed on profitability by sharply increasing raw material prices. Some raw materials increased in price 50% during the past year. Cost containment programs were instituted and product prices were increased whenever possible, which resulted in profit margins actually improving over the course of the year.

2. The company entered into a revolving credit agreement, under which UTC may borrow the lesser of $15,000,000 or 80% of eligible accounts receivable. At the end of the year, approximately $4,000,000 was outstanding under this agreement. The company plans to use this line of credit in the upcoming year to finance operations and expansion.

Instructions

(a) Should investors be informed of raw materials price increase, such as described in item 1? Does the fact that the company successfully met the challenge of higher prices affect the answer? Explain.

(b) How should the information in item 2 be presented in the financial statements of UTC?

An increase in price does not require disclosure, but it can be presented as an area of success in a meeting of management and shareholders.

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Step by Step Solution

Definition of Financial Disclosure

The process of disclosing all the information regarding assets, liabilities, income, and expenses is known as financial disclosure. The business entity uses financial statement to assist financial disclosure.

Information to the investors

The business entity is not required to disclose the increase in raw material price to the investors. The company can provide this information relating to an increase in price in management discussion by reflecting it as an area of success. If the business entity can meet expectations, then the business entity must provide information for the loopholes in the meeting with shareholders.

Information of item 2

The business entity must report $4,000,000 as a long-term liability in the balance sheet. Additional availability of the loan can be reflected in the notes to the financial statement. The fact related to the loan must also be reflected in the disclosure notes.

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