The following information was described in a note of Canon Packing Co.
“During August, Holland Products Corporation purchased 311,003 shares of the Company’s common stock which constitutes approximately 35% of the stock outstanding. Holland has since obtained representation on the Board of Directors.”
“An affiliate of Holland Products Corporation acts as a food broker for Canon Packing in the greater New York City marketing area. The commissions for such services after August amounted to approximately $20,000.”
Why is this information disclosed?
There is a material effect by Holland Products Corporation that needs to be disclosed.
The full disclosure principle is meant to share critical and material budgetary data with the outside world. Since outsiders do not know the points of interest of the company's business deals, contracts, and advances, it is difficult to estimate the substance.
Transactions between related parties are disclosed to guarantee that clients of financial statements understand the fundamental nature of certain exchanges. Since it is routinely difficult to legitimately separate financial material from related party transactions, disclosure is widely used in this area.
The disclosure is required by Holland to propose the purchase of a substantial portion of the company's common stock as well as the use of a Holland affiliate to act as a nutrition broker.
For each of the following subsequent events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.
(Dividend Policy Analysis) Matheny Inc. went public 3 years ago. The board of directors will be meeting shortly after the end of the year to decide on a dividend policy. In the past, growth has been financed primarily through the retention of earnings. A stock or a cash dividend has never been declared. Presented below is a brief financial summary of Matheny Inc.’s operations.
Average total assets
Number of shares
Average market price
(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’s cash flow problems are due primarily to the company’s 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
Accounts receivable (net)
Inventories (at cost)
Plant & Equipment (net of depreciation)
Liabilities and Stockholders’ Equity
Common stock (130,000 shares, $10 par)
Total liabilities and stockholders’ equity
*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.
FOR THE FISCAL YEARS ENDED MARCH 31
Cost of goods sold*
Income before income taxes
Income taxes (40%)
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.
b) Identify and explain what other financial reports and/or financial analyses might be helpful to the commercial loan officer of Topeka National Bank in evaluating Daniel Brown’s request for a time extension on Bradburn’s notes.
Heartland Company’s budgeted sales and budgeted cost of goods sold for the coming year are $144,000,000 and $99,000,000, respectively. Short-term interest rates are expected to average 10%. If Heartland can increase inventory turnover from its present level of 9 times a year to a level of 12 times per year, compute its expected cost savings for the coming year.
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