A close friend of yours, who is a history major and who has not had any college courses or any experience in business, is receiving the financial statements from companies in which he has minor investments (acquired for him by his now-deceased father). He asks you what he needs to know to interpret and evaluate the financial statement data that he is receiving. What would you tell him?
It is recommended that an adequate understanding of the nature and constraints of accounting, as well as the usefulness of financial statement instruments, be obtained.
Reports used by stakeholders, potential investors, and other users of financial statements for the purpose of analyzing the financial data of a company are called financial statements.
In order to properly assess and evaluate financial statement information, the friend must:
(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.
An annual report of Ford Motor Corporation states, “Net income a share is computed based upon the average number of shares of capital stock of all classes outstanding. Additional shares of common stock may be issued or delivered in the future on conversion of outstanding convertible debentures, exercise of outstanding employee stock options, and for payment of defined supplemental compensation. Had such additional shares been outstanding, net income a share would have been reduced by 10¢ in the current year and 3¢ in the previous year. . . . As a result of capital stock transactions by the company during the current year (primarily the purchase of Class A Stock from Ford Foundation), net income a share was increased by 6¢.” What information is provided by this note?
Olga Conrad, a financial writer, noted recently, “There are substantial arguments for including earnings projections in annual reports and the like. The most compelling is that it would give anyone interested something now available to only a relatively select few—like large stockholders, creditors, and attentive bartenders.” Identify some arguments against providing earnings projections.
An annual report of Crestwood Industries states, “The company and its subsidiaries have long-term leases expiring on various dates after December 31, 2017. Amounts payable under such commitments, without reduction for related rental income, are expected to average approximately $5,711,000 annually for the next 3 years. Related rental income from certain subleases to others is estimated to average $3,094,000 annually for the next 3 years.” What information is provided by this note?
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.
What effect do these subsequent events have on 2017 net income?
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