IntroductiontoManagementAccounting16thEdition 答案

1、Chapter 17Understanding and AnalyzingConsolidated Financial StatementsLEARNING OBJECTIVES:When your students have finished studying this chapter, they should be able to: 1.Contrast accounting for investments using the equity method and the marketvalue method. 2.Explain the basic ideas and methods us

2、ed to prepare consolidated financial statements. 3.Describe how goodwill arises and how to account for it. 4.Use financial statements analysis to evaluate an organizations performance 5.Explain and use a variety of popular financial ratios. 6.Identify the major implications that efficient stock mark

3、ets have for accounting.CHAPTER 17:ASSIGNMENTSCRITICAL THINKING EXERCISES25.Market Method, Equity Method, and Total Assets26.Depreciation in Consolidated Financial Statements27.Just-in-Time (JIT) Inventory and Current Ratio28.Market EfficiencyGENERAL EXERCISES and PROBLEMS29.Equity Method30 Consolid

4、ated Financial Statements31. Determination of Goodwill32. Purchased Goodwill33. Amortization and Depreciation34. Allocating Total Purchase Price to Assets35. Preparation of Consolidated Financial Statements36. Intercorporate Investments and Ethics37. Profitability Ratios38. Financial RatioUNDERSTAND

5、ING PUBLISHED FINANCIAL REPORTS39. Meaning of Account Descriptions40. Classification on Balance Sheet41. Effects of Transactions Under the Equity Method42. Noncontrolling Interests43. General Electric and GECS44. Goodwill45. Accounting for Goodwill46. Income Ratios and Asset Turnover47. Financial Ra

6、tios48. Nike 10-K Problem: Using Consolidated Financial StatementsEXCEL APPLICATION EXERCISE49.Calculating Financial RatiosCOLLABORATIVE LEARNING EXERCISE50.Financial RatiosINTERNET EXERCISE51.General Electrics Annual Report()CHAPTER 17:OUTLINE Part One: Intercorporate Investments Including Consolid

7、ationsFirms often invest in the equity securities of other companies. The investor may be simply investing excess cash, or he may be seeking some degree of control over the investee. There are three methods of accounting for intercorporate investments: the equity and market methods and consolidation

8、.An investor that holds less than 20% of another company is assumed to be a passive investorit cannot significantly influence the decisions of the investeeand it uses the market method. Investors with between 20% and 50% interest use the equity method. At this level of ownership, the investor has th

9、e ability to exert significant influence on the investee. Firms with an interest in excess of 50% must use the consolidation approach.I.Market Value and Equity Methods L. O. 1A.Market-Value Methodrecords the initial investment on the balance sheet at fair market value (FMV). Such investments are oft

10、en called marketable securities in the financial statements. Trading Securitiesinvestments that the company buys only with the intent to resell them shortly. Available-for-Sale Securitiesinvestments that the company does not intend to sell in the near future. Changes in market value of trading secur

11、ities are reported as gains (increase in FMV) or losses (decrease in FMV), whereas available-for-sale securities have their unrealized gains or losses shown in a separate valuation allowance account in the stockholders equity section of the balance sheet. (See EXHIBIT 17-1)B.Equity Methodaccounts fo

12、r the investment at the acquisition cost adjusted for the investors share of dividends and earnings or losses of the investee after the date of investment. Investors increase the carrying amount of the investment by their share of investees earnings and reduce the carrying amount by dividends receiv

13、ed from the investee and by their share in investees losses.II.Consolidated Financial Statements L. O. 2Parent Companythe company owning more than 50% of the other businesss stock. Subsidiarythe company whose stock is owned by the other business. Although parent and subsidiary companies typically ar

14、e separate legal entities, in many regards they function as one unit. Consolidated Financial Statementsfinancial statements that combine the financial statements of the parent company with those of various subsidiaries.A. The AcquisitionWhen a parent acquires a subsidiary, the evidence of interest i

15、s recorded as Investment in Subsidiary. When the consolidated statements are prepared, they cannot show both the evidence of interest and the underlying assets and liabilities of the subsidiary. To avoid such double-counting, the reciprocal evidence of ownership present is eliminated in two places:

16、(1) the Investment in Subsidiary on the parent companys books and (2) the Stockholders Equity on the subsidiary companys books. The entries necessary to accomplish this are called eliminating entries. III.Recognizing Income After AcquisitionLong-term investments in equity securities (e.g., the inves

17、tments in a subsidiary) are carried in the investors balance sheet by the equity method. The income generated by a subsidiary is recognized by the parent company as an increase in an account titled Investment in Subsidiary.A.Noncontrolling InterestsWhen a parent holds less than 100% of the stock of

18、a subsidiary, a consolidated balance sheet includes an account on the equities side called Noncontrolling Interests in Subsidiaries, or simply Noncontrolling Intereststhe account that shows the outside stockholders interest, as opposed to the parents interest, in a subsidiary corporation.B.Perspecti

19、ve on Consolidated StatementsSee EXHIBIT 17-2 and EXHIBIT 17-3 for an illustration of how investments in subsidiaries are presented in companies annual reports. The headings of the statements indicate that they are consolidated statements. On balance sheets, the minority interest typically appears j

20、ust above the stockholders equity section. On income statements, the minority interest in the net income is deducted as if it were an expense of the consolidated entity after all the other expenses are listed. Investments in Affiliates (or Investments in Associates)listed as an asset on the balance

21、sheet and reflect the purchase cost and interests in income or loss of investees. The FASB requires all subsidiaries to be consolidated. The major reason for forcing consolidation is to provide a more complete picture of the economic entity. See EXHIBIT 17-4 for a summary of the accounting for diffe

22、rent levels of investment in subsidiaries.C.Accounting for Goodwill L. O. 3In CHAPTER 16, goodwill is defined as the excess of cost over fair value of net identifiable assets of businesses acquired. The purchase price of a subsidiary often exceeds its book value. In fact, it frequently exceeds the s

23、um of the fair market values of the identifiable individual assets less the liabilities. When the amount paid exceeds the book values, the assets will be valued at their fair market values for the consolidated statements. Any amounts paid above the fair market values of the individual assets are car

24、ried as goodwill in the consolidated financial statements.A purchaser may be willing to pay more than the current values of the individual assets received because the acquired company is able to generate abnormally high earnings. The causes of this excess earnings power may be traced to personalitie

25、s, skills, locations, operating methods, and so forth.“Goodwill” is originally generated internally. For example, a happy combination of advertising, research, management talent, and timing may give a particular company a dominant market position for which another company is willing to pay dearly. T

26、his ability to command a premium price for the total business is goodwill. The selling company will never record goodwill. Therefore, the only goodwill recognized as an asset is that identified when one company is purchased by another.Part Two: Analysis of Financial StatementsCareful analysis of fin

27、ancial statements can help decision makers evaluate an organizations past performance and predict its future performance. Financial statements of Microsoft Corporation in EXHIBIT 17-5 and EXHIBIT 17-6 are used to focus on financial statement analysis.Investors analyze financial statements in order t

28、o decide whether to buy, sell, or hold common stock. Managers and the financial community (e.g., bank officers and stockholders) use them as clues to help evaluate the operating and financial outlook for an organization. Budgets or pro forma statements, carefully formulated expressions of predicted

29、results including a schedule of the amounts and timings of cash repayments, are helpful to creditors. They want assurances of being paid in full and on time.IV.Component PercentagesComponent Percentagesanalysis and presentation of financial statements in percentage form to aid comparability, and is

30、frequently used when comparing companies that differ in size (see EXHIBIT 17-7). The resulting statements are called Common-Size Statements.Income statement percentages are usually based on sales = 100%. Comparing the gross margin rate or the net income percentage with those of other firms in the in

31、dustry or with prior years may be useful. Better yet, a comparison of these percentages (along with those for other items on the income statement) with what was budgeted for the current year may help in diagnosing what changes created better or worse results.Balance sheet percentages are usually bas

32、ed on total assets = 100%. One can see the shifts in the composition of assets between current and long term. In addition, one can see shifts in the equities side of the balance sheet between current liabilities, noncurrent liabilities, and stockholders equity.V.Use of Ratios L. O. 4See EXHIBIT 17-8

33、 for how typical ratios are computed from financial statements. Many more ratios could be computed. For example, Standard & Poors Corporation sells a COMPUSTAT service. Via computer, COMPUSTAT can provide financial and statistical information for thousands of companies. The information includes

34、175 financial statement items on an annual basis and 100 items on a quarterly basis, plus limited footnote information. The SEC makes annual financial statements available online in its Edgar database (/edgar.shtml). The ratios shown in EXHIBIT 17-8 are as follows:TYPICAL NAMENUMERA

35、TORDENOMINATOR OF RATIOShort-Term Ratios: Current ratioCurrent assetsCurrent liabilities Avg. collection periodin daysAvg. A/R x 365Sales on accountDebt-to-Equity Ratios: Current debt to equityCurrent liabilitiesStockholders equity Total debt to equityTotal liabilitiesStockholders equityProfitabilit

36、y Ratios: Gross profit rate orGross profit orpercentagegross marginSales Return on salesNet incomeSales Return on stockholdersNet incomeAverageequitystockholders equity Earnings per shareNet income lessAvg. common sharesdividends on P/Soutstanding Price earningsMarket price perEarnings per shareshar

37、e of common stockDividend Ratios:Dividend yieldDividends perMarket price percommon sharecommon shareDividend payoutDividends perEarnings per sharecommon shareA.ComparisonsL. O. 5Evaluation of a financial ratio requires a comparison. There are three main types of comparisons: (1) Time Series Comparis

38、onswith a companys own historical ratios (e.g., for 5 to 10 years); (2) Benchmark Comparisonsgeneral rules of thumb (e.g., there is trouble if a companys current debt is at least 80% of its tangible net worth); and (3) Cross-Sectional Comparisonsratios of other companies or with industry averages fr

39、om Dun and Bradstreet. Comparisons for the Microsoft Company data across years, against benchmarks, and to the industry are presented.B.Discussion of Specific RatiosThe current ratio is a widely used statistic. Other things being equal, the higher the current ratio, the more assurance the creditor h

40、as about being paid in full and on time. The average collection period in days is another important short-term ratio. An increase in this ratio might indicate increasing acceptance of poor credit risks or less energetic collection efforts.Both creditors and shareholders watch the debt-to-equity rati

41、os to judge the degree of risk of insolvency and stability of profits. Companies with heavy debt in relation to ownership capital are in greater danger of suffering net losses or even bankruptcy when business conditions sour, revenues and many expenses decline, but interest expenses and maturity dat

42、es do not change.Investors find profitability ratios especially helpful. The gross profit rate and return on sales are both measures of operating success. Shareholders view the return on their invested capital as more important. The return on equity provides a measure of overall accomplishment.The f

43、inal four ratios in EXHIBIT 17-8 are based on earnings and dividends. The first, earnings per share of common stock (EPS), is the most popular of all ratios. This is the only ratio that is required as part of the body of the financial statements of publicly held companies in the United States. The E

44、PS must be presented on the face of the income statement. The calculation of EPS can be more complicated than is indicated in EXHIBIT 17-8 depending on the capital structure of the firm and the presence of common-stock equivalents. The price earnings, dividend yield, and dividend payout ratios are e

45、specially useful to investors in the common stock of the company.C.Operating Performance RatiosBusinesspeople often look at invested capitals rate of return as an important measure of overall accomplishment:rate of return on investment = income / invested capitalThe measurement of operating performa

46、nce (i.e., how profitably assets are employed) should not be influenced by the managements financial decisions (i.e., how assets are obtained). Operating performance is best measured by pretax operating rate of return on average total assets:pretax operating rate =operating income of return on avera

47、ge total assetsaverage total assetsThe right-hand side of the equation above consists of two important ratios: operating inc. = operating income x salesavg. total assets sales avg. tot. assetsThe right-hand side terms in the equation above are often called the operating income percentage on sales an

48、d total asset turnover (i.e., the two basic factors in profit making). An improvement in either will, by itself, increase the rate of return on total assets.If ratios are used to evaluate operating performance, they should exclude extraordinary items. Such items are not expected to recur, and theref

49、ore they should not be included in measures of normal performance.VI.Efficient Markets and Investor Decisions L. O. 6Much research in accounting and finance has concentrated on whether the stock markets are “efficient”. Efficient Capital Marketmarket prices “fully reflect” all information available

50、to the public. Therefore, searching for “underpriced” securities in such a market would be fruitless, unless an investor has information that is not generally available. If the real-world markets are indeed efficient, a relatively inactive portfolio approach would be an appropriate investment strate

51、gy for most investors. The hallmarks of the approach are risk control, high diversification, and low turnover of securities. The role of accounting information would mainly be in identifying the different degrees of risk among various stocks so that investors can maintain desired levels of risk and

52、diversification.Many ratios are used simultaneously rather than one at a time for such predictions. Research showed that accounting reports are only one source of information. In the aggregate, companies that choose the least-conservative accounting policies do not fool the market. In sum, the marke

53、t as a whole generally sees through any attempts by companies to gain favor through the choice of accounting policies that tend to boost immediate income.Some alternative sources of financial information are the following: company press releases, trade association publications, brokerage house analy

54、ses, and government economic reports. If accounting reports are to be useful, they must have some advantage over alternative sources in disclosing new information. Financial statement information may be more directly related to the item of interest, more reliable, lower in cost, and/or more timely t

55、han alternative sources.CHAPTER 17:Quiz/Demonstration Exercises Learning Objective 1 1. The Colts Corporation has acquired a 10% interest in the shares of Giants Corporation. Colts reported income for 20X1 of $25 million and issued dividends of $10 million during the year. Becaise Colts use the avai

56、lable for sale method of accounting for their investment in Giants, for 20X1 the value of their income will _.a.increase by $25 million, the amount of Giants earningsb.increase by $1 million, the dividends paid by Giants to Coltsc.decrease by $10 million, the amount Giants paid out in dividendsd.inc

57、rease by $1.5 million, Colts share in the earnings of Giants reduced by their share of the dividends paid out 2. The Raiders Corporation owns 40% of the outstanding shares of the Warriors Corporation. During 20X1, Warriors reported income of $25 million and paid dividends of $10 million to shareholders. Raiders use the equity method to account for their i