SOLUTIONS TO REVIEW EXERCISESSOLUTIONS TO EXERCISES STRAUB DIVERSIFIED COMPANY6-1 CHAPTER 6 ADDITIONAL ASPECTS OF FINANCIAL REPORTING AND FINANCIAL ANALYSIS CONTENT ANALYSIS OF EXERCISES AND PROBLEMS Number Content Time Range (minutes) E6-1 Segment Reporting. (Easy) Schedule showing segment revenues, profit, and assets. 10-15 E6-2 Segment Reporting. (Easy) Schedule showing segment revenues, profit, and assets. 10-15 E6-3 Segment Reporting. (Moderate) Schedule showing segment revenues and profit. Notes to schedule. 15-20 E6-4 Determination of Reportable Segments. (Moderate) Schedule showing segment revenues, profit, and assets. IFRS disclosures. 15-25 E6-5 Interim Reporting. (Moderate) First quarter income statement, balance sheet. Perpetual inventory system. Trial balance, additional information given. 15-20 E6-6 Interim Reporting. (Moderate) First quarter income statement, balance sheet. Periodic inventory system. Gross profit method for inventory. Trial balance, additional information given. 20-25 E6-7 Interim Reporting. (Moderate) Year-to-date, 6-month income statement. Second-quarter income statement. 15-20 E6-8 Interim Taxes. (Moderate) Schedule to compute the income tax expense to be listed on each quarterly income statement. 10-15 E6-9 (Appendix). Horizontal Analyses. (Easy) Of comparative income statements, balance sheets. Year-to-year and base-year-to-date approaches. 15-20 E6-10 (Appendix). Vertical Analyses. (Easy) Of comparative income statements, balance sheets. 15-20 E6-11 (Appendix). Ratios. (Moderate) Price/earnings, profit margin, return on total assets, return on stockholders' equity, current, inventory turnover, payables turnover, debt. 15-206-2 Number Content Time Range (minutes) E6-12 (Appendix). Ratios. (Moderate) Earnings per share, dividend yield, return on stockholders' equity, current, acid-test, receivables turnover, times interest earned, book value per common share. 15-20 E6-13 (Appendix). (AICPA adapted). Ratio Analysis. (Moderate) Current, inventory turnover, and debt ratios. Determine effects on ratios of various transactions and events. 10-20 P6-1 Income Statement and Segment Reporting. (Moderate) Single-step income statement. Allocation of revenues, expenses, assets to segments. Schedule. Related notes. Compute profit margin (Appendix). 50-80 P6-2 Income Statement and Segment Reporting. (Moderate) Multiple-step income statement. Allocation of revenues, expenses, assets to segments. Schedule. Related notes. Compute return on identifiable assets (Appendix). IFRS disclosures. 50-80 P6-3 Interim Reporting. (Moderate) Income statements for first six months, second quarter. Balance sheet, retained earnings statement. Perpetual inventory system. Worksheet. 60-80 P6-4 Interim Reporting. (Moderate) Income statements for first six months, second quarter. Balance sheet, retained earnings statement. Perpetual inventory system. Worksheet. 60-80 P6-5 (AICPA adapted). Interim Reporting. (Challenging) Identification of standards of disclosure, weaknesses in form and content of the given report. Indication of preferable treatment. 40-45 P6-6 (AICPA adapted). Financial Statement Presentation and Ratios. (Challenging) Identification of appropriate and inappropriate disclosures. Justification. Description of ratio significance. Ratio computations. 20-40 P6-7 (AICPA adapted). Multiple-Step Income Statement. (Challenging) Preparation of income statement, including extraordinary item and deferred taxes. Reconciliation of net income and taxable income. 45-60 P6-8 (Appendix A). The Coca-Cola Company Disclosures. (Moderate) Numerous questions relating to the financial report in Appendix A at the end of the book. 25-45 P6-9 (Appendix). Horizontal Analysis and Ratios. (Moderate) Year-to-year approach. Current, acid-test, inventory turnover, receivables turnover, earnings per share, dividend yield, return on total assets, return on stockholders' equity, debt. 60-756-3 Number Content Time Range (minutes) P6-10 (Appendix). Vertical Analysis and Ratios. (Moderate) Current, acid-test, inventory turnover, receivables turnover, payables turnover, return on total assets, return on stockholders' equity, debt, times interest earned. 60-75 P6-11 (Appendix). Horizontal and Vertical Analyses. (Moderate) Base-year-to-date approach. Two year analyses. 45-60 P6-12 (Appendix). Ratio Analysis. (Moderate) Dividend yield, price/earnings, profit margin, return on total assets, return on stockholders' equity, current, acid-test, inventory turnover, receivables turnover, average operating cycle, debt, times interest earned, book value per common share. 30-45 P6-13 (Appendix). (AICPA adapted). Ratio Analysis. (Moderate) Current, acid-test, number of days sales in average receivables, inventory turnover, book value per share, earnings per share, price/earnings, dividend yield. 30-40 ANSWERS TO QUESTIONS Q6-1 The efficient capital markets hypothesis research tends to show that (1) the prices of securities traded in the capital markets fully reflect all publicly available information, and (2) these prices are adjusted almost immediately based on new information and in an unbiased manner. An efficient capital market means that an individual investor cannot use published information to earn an “abnormal” return on a security investment with a given amount of risk. That is, all securities with a similar amount of risk will yield approximately the same rate of return. Q6-2 In an audit report, the two opinions that an auditor expresses are: 1. That the company’s financial statements present fairly the financial position of the company and the results of its operations and cash flows in conformity with accounting principles generally accepted in the United Stated of America, and 2. That the company maintained effective internal control over its financial reporting. Q6-3 An audit committee is a group that has oversight over the financial reporting process of a company. Generally, the duties of an audit committee are to oversee the internal control structure of a company, help in the selection of accounting policies, help select the auditor, approve all auditing services, review the audit plan, review suggestions by auditors about weaknesses in internal control, and review the financial statements and audit report.6-4