Accounting and Finance: Discussion Questions

Accounting and Finance: Discussion Questions

What are the corporation’s relative risks and rewards of equity versus debt securities? Debt securities? Financial health. I What is the difference between equity and Use the organization’s financial statements to determine its I Identify examples from the organization’s financial statements to justify the team’s I I responses. Format your paper consistent with PAP guidelines. Complete the following problem sets in Chi. 7 and Appendix E of Financial Accounting: Week Five Discussion Questions ; What must financial managers consider when operating in the global environment?

What types of regulatory compliance might they face? What might they do to mitigate financial risk? Should there be global accounting standards? Why or why not? International Note As more countries adopt international accounting standards, the ability of analysts to compare companies from different countries should improve. However, international standards are open to widely varying interpretations. In addition, some countries adopt international standards “with modifications. ” As a consequence, most cross-country comparisons are still not as transparent as within-country comparisons.

We use three basic tools in financial statement analysis to highlight the significance of financial statement ATA: Horizontal analysis, Vertical analysis, and Ratio analysis In previous chapters, we relied primarily on ratio analysis, supplemented with some basic horizontal and vertical analysis. In the remainder Of this section, we introduce more formal forms of horizontal and vertical analysis. In the next section, we review ratio analysis in some detail. Horizontal Analysis Horizontal analysis, also known as trend analysis, is a technique for evaluating a series of financial statement data over a period of time.

Its purpose is to determine the increase or decrease that has taken place, expressed as either an amount or a percentage. Illustration 13-8 Horizontal analysis-”computation of changes since base period [pick Helpful Hint When using horizontal analysis, be sure to examine both dollar amount changes and percentage changes. It is not necessarily bad if a company’s earnings are growing at a declining rate. The amount of increase may be the same as or more than the base year, but the percentage change may be less because the base is greater each year.

The comparative balance sheets show that a number of changes occurred in Chicago Cereal’s financial position from 2008 to 2009. In the assets section, current assets increased $290,000, or 1 1. % ($290 $2,427), and property assets (net) increased $1 74,000, or 6. 2%. Other assets increased $21 9,000, or 4. 0%. In the liabilities section, current liabilities increased $24,000, or 0. 6%, while long-term liabilities increased $202,000, or 4. 4%. In the stockholders’ equity section, we find that retained earnings increased $806,000, or 312%.

Illustration 13-12 presents two-year comparative income statements of Chicago Cereal Company for 2009 and 2008, showing dollar and percentage changes. ; What is meant by consolidated financial statements? When and why are consolidated financial statements necessary? Study Objective 4 Describe the purpose and usefulness of consolidated financial statements. A company that owns more than 50% of the common stock of another entity is known as the parent company. The entity whose stock is owned by the parent company is called the subsidiary (affiliated) company.

Because of its stock ownership, the parent company has a controlling interest in the subsidiary company. When a company owns more than 50% of the common stock of another company, it usually prepares consolidated financial statements. Consolidated financial Statements present the assets and liabilities controlled by the parent company. They also present the total revenues and expenses of the subsidiary companies. Companies prepare consolidated statements in addition to the financial statements for the individual parent and subsidiary companies.

As noted earlier, prior to acquiring all of Turner Broadcasting, Time Warner accounted for its investment in Turner using the equity method. Time Warder’s net investment in Turner was reported in a single line item-” other investments. After the merger, Time Warner instead consolidated Turner’s results with its own. Under this approach, Time Warner included the individual assets and abilities of Turner with its own assets. That is, Turners plant and equipment were added to Time Warder’s plant and equipment; its receivables were added to Time Warder’s receivables, and so on.

A similar sort of consolidation went on when AOL merged with Time Warner. Helpful Hint Fifth parent (A) has three wholly owned subsidiaries (B, C, and D), there are four separate legal entities but only one economic entity from the viewpoint of the shareholders of the parent company. Consolidated statements are useful to the stockholders, board of directors, and management of the parent company. Consolidated statements indicate to creditors, prospective investors, and regulatory agencies the magnitude and scope of operations of the companies under common control.

For example, regulators and the courts undoubtedly used the consolidated statements of AT to determine whether a breakup of AT was in the public interest. Listed here are three companies that prepare consolidated statements and some of the company IIS they have owned. Note that one, Disney, is Time Warder’s arch rival. (See SO 4) Cash dividend ; Describe what is meant by a cash dividend. Why would an organization sue dividends? When might it decide not to do so? Recording Dividends During the time the company holds the stock, it makes entries for any cash dividends received.

Holdings of Less Than 20% cost method, companies record the investment at cost and recognize revenue only when cash dividends are received. In the accounting for stock investments of less than 20%, companies use the cost method. Under the cost method, companies record the investment at cost and recognize revenue only when cash dividends are received. Because it exercised significant control over major decisions made by Turner, Time Warner used an approach called the equity method. Under the equity method, the investor records its share of the net income of the invested in the year when it is earned.

An alternative might be to delay recognizing the investors share of net income until a cash dividend is declared. But that approach would ignore the fact that the investor and invested are, in some sense, one company, making the investor better off by the invests earned income. PREVIOUS WEEKS SQ Week One Discussion Questions ; Explain the effect of debits and credits to financial statements. Provide examples to illustrate your points. ; What are debits and credits? How do these affect the accounting equation? Are debits always increases? Are credits always decreases?

Explain your answers. ; Share an example of an external user of financial statements and describe how financial statements are important to this user. Week Two Discussion Questions ; What are the different bases of accounting? When is it appropriate to use the cash vs… Accrual? Which one is better? Why? ; What are the financial statements? What information does each one offer? How are these used to communicate financial health? Which financial statement is most important? Why? ; What is the difference between a prepaid expense and an accrued expense?

Provide an example. Week Three Discussion Questions ; What is the purpose of financial statement analysis? What are some tools you might use to analyze financial performance? What might you use to benchmark performance? Why? ; What types of financial ratios are used to analyze financial performance? Are some more important than others? Why? Which ratios are important to creditors, investors, and managers? Why? ; Describe the difference between liquidity and long-term solvency. How do these relate? Provide examples.

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