Introduction to Management Accounting (16th Edition) 答案

Chapter 17 Understanding and Analyzing Consolidated Financial Statements LEARNING 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 market–value method. 2.    Explain the basic ideas and methods used to prepare consolidated financial statements. 3.    Describe how goodwill arises and how to account for it. 4.    Use financial statements analysis to evaluate an organization’s performance 5.    Explain and use a variety of popular financial ratios. 6.    Identify the major implications that efficient stock markets have for accounting. CHAPTER 17:    ASSIGNMENTS CRITICAL THINKING EXERCISES 25.    Market Method, Equity Method, and Total Assets 26.    Depreciation in Consolidated Financial Statements 27.    Just-in-Time (JIT) Inventory and Current Ratio 28.    Market Efficiency GENERAL EXERCISES and PROBLEMS 29.    Equity Method 30 Consolidated Financial Statements 31. Determination of Goodwill 32. Purchased Goodwill 33. Amortization and Depreciation 34. Allocating Total Purchase Price to Assets 35. Preparation of Consolidated Financial Statements 36. Intercorporate Investments and Ethics 37. Profitability Ratios 38. Financial Ratio UNDERSTANDING PUBLISHED FINANCIAL REPORTS 39. Meaning of Account Descriptions 40. Classification on Balance Sheet 41. Effects of Transactions Under the Equity Method 42. Noncontrolling Interests 43. General Electric and GECS 44. Goodwill 45. Accounting for Goodwill 46. Income Ratios and Asset Turnover 47. Financial Ratios 48. Nike 10-K Problem: Using Consolidated Financial Statements EXCEL APPLICATION EXERCISE 49.    Calculating Financial Ratios COLLABORATIVE LEARNING EXERCISE 50.    Financial Ratios INTERNET EXERCISE 51.    General Electric’s Annual Report () CHAPTER 17:    OUTLINE Part One: Intercorporate Investments Including Consolidations Firms 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. An investor that holds less than 20% of another company is assumed to be a passive investor—it cannot significantly influence the decisions of the investee—and it uses the market method. Investors with between 20% and 50% interest use the equity method. At this level of ownership, the investor has the 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. 1} A.    Market-Value Method—records the initial investment on the balance sheet at fair market value (FMV). Such investments are often called marketable securities in the financial statements. Trading Securities—investments that the company buys only with the intent to resell them shortly. Available-for-Sale Securities—investments that the company does not intend to sell in the near future. Changes in market value of trading securities 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 Method—accounts for the investment at the acquisition cost adjusted for the investor’s 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 investee’s earnings and reduce the carrying amount by dividends received from the investee and by their share in investee’s losses. II.    Consolidated Financial Statements    {L. O. 2} Parent Company—the company owning more than 50% of the other business’s stock. Subsidiary—the company whose stock is owned by the other business. Although parent and subsidiary companies typically are separate legal entities, in many regards they function as one unit. Consolidated Financial Statements—financial statements that combine the financial statements of the parent company with those of various subsidiaries. A. The Acquisition When a parent acquires a subsidiary, the evidence of interest is 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: (1) the Investment in Subsidiary on the parent company’s books and (2) the Stockholders’ Equity on the subsidiary company’s books. The entries necessary to accomplish this are called eliminating entries. III.    Recognizing Income After Acquisition Long-term investments in equity securities (e.g., the investments in a subsidiary) are carried in the investor’s 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 Interests When a parent holds less than 100% of the stock of a subsidiary, a consolidated balance sheet includes an account on the equities side called Noncontrolling Interests in Subsidiaries, or simply Noncontrolling Interests—the account that shows the outside stockholders’ interest, as opposed to the parent’s interest, in a subsidiary corporation. B.    Perspective on Consolidated Statements See 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 just 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 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 different levels of investment in subsidiaries. C.    Accounting for Goodwill    {L. O. 3} In 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 sum 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 carried 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 personalities, 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. This 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 Statements Careful analysis of financial statements can help decision makers evaluate an organization’s 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 to 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 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 Percentages Component Percentages—analysis and presentation of financial statements in percentage form to aid comparability, and is 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 industry 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 based 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. 4} See EXHIBIT 17-8 for how typical ratios are computed from financial statements. Many more ratios could be computed. For example, Standard & Poor’s Corporation sells a COMPUSTAT service. Via computer, COMPUSTAT can provide financial and statistical information for thousands of companies. The information includes 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 (). The ratios shown in EXHIBIT 17-8 are as follows: TYPICAL NAME    NUMERATOR        DENOMINATOR OF RATIO Short-Term Ratios: Current ratio            Current assets            Current liabilities Avg. collection period in days    Avg. A/R x 365        Sales on account Debt-to-Equity Ratios: Current debt to equity    Current liabilities        Stockholders’ equity Total debt to equity        Total liabilities        Stockholders’ equity Profitability Ratios: Gross profit rate or        Gross profit or percentage        gross margin            Sales Return on sales        Net income            Sales Return on stockholders’    Net income            Average equity                            stockholders’ equity Earnings per share        Net income less        Avg. common shares dividends on P/S        outstanding Price earnings        Market price per        Earnings per share share of common stock Dividend Ratios: Dividend yield        Dividends per            Market price per common share        common share Dividend payout        Dividends per            Earnings per share common share A.    Comparisons                {L. O. 5} Evaluation of a financial ratio requires a comparison. There are three main types of comparisons: (1) Time Series Comparisons—with a company’s own historical ratios (e.g., for 5 to 10 years); (2) Benchmark Comparisons—general rules of thumb (e.g., there is trouble if a company’s current debt is at least 80% of its tangible net worth); and (3) Cross-Sectional Comparisons—ratios of other companies or with industry averages from Dun and Bradstreet. Comparisons for the Microsoft Company data across years, against benchmarks, and to the industry are presented. B.    Discussion of Specific Ratios The current ratio is a widely used statistic. Other things being equal, the higher the current ratio, the more assurance the creditor has 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 ratios 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 dates 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 final 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 EPS 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 especially useful to investors in the common stock of the company. C.    Operating Performance Ratios Businesspeople often look at invested capital’s rate of return as an important measure of overall accomplishment: rate of return on investment = income / invested capital The measurement of operating performance (i.e., how profitably assets are employed) should not be influenced by the management’s 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 average total assets    average total assets The right-hand side of the equation above consists of two important ratios: operating inc.  = operating income    x                  sales avg. total assets            sales                    avg. tot. assets The right-hand side terms in the equation above are often called the operating income percentage on sales and 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 therefore they should not be included in measures of normal performance. VI.    Efficient Markets and Investor Decisions    {L. O. 6} Much research in accounting and finance has concentrated on whether the stock markets are “efficient”. Efficient Capital Market—market prices “fully reflect” all information available 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 strategy 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 diversification.