ACCT/FIN 2220 ~ Financial Statement Analysis

Understanding Financial Statements 11th edition

Chapter 2 ~ Analyzing the Balance Sheet
Step-by-Step Guide & Explanations! 8% of your overall grade!

HOW MUCH TIME SHOULD I SPEND AND HOW HARD SHOULD I WORK?
Calculate this assignment’s percent of the total course points. Then spend that amount of time,
energy, and effort on this assignment. However, remember that completing the chapter homework
is the “dress rehearsal” for the chapter case, which folds into the Final Project!

Problem 2.11 ~ Deferred Taxes

Using the given data calculate the net income for reporting purposes and for tax purposes. Then
calculate the deferred tax liability. (Of course, there is an excellent example of the chart in your
textbook.) You should prepare a professional report/schedule. Word does have a table function
with some limited calculation functions like Excel; however using Excel is preferred for this
question because it will be required for future coursework. If you use Excel, then your Excel
spreadsheet needs to be copied into your Word document to continue the rest of your answer.
(Refer to my video on Deferred Taxes found on the Ch. 2 Page in Canvas.)

Problem 2.12 ~ Treasury Stock

This questions relates to the treasury stock discussion found in Ch. 2; however, it also refers to the
Earnings per Share (EPS) ratio, which is found in Ch. 5. The EPS ratio has the number of shares
outstanding as the denominator in the formula. Corporations have three different numbers related
to shares of stock: authorized, issued, and outstanding. (These terms were discussed in your
ACCT 1110 or 2010 course.) How do you calculate the number of shares outstanding (out there)?
Does the number of treasury shares increase or decrease the number of shares outstanding? If the
number of shares outstanding in the denominator goes down, what will that do the EPS? (Is 1/3
bigger or smaller than 1/4?)

Problem 2.13 ~ Accounts Receivable and its Allowance Account

Using the given data, calculate (as shown in the textbook):
Accounts Receivable (total) for both 2013 and 2012

Growth Rate (% Change) for the following items:

Net Sales
Accounts Receivable (total)
Allowance for Doubtful Accounts (ADA)
Accounts Receivable, net
Calculate the ADA as a percentage of total Accounts Receivable (ADA/total Accounts Receivable).
Calculate the ADA as a percentage of Net Sales (ADA/Net Sales).

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From these calculations, does it appear that the company is using the Percentage of Sales or the
Percentage of Accounts Receivable to estimate their allowance account?

Using the growth rate (% change) of the Net Sales, the total Accounts Receivable, and the ADA,
does the amount of the ADA account appear reasonable (i.e. management’s estimate has a logical
basis) because there is a consistent pattern with the ADA account and either the New Sales or total
Accounts Receivable account? If the ADA account balance doesn’t appear reasonable/consistent
with other data, then has management given any additional explanations in the notes to the
financial statements or the MD&A?

MUST ALSO ANALYZE THE ALLOWANCE ACCOUNT & ITS CHANGES:

The previous analysis focused on just the ending balance in the ADA account. However, the
Valuation and Qualifying Accounts schedule (a required 10-K item) details the increases
(management’s estimate of Bad Debt Expense) and the decreases (the actual account write-offs of
Accounts Receivable).

Based on the data shown in the Valuation and Qualifying Accounts, do the increases and
decreases appear reasonable based on the solutions calculated above, or do the numbers indicate
that management might be manipulating numbers using their ability to estimate uncollectible
accounts?

Does the $0 of “Charged to Costs and Expenses” in 2012 in the Valuation and Qualifying
Accounts schedule now appear reasonable and logical or does it still remain an unusual result?

(Refer to my video on Accounts Receivable found on the Ch. 2 Page in Canvas.)

Problem 2.14 ~ Inventory Methods

(a) You must prepare in Excel a business professional report calculating both Cost of Goods Sold
and Ending Inventory Balance using the following three inventory methods: average cost, FIFO,
and LIFO (these should be three separate reports all formatted the same so that they can be easily
compared visually).

Then you must prepare an abbreviated Income Statement showing Sales, Cost of Goods Sold, and
Gross Profit for all three methods (again three separate reports).

(b) Based on the reports prepared above, which method yields the highest ending inventory?

(c) Based on the reports prepared above, which method yields the highest cost of goods sold?

(d) Explain why ending inventory and cost of goods sold differ under the three methods of
inventory valuation (i.e. When using the ____ method, the most expensive inventory items are

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included in the _____ account and the least expensive inventory items in the ______ account,
which makes the Cost of Goods Sold account on the Income Statement to be larger/smaller than it
would have been under the _____ method).

Use your own words (copying out of the textbook is plagiarism)!

Your audience is a business professional, but not an accountant, so be sure to appropriately define
any accounting terms!

(Refer to my video on Inventory found on the Ch. 2 Page in Canvas.)

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