Exam 17: Understanding and Analyzing Consolidated Financial Statements

_____ are investments that are not intended for resale in the near future.

Below is a comparative income statement for Melissa Company: Melissa Company Income Statement For the Years Ended December 31,20X6 and 20X5 20X6 20X5 Sales \ 1,744 \ 1,562 Less: Cost of goods sold 992 806 Gross profit \ 752 \ 756 Less operating expenses: Wage expense \ 172 \ 160 Depreciation expense 28 26 Rent expense 36 36 Miscellaneous expense 40 70 Total operating expenses \ 276 \ 292 Operating income \ 476 \ 464 Less other expenses: Interest 20 60 Income before tax \ 456 \ 404 Less: Income tax expense 182 162 Net income \ 274 \ 242 If a common-size income statement were prepared, _____ would be attributable to the 20X5 wage expense of Melissa Company.

The following are the income statements and balance sheets for Score Company: 20X2 Sales only credit sales) \1 ,606.0 Less cost of goods sold 1,062.0 Gross profit \5 44.0 Less operating expenses 322.0 Operating income \2 22.0 Less other expense: Interest 9.6 Income before tax \2 12.4 Less income tax expense 85.0 Net income \1 27.4 20X2 20X1 20X2 20X1 Current assets: Current liabilities: Cash \ 36 \ 38 Accts payable \ 98 \ 64 Accts receivable 180 144 Wages payable 18 16 Inventory 120 100 Taxes payable 28 4 Prepaid rent 20 24 Current portion Total current assets \3 56 \3 06 of long-term debt 30 6 Long-term assets: Total current Fixed assets \ 320 \ 316 liabilities \ 174 \ 90 Accum. deprec. ) ) Long-term liabilities Total long-term assets \1 14 \1 36 Total liabilities \2 40 \1 82 Owners' equity: Common stock, \ 5 par \8 0 \8 0 Retained income 150 180 Total owners' equity \2 30 \2 60 Total assets \4 70 \4 42 Total liab. and own. equity \4 70 \4 42 $\text {December 31 market price per share:}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\$120\quad\quad\$106$ The debt?to?equity ratio for Score Company in 20X2 is _____.

On January 1, 20X6, Jane Company acquired 80% of the outstanding shares of Pauley Company for $152 in cash.The stockholders' equity accounts of Jane Company and Pauley Company were $420 and $190, respectively.The balance in stockholders' equity on the consolidated balance sheet immediately after the acquisition of Pauley Company's stock is _____.

When a parent company owns less than 50% of a subsidiary company, the companies must prepare consolidated financial statements.

Rock Company acquired 40% of the voting stock of Hudson Company for $40 million.In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million.At the end of the year the market value of Rock Company's investment in Hudson Company is $44 million.What accounts would be affected on Rock Company's books at the time they acquire Hudson Company's stock and by how much?

Presented below are the balance sheets of Monty Company and Hall Company at January 1, 20X6: Hall Company Monty Company Balance Sheet Balance Sheet January 1,206 January 1,206 Cash \ 100 Cash \ 400 Net fixed assets 400 Net fixed assets 380 Total assets \ 500 Total assets \ 780 Accounts payable \ 20 Accounts payable \1 20 Long-term bonds Long-term bonds payable 220 payable 280 Stockholders' equity Stockholders' equity Total liabilities and - Total liabilities and stockholders' equity \ 500 stockholders' equity \ 780 On January 1, 20X6, Monty Company acquired 100% of the outstanding common stock of Hall Company for $260 in cash.The net income for 20X6 was $30 and $40 for Hall Company and Monty Company, respectively.None of the income resulted from intercompany sales.The net income on the consolidated income statement is_____.

The Investments in Affiliates account appears on the consolidated balance sheet of the subsidiary company.

The investor's method of accounting for long?term equity securities depends on the ability of the investor to influence the operations of the investee.

When prices of resources do not change, financial capital maintenance and physical capital maintenance give identical measures of income.

_____ are investments that the company buys only with the intent to resell them shortly.

Below is the balance sheet for Donald Company: Donald Company Balance Sheet December 31 , 20X6 20X5 Current assets: Cash \ 380 \ 242 Accounts receivable 430 194 Inventory 238 388 Prepaid insurance 32 76 Total current assets \1 ,080 \9 00 Long-term assets: Fixed assets \ 406 \ 452 Less: Accumulated depreciation Total long-term assets \ 224 Total assets \ 1,214 \ 1,124 Current liabilities: Accounts payable \ 176 \ 152 Wages payable total current liabilities \ 214 \ 184 Long-term liabilities: Notes payable Total liabilities Owners' equity: Common stock \ 190 \ 160 Retained income 390 360 Total owners' equity \5 20 Total liabilities and owners' equity What issue would be of most concern or source of optimism to financial analysts of Donald Company?

Below is a comparative income statement for Joshua Company: Joshua Company Income Statement For the Years Ended December 31,20X6 and 20X5 20X6 20X5 Sales \ 1,744 \ 1,562 Less: Cost of goods sold 992 806 Gross profit \ 752 \ 756 Less operating expenses: Wage expense \ 172 \ 160 Depreciation expense 28 26 Rent expense 36 36 Miscellaneous expense 40 70 Total operating expenses \ 276 \ 292 Operating income \ 476 \ 464 Less other expenses: Interest 20 60 Income before tax \ 456 \ 404 Less: Income tax expense 182 162 Net income \ 274 \ 242 Identify the issue that would be of most concern or source of optimism to financial analysts of Joshua Company.

Comparing a company's ratios with the ratios of other companies in the same industry is called an) _____.

Under the equity method, the investor recognizes as income _____.

Jeff Company purchased common stock of Garcia Company as a long-term investment.During the current year, Garcia Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Jeff Company owns 10% of the outstanding shares of Garcia Company.Garcia Company's dividend will affect Jeff Company by _____.

The following are the income statements and balance sheets for Merkey Company: 20X2 Sales only credit sales) \1 ,606.0 Less cost of goods sold 1,062.0 Gross profit \5 44.0 Less operating expenses 322.0 Operating income \2 22.0 Less other expense: Interest 9.6 Income before tax \2 12.4 Less income tax expense 85.0 Net income \1 27.4 20X2 20X1 20X2 20X1 Current assets: Current liabilities: Cash \ 36 \ 38 Accts payable \ 98 \ 64 Accts receivable 180 144 Wages payable 18 16 Inventory 120 100 Taxes payable 28 4 Prepaid rent 20 24 Current portion Total current assets \3 56 \3 06 of long-term debt 30 6 Long-term assets: Total current Fixed assets \ 320 \ 316 liabilities \ 174 \ 90 Accum. deprec. ) ) Long-term liabilities Total long-term assets \1 14 \1 36 Total liabilities \2 40 \1 82 Owners' equity: Common stock, \ 5 par \8 0 \8 0 Retained income 150 180 Total owners' equity \2 30 \2 60 Total assets \4 70 \4 42 Total liab. and own. equity \4 70 \4 42 $\text {December 31 market price per share:}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\$120\quad\quad\$106$ The dividend?yield ratio for Merkey Company in 20X2 is _____.

Orlando Company acquired all of the shares of Tampa Company for $100.The fair values of Tampa Company's assets and liabilities at the time of acquisition were $200 and $120, respectively.On the consolidated balance sheet of Orlando Company, goodwill is _____.

Liquidity focuses on whether there are sufficient current assets to satisfy current liabilities as they become due.

Which of the following statements regarding goodwill is false?