Deck 17: Financial Information and Accounting Concepts

Question 1

Why would a bank lending officer be interested in the cash flow statement of a company that is applying for a loan?

Answer 1

Cash flow statements provide an indication of a company's standing. It is used to gauge the company's ability to pay its short-term obligations when they become due.
It is very important to determine if a company is likely to go bankrupt. This is used to calculate the credit risk associated with the company. It would help the bank officer to minimize the risk of a future uncertainty.

Question 2

Ethical Considerations. In the process of closing the company books, you encounter a problematic transaction. One of the company's customers was invoiced twice for the same project materials, resulting in a $1,000 overcharge. You immediately notify the controller, whose response is, "Let it go, it happens often. It'll probably balance out on some future transaction." What should you do now?

Answer 2

It should be corrected. The risks involved in allowing such an error to stand can have negative consequences which include:
• The possible loss of the customer.
• Potential legal difficulties.
• Deleterious effects on other accounting activities.
• A bad reputation of the company.
• The potential investors would be demotivated.

Question 3

The senior partner of an accounting firm is looking for ways to increase the firm's business. What other services besides traditional accounting can the firm offer to its clients? What new challenges might this additional work create?

Answer 3

The additional services that the firm provides should be made in accordance with the expertise of the employees. These additional services should include:
• Design of accounting systems.
• Updating accounting related computer information systems and management reporting systems.
• Providing business valuations.
• Consulting on profit improvement.
• Developing employee benefit programs and inventory control systems,
• Performing financial analysis reports for any number of situations.

Question 4

Visit the websites of Google and Microsoft and retrieve their annual reports. Using these financial reports, compute the working capital, current ratio, and quick ratio for each company. Does one company appear to be more liquid than the other? If so, why?

Question 5

If you were asked to lend money to your cousin's clothing store to help her through a slow sales period, would you be more interested in looking at the current ratio or the quick ratio as a measure of liquidity? Why?

Question 6

Given the eventual need for rigorous financial management, should every company have extensive cost controls in place from the first moment of operation? Explain your answer.

Question 7

Concept Integration. Your appliance manufacturing company recently implemented a just-in-time inventory system (see Chapter 9) for all parts used in the manufacturing process. How might you expect this move to affect the company's inventory turnover rate, current ratio, and quick ratio?

Question 8

Google recently had a debt-to-equity ratio of 0.04. Microsoft, one of its key competitors, had a debt-to-equity ratio of 0.15. From a bank's point of view, which of the two companies is a more attractive loan candidate, based on this ratio? Why?

Question 9

Consider the statements made by the CEO regarding the past year: Did the company do well, or are changes in operations necessary to its future well-being? What are the projections for future growth in sales and profits?

Question 10

Over the course of a recent six-month period, Google's current ratio increased from 8.77 to 11.91. Does this make Google more or less of a credit risk in the eyes of potential lenders? Why?

Question 11

Examine the financial summaries for information about the fiscal condition of the company: Did the company show a profit?

Question 12

What is GAAP?

Question 13

Did the company report a profit or a loss for this accounting period? What other performance indicators were reported? Is the company's performance improving or declining?

Question 14

What is an audit, and why are audits performed?

Question 15

Did the company's performance match industry analysts' expectations, or was it a surprise? How did analysts or other experts respond to the firm's actual quarterly or year-end results?

Question 16

What is the matching principle?

Question 17

What reasons were given for the company's improvement or decline in performance?

Question 18

What are the three main profitability ratios, and how is each calculated?

Question 19

Should public companies be allowed to publish any non-GAAP performance metrics? Why or why not?

Question 20

What is the value of an income statement?

Question 21

How could you apply the concept of a balance sheet to your personal financial planning?

Question 22

Why were efforts made to converge the GAAP and IFRS standards?

Question 23

Why would a company bother with double-entry bookkeeping?

Question 24

Why are the costs of fixed assets depreciated?