Chap.3 - Chapter 3 Balance Sheet QUESTIONS 3-1....

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Unformatted text preview: Chapter 3 Balance Sheet QUESTIONS 3-1. AssetsResources of the firm LiabilitiesDebts or obligations of the firm; creditors interest Owners EquityOwners interest in the firm 3-2. 3-3. 3-4. They are listed in order of liquidity, which is the ease with which they can be converted to cash. 3-5. Marketable securities are held as temporary investments or idle cash. They are short-term, low risk, highly liquid, low yield. Examples are treasury bills and commercial paper. Investments are long-term, held for control or future use in operations. They are usually less liquid and expected to earn a higher return. 3-6. Accounts receivable represents the money that the firm expects to collect; accounts payable represents the debts for goods purchased by a firm. 3-7. A retailing firm will have only finished goods and supplies. A manufacturing firm will have raw materials, work in process, finished goods, and supplies. 3-8. Depreciation represents the allocation of an assets cost over the period it is utilized. Tools, machinery, and buildings are depreciated because they wear out. Land is not depreciated, since its value typically does not decline. If the land has minerals or natural resources, it may be subject to depletion. 3-9. Straight-line depreciation is better for reporting, since it results in higher profits than does accelerated depreciation. Double-declining-balance is preferable for tax purposes, since it allows the highest depreciation and, thereby, lower a. L e. A i. A m. A q. A b. L f. A j. E n. L r. A c. A g. L k. E o. L s. A d. A h. A l. E p. A t. A a. TA c. IA e. IA g. TA i. TA k. IV b. CA d. CA f. CA h. CA j. CA l. TA 45 taxes in the early years of the life of the asset. Using double-declining-balance for taxes increases the firms cash flow in the short run. 46 3-10. The rent is treated as a liability because it is unearned. The rental agency owes the tenant the use of the property until the end of the term of the agreement. The rent should be recognized as income over the period covered by the rent. 3-11. a. A bond will sell at a discount if its stated rate of interest is less than the market rate. It sells to yield the market rate. It might also sell low if there were a great deal of risk involved. b. The discount is shown as a reduction of the liability. Bonds payable $1,000 Less: bond discount 170 $ 830 The bond discount is amortized, with the amortization shown as interest expense on the income statement. 3-12. Include minority interest as a long-term liability for primary analysis. 3-13. Historical cost causes difficulties in analysis because cost does not measure the current worth or value of the asset. 3-14. At the option of the bondholder (creditor), the bond is exchanged for a specified number of common shares (and the bondholder becomes a common stockholder). Often convertible bonds are issued when the common stock price is low, in the opinion of management, and the firm eventually wants to increase its common equity. By issuing a convertible bond, the firm may get increase its common equity....
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This note was uploaded on 12/20/2009 for the course COBA FIN302 taught by Professor Nejlaellili during the Spring '09 term at BA Mannheim.

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Chap.3 - Chapter 3 Balance Sheet QUESTIONS 3-1....

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