Chapter 2 Solution-Classifying Accounting Items Flashcard

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E2. 5. Classifying Accounting Items a. Current asset b. Net revenue in the income statement: a deduction from revenue c. Net accounts receivable, a current asset: a deduction from gross receivables d. An expense in the income statement. But R&D is usually not a loss to shareholders; it is an investment in an asset. e. An expense in the income statement, part of operating income (and rarely an extraordinary item). If the restructuring charge is estimated, a liability is also recorded, usually lumped with “other liabilities. ” f. Part of property, plan and equipment.

As the lease is for the entire life of the asset, it is a “capital lease. ” Corresponding to the lease asset, a lease liability is recorded to indicate the obligations under the lease. g. In the income statement h. Part of dirty-surplus income in other comprehensive income. The accounting would be cleaner if these items were in the income statement. i. A liability j. Under GAAP, in the statement of owners equity. However from the shareholders’ point of view, preferred stock is a liability k. Under GAAP, in the statement of owners’ equity.

However from the shareholders’ point of view, preferred dividends are an expense. Preferred dividends should be deducted in calculating “net income available to common” and for earnings in earnings per share. l. As an expense in the income statement. E2. 10. Testing Accounting Relations: Genetech Inc. (a) Revenue = Net income + Net expenses (including taxes) = $784. 8 + 3,836. 4 = $4,621. 2 million (b)ebit = Net income + Interest + Taxes = $784. 8 – 82. 6 + 434. 6 = $1,136. 8 million (Note: net interest is interest income minus interest expense) c)ebitda= Net income + interest + taxes + depreciation and amortization = Ebit + depreciation + amortization = $1,136. 8 + 353. 2 = $1,490. 0 million Depreciation and amortization is reported as an add-back to net income to get cash flow from operations in the cash flow statement. (d) Long-term assets = Total assets – Current assets = $9,403. 4 – 3,422. 8 = $5,980. 6 million Total Liabilities = Total assets – shareholders’ equity = $9,403. 4 – 6,782. 2 = $2,621. 2 million Short-term Liabilities = Total liabilities – Long-term Liabilities = $2,621. 2 – 1,377. 9 $1,243. 3 million (e) Change in cash and cash equivalents = Cash flow from operations – Cash used in investing activities + Cash from financing activities Change in cash and cash equivalents is given by the changes in the amount is the balance sheet = $270. 1 – 372. 2 = -$102. 1 So, -$102. 1 = $1,195. 8 – $451. 6 + ? So ? = -$846. 3 million That is, there was a cash outflow of $846. 3 million for financing activities. E7. 8. Accounting Relations for Kimberly-Clark Corporation a. Reformulate the balance sheet: 20072008

Operating assets $18,057. 0 $16,796. 2 Operating liabilities 6,011. 8 5,927. 2 Net operating assets (NOA) 12,045. 2 10,869. 0 (i) Financial obligations $6,496. 4 $4,395. 4 Financial assets 382. 7 6,113. 7 270. 8 4,124. 6 (ii) Common equity $ 5,931. 5 $ 6,744. 4 (iii) b.

Free cash flow = Operating income – Change in net operating assets = $2,740. 1 – (12,045. 2 – 10,869. 0) = $1,563. 9 c. NOA (end) = NOA (beginning) + Operating income – Free cash flow $12,045. 2 = $10,869. 0 + 2,740. 1 – 1,563. 9 d. CSE (end) = CSE (beginning) + Comprehensive income – Net payout Comprehensive income = Operating income – Net financial expense $2,593. 0 = $2,740. 1 – 147. 1 $5,931. 5 = 6,744. 4 + 2593. 0 – Net payout Thus, net payout = $3,405. 9

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