Chapter 21—Analysis of Financial Statements

MULTIPLE CHOICE

1. A useful tool in financial statement analysis is the common-size financial statement. What does
this tool enable the financial analyst to do?
a. Evaluate financial statements of companies within a given industry of approximately the
same value.
b. Determine which companies in the same industry are at approximately the same stage of
development.
c. Ascertain the relative potential of companies of similar size in different industries.
d. Compare the mix of assets, liabilities, capital, revenue, and expenses within a company
over time or between companies within a given industry without respect to relative size.

ANS: D OBJ: LO 1

2. When using common-size statements

a. data may be selected for the same business as of different dates, or for two or more
businesses as of the same date.
b. relationships should be stated in terms of ratios.
c. dollar changes are reported over a period of at least three years.
d. All of the above are correct.

ANS: A OBJ: LO 1

3. Which of the following statements best describes the use of financial statement analysis?
a. Financial statement analysis techniques are merely guides to interpretation of financial
data.
b. Financial statement analysis can eliminate the risk in investment decisions.
c. Measurements for a specific company should be compared only with data from past
periods.
d. All of the above are correct.

ANS: A OBJ: LO 1

4. Rauh Corporation had a current ratio of 2.0 at the end of 2004. Current assets and current
liabilities increased by equal amounts during 2005. The effects on net working capital and on the
current ratio, respectively, were
a. no effect; increase.
b. no effect; decrease.
c. increase; increase.
d. decrease; decrease.

ANS: B OBJ: LO 1

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5. Which of the following ratios measures short-term solvency?
a. Current ratio
b. Creditors' equity to total assets
c. Return on investment
d. Total asset turnover

ANS: A OBJ: LO 1

6. If a firm changes its inventory method from FIFO to LIFO just prior to a period of rising prices,
the effect in the next period will be

Current Ratio Inventory Turnover

a. No effect Increase
b. No effect Decrease
c. Increase Decrease
d. Decrease Increase

ANS: D OBJ: LO 2

7. Which of the following transactions would increase a firm's current ratio?

a. Purchase of inventory on account
b. Payment of accounts payable
c. Collection of accounts receivable
d. Purchase of temporary investments for cash

ANS: B OBJ: LO 1

8. How are trade receivables used in the calculation of each of the following?
Current Ratio Inventory Turnover

a. Not used Numerator

b. Numerator Numerator
c. Numerator Not used
d. Denominator Numerator

ANS: C OBJ: LO 1

9. In comparing the current ratios of two companies, why is it invalid to assume that the company
with the higher current ratio is the better company?
a. A high current ratio may indicate inadequate inventory on hand.
b. A high current ratio may indicate inefficient use of various assets and liabilities.
c. The two companies may define working capital in different terms.
d. The two companies may be different sizes.

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 ANS: B OBJ: LO 1

10. Which of the following is the primary factor in determining the functional currency of a foreign
subsidiary?
a. How the costs for the foreign entity's product are determined
b. The denomination of the foreign entity's financing
c. The location of the primary sales market that influences the price of the foreign entity's
product
d. Management's assessment of all relevant factors

ANS: D OBJ: LO 5

11. A translation adjustment resulting from the translation process is disclosed on the financial
statements
a. as a separate component of stockholders' equity.
b. as a below-the-line item on the income statement.
c. as an adjustment to retained earnings.
d. as a part of income from operations on the income statement.

ANS: A OBJ: LO 5
12. Which of the following is the ​least​ likely means a company might choose to meet the needs of
international investors?
a. Translation of financial statements or annual reports into the language of the user.
b. Denomination of the financial statements in the currency of the country where the
financial statements will be used.
c. Partial or complete restatement of financial statements to the accounting principles of the
financial statement users' country.
d. Mutual recognition in which one country accepts the financial statements of another
country for regulatory purposes such as listing on stock exchanges or filing annual reports.

ANS: D OBJ: LO 3

13. Information from Blain Company's balance sheet is as follows: Current assets:

Cash $ 1,200,000
Marketable securities ............................... 3,750,000
Accounts receivable ................................. 28,800,000
Inventories ......................................... 33,150,000
Prepaid expenses .................................... 600,000
Total current assets $67,500,000
Current liabilities: ..................................
Notes payable ....................................... $ 750,000
Accounts payable .................................... 9,750,000
Accrued expenses .................................... 6,250,000
Income taxes payable ................................ 250,000
Payments due within one year on long-term debt ...... 1,750,000

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 Total current liabilities ........................... $18,750,000

What is Blain's current ratio?

a. 0.26 to 1
b. 0.30 to 1
c. 1.80 to 1
d. 3.60 to 1

ANS: D OBJ: LO 1

14. Millward Corporation's books disclosed the following information for the year ended December
31, 2005:

Net credit sales ...................................... $1,500,000

Net cash sales ........................................ 240,000
Accounts receivable at beginning of year .............. 200,000
Accounts receivable at end of year .................... 400,000

Millward's accounts receivable turnover is

a. 3.75 times.
b. 4.35 times.
c. 5.00 times.
d. 5.80 times.

ANS: C OBJ: LO 1

15. Selected information from the accounting records of Thorne Company is as follows:

Net sales for 2005 .................................... $900,000

Cost of goods sold for 2002 ........................... 600,000
Inventory at December 31, 2004 ........................ 180,000
Inventory at December 31, 2005 ........................ 156,000
Thorne's inventory turnover for 2005 is
a. 5.36 times.
b. 3.85 times.
c. 3.67 times.
d. 3.57 times.

ANS: D OBJ: LO 1

16. Selected information from the accounting records of the Vassar Company is as follows:

Net accounts receivable at December 31, 2004 .......... $ 900,000

Net accounts receivable at December 31, 2005 .......... 1,000,000
Accounts receivable turnover .......................... 5 to 1
Inventories at December 31, 2004 ...................... $1,100,000
Inventories at December 31, 2005 ...................... 1,200,000

4
 Inventory turnover .................................... 4 to 1

What was Vassar's gross margin for 2005?

a. $150,000
b. $200,000
c. $400,000
d. $500,000

ANS: A OBJ: LO 1

17. The following data were abstracted from the records of Johnson Corporation for the year:

Sales ................................................. $1,800,000

Bond interest expense ................................. 60,000
Income taxes .......................................... 300,000
Net income ............................................ 400,000

How many times was bond interest earned?

a. 7.67
b. 11.67
c. 12.67
d. 13.67

ANS: C OBJ: LO 1

18. Selected information for Henry Company is as follows:

December 31
2004 2005
Common stock ................................ $600,000 $600,000
Additional paid-in capital .................. 250,000 250,000
Retained earnings ........................... 170,000 370,000
Net income for year ......................... 120,000 240,000

Henry's return on common stockholder's equity, rounded to the nearest percentage point, for 2005
is
a. 20 percent.
b. 21 percent.
c. 28 percent.
d. 40 percent.

ANS: B OBJ: LO 1
19. Selected information from the accounting records of Ellison Manufacturing lows:

Net sales ............................................. $3,600,000

Cost of goods sold .................................... 2,400,000
Inventories at January 1 ............................. 672,000

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 Inventories at December 31 ............................ 576,000

What is the number of days' sales in average inventories for the year?
a. 102.2
b. 94.9
c. 87.6
d. 68.1

ANS: B OBJ: LO 1

20. Orchard Corporation's capital stock at December 31 consisted of the following: (a) Common
stock, $2 par value; 100,000 shares authorized, issued, and outstanding. (b) 10% noncumulative,
nonconvertible preferred stock, $100 par value; 1,000 shares authorized, issued, and outstanding.

Orchard's common stock, which is listed on a major stock exchange, was quoted at $4 per share
on December 31. Orchard's net income for the year ended December 31 was $50,000. The yearly
preferred dividend was declared. No capital stock transactions occurred. What was the price-
earnings ratio on Orchard's common stock at December 31?
a. 6 to 1
b. 8 to 1
c. 10 to 1
d. 16 to 1

ANS: C OBJ: LO 1

21. Selected financial data of Alexander Corporation for the year ended December 31, 2005, is
presented below:

Operating income ...................................... $900,000

Interest expense ...................................... ​ 100,000​)
(
Income before income tax .............................. $800,000
Income tax expense .................................... ​(320,000​)
Net income ............................................ $480,000
Preferred stock dividends ............................. ​(200,000​)
Net income available to common stockholders ........... $280,000​

Common stock dividends were $120,000. The times-interest-earned ratio is

a. 2.8 to 1.
b. 4.8 to 1.
c. 6.0 to 1.
d. 9.0 to 1.

ANS: D OBJ: LO 1

22. During the year, The Grap Company purchased $1,920,000 of inventory. The cost of goods sold
for the year was $1,800,000 and the ending inventory at December 31 was $360,000. What was
the inventory turnover for the year?

6
 a. 5.0
b. 5.3
c. 6.0
d. 6.4

ANS: C OBJ: LO 1
23. On December 31, 2004 and 2005, Taft Corporation had 100,000 shares of common stock and
50,000 shares of noncumulative and nonconvertible preferred stock issued and outstanding.
Additional information:

Stockholders' equity at 12/31/2005 .................... $4,500,000

Net income year ended 12/31/2005 ...................... 1,200,000
Dividends on preferred stock year ended 12/31/2005 .... 300,000
Market price per share of common stock at 12/31/2005 .. 144

The price-earnings ratio on common stock at December 31, 2005, was

a. 10 to 1.
b. 12 to 1.
c. 14 to 1.
d. 16 to 1.

ANS: D OBJ: LO 1

24. Albright Distributing Inc. converts its foreign subsidiary financial statements using the translation
process. Their German subsidiary reported the following for 2005: revenues and expenses of
10,050,000 and 7,800,000 marks, respectively, earned or incurred evenly throughout the year,
dividends of 2,000,000 marks were paid during the year. The following exchange rates are
available:

On January 1, 2005 .................................... $.250

On December 31, 2005 .................................. .285
Average rate for 2005 ................................. .270
Rate when dividends were declared and paid ............ .255

Translated net income for 2005 is

a. $641,250.
b. $607,500.
c. $131,250.
d. $97,500.

ANS: B OBJ: LO 5

25. Tokyo Enterprises, a subsidiary of Worldwide Enterprises based in Dallas, reported the following
information at the end of its first year of operations (all in yen): assets--110,000,000;
expenses--41,000,000; liabilities--97,500,000; capital stock--5,500,000; revenues--48,000,000.
Relevant exchange rates are as follows:

7
 On date subsidiary stock was purchased ................ $.085
Average rate for the year ............................. .078
At year end ........................................... .075

As a result of the translation process, what amount is recorded on the financial statements as the
translation adjustment?
a. $21,000 debit adjustment
b. $76,000 debit adjustment
c. $21,000 credit adjustment
d. $76,000 credit adjustment

ANS: B OBJ: LO 5

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 26. What is the effect of the collection of accounts receivable on the current ratio and
net working capital, respectively?

​Current Ratio​ ​Net Working Captial

a. No effect No effect
b. Increase Increase
c. Increase No effect
d. No effect Increase

ANS: A OBJ: LO 1

27. Which of the following is an appropriate computation for return on investment?

a. Net income divided by total assets
b. Net income divided by sales
c. Sales divided by total assets
d. Sales divided by stockholders' equity

ANS: A OBJ: LO 1

28. Which of the following is included in the calculation of the acid-test (quick) ratio?

​Accounts Receivable​ ​Inventories

a. No No
b. No Yes
c. Yes No
d. Yes Yes

ANS: C OBJ: LO 1

29. A measure of profitability analysis is

a. times interest earned
b. cash flow per share
c. quick ratio
d. dividend payout ratio

ANS: D OBJ: LO 1

30. Selected information from the 2005 and 2004 financial statements of SCL Corporation is
presented below:

(​ in thousands)
​As of December 31
2005 2004
Cash ................................... $ 21 $ 35
Marketable securities 22

9
 (current) ........... 27
Accounts receivable (net) .... 60 98
Inventory ............................ 105 142
Prepaid expenses ................. 5 3
Land and building (net) ......... 247 315
Accounts payable ................ 57 75
Accrued expenses ............... 10 14
Notes payable (short-term) ... 8 4
Bonds payable ..................... 52 66

​(in thousands)
​ s of December 31
A
2005 2004
Cash sales ........................... $750 $675
Credit sales (percent of cash
sales) ............. 82% 85%
Cost of goods sold
(percent of total sales) ...... 60% 58%
Net income .......................... $ 30 $ 38
Interest expense .................. 6 9
Income tax expense ............. 6 7

SCL's current ratio as of December 31, 2005, is

a. 2.84 to 1.
b. 3.37 to 1.
c. 2.91 to 1.
d. 3.33 to 1.

ANS: C OBJ: LO 1

31. Refer to the SCL Corporation information above. SCL's quick (acid test) ratio as December 31,
2005, is
a. 1.44 to 1.
b. 1.50 to 1.
c. 1.67 to 1.
d. 1.66 to 1.

ANS: A OBJ: LO 1

32. Refer to the SCL Corporation information above. SCL's account receivable turnover for 2005 is
a. 13.85.
b. 10.00.
c. 9.49.
d. 7.78.

10
 ANS: D OBJ: LO 1

33. Refer to the SCL Corporation information above. SCL's merchandise inventory turnover for
2005 is
a. 3.43.
b. 5.68.
c. 6.63.
d. 6.79.

ANS: C OBJ: LO 1

34. Refer to the SCL Corporation information above. SCL's turnover of assets and number of times
interest earned for 2005 are respectively

​Asset Turnover​ ​Times Interest Earned

a. 2.97 5.0
b. 2.94 5.0
c. 2.94 6.0
d. 2.94 7.0

ANS: D OBJ: LO 1
35. The primary purpose of the Security and Exchange Commission's Form 20-F is
a. to explain in detail the differences between the internal controls established under the
accounting and auditing principles of a foreign country and those of the United States.
b. to determine the fee a foreign company must pay to register its financial statements with
the Securities and Exchange Commission..
c. to explain in detail the differences between net income computed under the accounting
principles of a foreign country and U.S. GAAP.
d. to explain in detail the differences between total assets measured using the accounting
principles of a foreign country and U.S. GAAP.

ANS: C OBJ: LO 4

PROBLEMS

1. Comparative balance sheet data for the Addyson Co. at the end of 2004 and 2005 follows:

Addyson Company
Condensed Comparative Balance Sheet
December 31, 2005 and 2004

Assets 2005 2004

Current assets ............................... $ 71,000 $ 68,000
Long-term investments ........................ 67,000 43,000
Land, buildings, and equipment (net) ......... 195,000 162,000

11
 Intangible assets ............................ 9,400 11,300
Other assets ................................. 5,000 8,000
Total assets ................................. $347,400 $292,300

Liabilities
Current liabilities .......................... $ 37,100 $ 34,000
Long-term liabilities--8% bonds .............. 23,500 17,900
Total liabilities ............................ $ 60,600 $ 51,900

Stockholders' Equity
6% preferred stock ........................... $ 7,500 $ 7,500
Common stock ................................. 50,000 50,000
Additional paid-in capital ................... 46,000 46,000
Retained earnings ............................ 183,300 136,900
Total stockholders' equity ................... $286,800 $240,400
Total liabilities and stockholders' equity ... $347,400 $292,300

Prepare a common-size balance sheet comparing financial structure percentages for the two-year
period. Use total assets to standardize.

12
 ANS:

Addyson Company
Condensed Common-Size Balance Sheet
For Years Ended December 31, 2005 and 2004

Assets 2005 2004

Current assets .............................. 20% 23%
Long-term investments ....................... 19 15
Land, buildings, and equipment (net) ........ 57 55
Intangible assets ........................... 3 4
Other assets ................................ 1​ 3​
Total assets ................................ 100​% 100​%

Liabilities
Current liabilities ......................... 11% 12%
Long-term liabilities--8% bonds ............. ​ 7​ ​ 6​
Total liabilities ........................... ​18​% ​18​%

Stockholders' Equity
6% preferred stock .......................... 2% 2%
Common stock ................................ 14 17
Additional paid-in capital .................. 13 16
Retained earnings ........................... 53 47
Total stockholders' equity .................. 82​% 82​%
Total liabilities and stockholders' equity .. 100​% 100​%

OBJ: LO 1

2. The inventory of Brett Company averages $1,255,002 at cost. During 2005, sales of $7,341,750
were made at 30 percent above cost.

Using the given data, compute the following:

(1) Inventory turnover rate for 2005.

(2) Number of days' sales in inventory.

ANS:
(1)
$7,341,750 / 1.30 = $5,647,500
$5,647,500 / $1,255,002 = 4.50 times (rounded)

(2)
365 / 4.50 = 81.1 days

OBJ: LO 1

13
3. Comparative data for Kerry Inc. for the two-year period 2004-2005 are given as
follows:

Income Statement Data

2005 2004
Net sales ................................... $1,400,000 $800,000
Cost of goods sold .......................... 840,000 440,000
Gross profit on sales ....................... $ 560,000 $360,000
Selling, general, and other expenses ........ 400,000 130,000
Income tax expense .......................... 40,000 30,000
Net income .................................. $ 120,000 $200,000
Dividends paid .............................. 80,000 80,000
Net increase in retained earnings ........... $ 40,000 $120,000

Balance Sheet Data

2005 2004
Assets
Current assets .............................. $ 540,000 $ 440,000
Land, buildings, and equipment .............. 800,000 720,000
Total assets ................................ $1,340,000 $1,160,000

Liabilities and Stockholders' Equity

Current liabilities ......................... $ 300,000 $ 240,000
Bonds payable (8%) .......................... 320,000 320,000
Common stock ($5 par) ....................... 480,000 400,000
Retained earnings ........................... 240,000 200,000
Total liabilities and stockholders' equity .. $1,340,000 $1,160,000

From the given data, compute the following for 2004 and 2005:
(1) Current ratio.
(2) Net profit margin on sales.
(3) Gross profit margin on sales.
(4) Debt-to-equity ratio.
(5) Times interest earned.

ANS:

(1)
2005: $540,000 / $300,000 = 1.80 to 1
2004: $440,000 / $240,000 = 1.83 to 1

(2)
2005: $120,000 / $1,400,000 = 8.57%
2004: $200,000 / $800,000 = 25%

(3)
2005: $560,000 / $1,400,000 = 40%
2004: $360,000 / $800,000 = 45%

14
 (4)
2005: $620,000 / $720,000 = 0.86 to 1
2004: $560,000 / $600,000 = 0.93 to 1

(5)
2005: ($120,000 + $40,000 + $25,600*) / $25,600 = 7.25 times
2004: ($200,000 + $30,000 + $25,600*) / $25,600 = 9.98 times
* (8% ​×​ $320,000)

OBJ: LO 1

4. Income statements for LaRue Co. show the following:

2005 2004 2003

Sales (net) ..................... $500,000 $400,000 $350,000
Cost of goods sold:
Beginning inventory ............. 110,000 90,000 20,000
Purchases ....................... 420,000 330,000 370,000
$530,000 $420,000 $390,000
Ending inventory ................ 170,000 110,000 90,000
360,000 310,000 300,000
Gross profit .................... $140,000 $ 90,000 $ 50,000

From the data presented, calculate the following ratios for 2005 and 2004:
(1) Inventory turnover rate.
(2) Number of days' sales in inventories.
(3) Gross profit margin on sales.

ANS:

(1)
2005​ 2004​
Cost of goods sold .................... $360,000 $310,000
Inventory:
Beginning of year ..................... 110,000 90,000
End of year ........................... 170,000 110,000
Average inventory ..................... 140,000 100,000
Inventory turnover .................... 2.57 times 3.10 times

(2)
Inventory turnover for year ........... 2.57 3.10
Number of days' sales in average 365/2.57 = 365/3.10 =
inventory .............................
142.0 days 117.7 days

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 (3)
Gross profit .......................... $140,000 $ 90,000
Sales (net) ........................... 500,000 400,000

Gross profit margin on sales .......... 28% 22.5%

OBJ: LO 1

5. The following are comparative data for Gates Company for the three-year period 2003-2005:

Income Statement Data

2005 2004 2003
Net sales (80% are on credit each
period) ......................... $900,000 $720,000 $840,000
Net purchases ................... 480,000 390,000 330,000

Balance Sheet Data

Accounts receivable, December 31 $150,000 $132,000 $126,000

Compute the following measurements for 2005 and 2004:

(1) The receivables turnover rate.
(2) The average collection period for accounts receivable.

ANS:

(1)
2005​ 2004​
Net credit sales ............................. $720,000 $576,000
Net receivables:
Beginning of year ............................ 132,000 126,000
End of year .................................. 150,000 132,000
Average receivables .......................... 141,000 129,000

Receivables turnover ......................... 5.11 times 4.47 times

(2)
Average receivables .......................... $141,000 $129,000

Net credit sales ............................. $720,000 $576,000

Average daily credit sales ................... 1,973* 1,578**
Average collection period (average receivables
÷ average daily credit sales) ................ 71.5 days 81.7 days

* ($900,000 ×
​ ​ .80)/365 = $1,973
** ($720,000 ×​ ​ .80)/365 = $1,578

OBJ: LO 1

16
6. The balance sheet for the Byrne Dareed Corp. showed liabilities and stockholders' equity
balances at the end of each year as given below:

2005​ 2004​
Current liabilities .......................... $ 750,000 $ 600,000
12% Bonds payable ............................ 1,200,000 1,200,000
Preferred 10% stock, $100 par ................ 900,000 750,000
Common stock, $20 par ........................ 2,250,000 1,875,000
Additional paid-in capital ................... 450,000 375,000
Retained earnings ............................ 750,000 540,000

Net income ................................... 375,000 300,000

Market price per share, December 31 .......... 65 60
Common stock dividends ....................... 75,000 45,000

Based on the data provided, compute the following ratios for 2005:
(1) The rate of earnings on average total stockholders' equity.
(2) The number of times bond interest requirements were earned.
(3) The earnings per share on common stock.
(4) The price-earnings ratio.
(5) Debt-to-equity ratio.

ANS:
(1)
$375,000 / [($4,350,000 + $3,540,000)/2] =
$375,000 / $3,945,000 =
9.51%

(2)
($375,000 + $144,000) / $144,000 = 3.6 times

(3)
($375,000 - $90,000) / 112,500 shares = $2.53 per share

(4)
$65 / $2.53 = 25.69 times

(5)
$1,950,000 / $4,350,000 = 0.45 to 1

OBJ: LO 1

7. The following partial balance sheet information is for Ollie Company:

12/31/05 12/31/04
Dividends Payable ........................... $ 3,400 $ 2,200
Deferred Income Taxes (Liability) ........... 46,000 41,500
Equipment ................................... 92,500 78,000
Accumulated Depreciation--Equipment ......... 28,300 30,000
17
 Unappropriated Retained Earnings ............ 71,000 50,000
Appropriated Retained Earnings .............. 2,000 0
Cash ........................................ 670 350
Income Tax Refund Receivable ................ 1,750 1,400

The following additional information relates to 2005:

(a) Net income for the year, $100,000.
(b) Depreciation expense for the year, $7,400.
(c) Income tax expense for the year, $35,000.
(d) During the year, equipment was overhauled at a cost of $2,500. The cost was
debited to accumulated depreciation.
(e) During the year, equipment with a book value of $10,000 was sold. A loss of
$1,100 was realized on the sale.

Compute the following:

(1) Total equipment purchases during the year.
(2) Cash paid for income taxes during the year.
(3) Cash paid for dividends during the year.

ANS:
(1)

Accumulated Depreciation--Equipment
Beginning balance
30,000

Depreciation expense 7,400

Equipment overhaul 2,500

Accumulated depreciation of 6,600

equipment sold

Ending balance 28,300

Equipment
78,000
Beginning balance

Cost of equipment sold 16,600

Purchase of new equipment 31,100

Ending balance 92,500

Total equipment purchases = $31,100

(2)

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 Deferred Income Taxes

Beginning balance 41,500

Total income tax expense 35,000

Current portion of income tax 30,500

Ending balance 46,000

Income Tax Refund Receivable

Beginning balance 1,400

Current portion of income tax 30,500

Cash payments for income tax 30,850

Ending balance 1,750

Cash payments for income tax = $30,850

(3)

Unappropriated Retained Earnings

Beginning balance 50,000

Appropriation 2,000

Net income 100,000

Dividends declared 77,000

Ending balance 71,000

Dividends Payable

Beginning balance 2,200

Dividends declared 77,000

Dividends paid 75,800

Ending balance 3,400

Cash payments for dividends = $75,800

OBJ: LO 6

19
8. On July 15, 2005, United Manufacturing Inc., a New York based conglomerate, purchased, Sky
Inc., a Korean-based company. Sky Inc.'s balance sheet on the date of purchase is as follows:

In Korean Won
(in thousands)
Cash .............................................. 11,250
Accounts receivable ............................... 62,500
Inventory ......................................... 57,250
Plant assets (net) ................................ 48,900​
179,900​

Accounts payable .................................. 64,000

Non-current liabilities ........................... 74,900
Capital stock ..................................... 12,500
Retained earnings ................................. 28,500​
179,900​

The exchange rate for Korean won on July 15, 2005, is $.007.

Prepare a translated balance sheet as of July 15, 2005.

ANS:

In Korean Won Exchange

(in thousands) Rate In U.S. $
Cash ......................... 11,250 $0.007 $ 78,750
Accounts receivable .......... 62,500 0.007 437,500
Inventory .................... 57,250 0.007 400,750
Plant assets (net) ........... 48,900 0.007 342,300
179,900​ $1,259,300

Accounts payable ............. 64,000 0.007 $ 448,000

Non-current liabilities ...... 74,900 0.007 524,300
Capital stock ................ 12,500 0.007 87,500
Retained earnings ............ 28,500​ 0.007 199,500
179,900​ $1,259,300

OBJ: LO 5
9. Financial information for Toro Enterprises at the end of 2005 is as follows:

French Francs
Current assets ........................................ 14,500,000
Equipment ............................................. 9,750,000
Current liabilities ................................... 6,500,000
Long-term debt ........................................ 3,200,000
Capital stock ......................................... 1,600,000
Retained earnings (January 1, 2005) ................... 9,250,000
Revenues .............................................. 10,450,000
Expenses .............................................. 6,750,000

Relevant exchange rates are as follows:

20
 When Toro was purchased ............................... $0.20
Current exchange rate ................................. 0.32
Average rate for the year ............................. 0.28

In addition, the computed retained earnings balance from the prior year's translated financial
statements is $2,405,000 at the end of 2005.

Prepare a translated trial balance for Toro Enterprises.

ANS:

In Francs Exchange In U.S. $

(in thousands) Rate (in thousands)
Current assets .............. 14,500 0.32 $4,640
Equipment ................... 9,750 0.32 3,120
Expenses .................... 6,750​ 0.28 1,890​
31,000​ $9,650​

Current liabilities ......... 6,500 0.32 $2,080

Long-term debt .............. 3,200 0.32 1,024
Capital stock ............... 1,600 0.20 320
Retained earnings
(January 1, 2005) ........... 9,250 computed 2,405
Revenues .................... 10,450 0.28 2,926
Translation adjustment ...... 895​
31,000​ $9,650​

OBJ: LO 5

10. The following financial information is available for Paul Company, a hypothetical non-U.S. firm
with shares listed on a U.S. stock exchange:

Net income computed according to home country GAAP ...... 800,000

Stockholders' equity computed according to home
country GAAP ............................................ 8,000,000
Possible obligation for severance benefits to be paid
to employees in future years; recognized this year ...... 3,000,000
Development costs capitalized at the end of the year .... 3,200,000

If Paul were following U.S. GAAP, development costs would be expensed when incurred..
According to U.S. GAAP, the possible obligation for severance benefits would not be recognized
until it had become probable.

Prepare a reconciliation of Paul's reported stockholders' equity and net income to the amounts of
these items under U.S. GAAP.

ANS:

Paul Company
Reconciliation of Stockholders' Equity to U.S. GAAP
21
 Stockholders' equity computed according to homecountry
GAAP .................................................. $8,000,000
Adjustments required to conform to U.S. GAAP:
Development costs capitalized at the end of the year (3,200,000)
Possible obligation for severance benefits ........... 3,000,000​
Stockholders' equity in accordance with U.S. GAAP ..... $ 7,800,000​

Paul Company
Reconciliation of Net Income to U.S. GAAP

Net income according to home country GAAP ............. $ 800,000

Adjustments required to conform to U.S. GAAP:
Possible obligation for severance benefits .......... 3,000,000
Development costs capitalized at the end of the year (3,200,000​)
Net income in accordance with U.S. GAAP ............... $ 600,000​

OBJ: LO 3, LO 4

11. The following schedule shows the net changes in the balance sheet accounts at December 31,
2004, as compared to December 31, 2005, for the Williams Company. The statement of cash
flows for the year ended December 31, 2005, has not been prepared.

Increase
Assets (Decrease)
Cash and cash equivalents .............................. $ 60,000
Accounts receivable (net) .............................. 66,000
Inventories ............................................ 37,000
Prepaid expenses ....................................... 2,000
Property, plant, and equipment (net) ................... 63,000​
Total assets ........................................... $228,000​

Liabilities
Accounts payable ....................................... $(46,000)
Short-term notes payable ............................... (20,000)
Accrued liabilities .................................... 28,500
Bonds payable .......................................... (28,000)
Less: Amortized bond discount .......................... 1,200​
Total liabilities ...................................... $(64,300​)

Stockholders' Equity
Common stock ........................................... $500,000
Paid-in capital in excess of par ....................... 200,000
Retained earnings ...................................... (437,700)
Appropriation of retained earnings for possible
plant expansion ........................................ 30,000​
Total stockholders' equity ............................. $292,300​

The following additional information has been gathered:

22
(a) The net income for the year ended December 31, 2005, was $172,300.
(b) During the year ended December 31, 2005, uncollectible accounts receivable of
$26,400 were written off by a debit to Allowance for Doubtful Accounts.
(c) A comparison of Property, Plant, and Equipment, as of the end of each year
follows:

December 31 Increase
2005 2004 (Decrease)
Property, plant, and equipment ... $570,500 $510,000 $60,500
Less: Accumulated depreciation ... 225,500 228,000 ​ (2,500​)
$345,000 $282,000 $63,000

During 2005, machinery was purchased at a cost of $45,000. In addition, machinery that was
acquired in 1998 at a cost of $48,000 was sold for $3,600. At the date of sale, the machinery had
an undepreciated cost of $4,200. The remaining increase in property, plant, and equipment
resulted from the acquisition of a tract of land for a new plant site.

(d) The bonds payable mature at the rate of $28,000 every year.
(e) In January 2005, the company issued an additional 10,000 shares of common stock
at $14 per share upon exercise of outstanding stock options held by key employees.
In May 2005, the company declared and issued a 5% stock dividend on its
outstanding stock. During the year, a cash dividend was paid on the common stock.
On December 31, 2005, there were 840,000 shares of common stock outstanding.
(f) The appropriation of retained earnings was made in anticipation of the construction
of a new plant.
(g) The notes payable relate to operating activities.

Prepare a statement of cash flows for the year ended December 31, 2005, using the indirect
method.

ANS:

Williams Company
Statement of Cash Flows
For the Year Ended December 31, 2005
Cash flows from operating activities:
Net income ................................ $172,300
Adjustments:
Depreciation .............................. 41,300​ 1
Amortization of bond discount ............. 1,200
Loss on sale of machinery ................. 600​ 2​
Increase in accounts receivable ........... (66,000)
Increase in inventory ..................... (37,000)
Increase in prepaid expenses .............. (2,000)
Decrease in accounts payable .............. (46,000)
Decrease in short-term notes payable ...... (20,000)
Increase in accrued liabilities ........... 28,500​
Net cash flow provided by operations ........ $ 72,900

Cash flows from investing activities:

23
 Sale of machinery ......................... $ 3,600
Purchase of machinery ..................... (45,000)
Purchase of land .......................... (63,500​)​ 3
Net cash flow used by investing activities .. (104,900)

Cash flows from financing activities:

Issuance of common stock​ 4 ................. $140,000
Retirement of bonds ....................... (28,000)
Payment of dividends ...................... (20,000​)5​
Net cash flow provided by financing activities 92,000
Net increase in cash and cash equivalents ... $ 60,000

Note: Completion of the formal statement of cash flows would require disclosure of the
beginning and ending cash and cash equivalents.

Computations:

1​
Accumulated depreciation--beginning balance ............ $(228,000)
Accumulated depreciation--machine sold
($48,000 - $4,200) ..................................... 43,800
Accumulated depreciation--ending balance ............... ​ 225,500​
Depreciation expense for the year 2002 ................. $ 41,300​

2​
Book value of machine sold ($48,000 - $43,800) ......... $ 4,200
Proceeds on sale ....................................... (3,600)
Loss on sale ........................................... $ 600​

3​
Property, plant, and equipment--beginning balance ...... $(510,000)
Purchase of machine .................................... (45,000)
Sale of machine ........................................ 48,000
Property, plant, and equipment--ending balance ......... 570,500​
Purchase of land ....................................... $ 63,500​

4​
Additional stock issued as a result of 5% stock
dividend: 800,000 shares ​×​ .05 = 40,000 shares.

5​
Net decrease in retained earnings ...................... $ 437,700
Appropriation of retained earnings ..................... (30,000)
Stock dividend (40,000 shares ​×​ $14) ................... (560,000)
Net income ............................................. 172,300​
Dividends declared and paid ............................ $ 20,000​

OBJ: LO 6

12. The following 3 ratios have been computed using the financial statements for the year ended
December 31, 2005, for James Company:

Current ratio = (Current assets/Current liabilities)

= $70,000 ​÷​ $40,000
= 1.75

24
Debt-to-equity ratio = (Total liabilities/ Stockholders' equity)
= $100,000 ​÷​ $120,000
= .83
Return on sales =(Net income/Sales)
= $40,000 ​÷​ $390,000
= .10

25
The following additional information has been assembled:
(a) James uses the LIFO method of inventory valuation. Beginning inventory was
$30,000 and ending inventory was $40,000. If James had used FIFO, beginning
inventory would have been $40,000 and ending inventory would have been
$55,000.
(b) James' sole depreciable asset was purchased on January 1, 2002. The asset cost
$110,000 and is being depreciated over 10 years with no estimated salvage value.
Although the 10-year life is within the acceptable range, most firms in James'
industry depreciate similar assets over 8 years.

(c) For 2005, James decided to recognize a $15,000 liability for future environmental
cleanup costs. Most other firms in James' industry have similar environmental
cleanup obligations but have decided that the amounts of the obligations are not
reasonably estimable at this time; on average, these firms recognized only 5% of
their total environmental cleanup obligation.

Show how the values for the 3 ratios computed above differ if James had used FIFO, depreciated
the asset over 8 years, and recognized only 5% of its environmental cleanup obligation. Compute
how the financial statements would differ if the alternative accounting methods had been used.
Do not treat the use of these alternative methods as accounting changes. Ignore any income tax
effects.

ANS:
Adjustments:
(a)
Using FIFO:
Ending inventory increases by $15,000 ($55,000 - $40,000).
Net income for 2005 increases by $5,000 [($55,000 - $40,000) - ($40,000 - $30,000)].
Beginning retained earnings increases by $10,000 ($40,000 - $30,000).

(b)
8-year useful life:
Book value at December 31, 2005:
10-year life: $110,000 - [($110,000 ​÷​ 10) ​×​ 4 years] = $66,000
8-year life: $110,000 - [($110,000 ​÷​ 8) ×
​ ​ 4 years] = $55,000
Book value decreases by $11,000 ($66,000 - $55,000).
Net income for 2002 decreases by $2,750 [($130,000 ​÷​ 8) - ($130,000 ​÷​ 10)]
Beginning retained earnings decreases by $8,250 [($110,000 ​÷​ 8) ×​ ​ 3 years] - [($110,000 ​÷​ 10)
×​ 3 years].

(c)
Environmental cleanup obligation:
Net income for 2005 increases by $14,250 [($15,000 - ($15,000 ​×​ .05)].
Environmental cleanup obligation decreases by $14,250.

Adjusted current ratio: ($70,000 + $15,000) ​÷​ $40,000 = ​2.13

Adjusted debt-to-equity ratio: ($100,000 - $14,250) ​÷​ ($120,000 + $5,000 + $10,000 - $2,750 -
$8,250 + $14,250) = ​.62
Adjusted return on sales ratio: ($40,000 + $5,000 - $2,750 + $14,250) ​÷​ $390,000 = ​0.145

26
 OBJ: LO 2

13. The following 3 ratios have been computed using the financial statements for the year ended
December 31, 2005, for Arthur Company:

Current ratio = (Current assets/Current liabilities)

= $85,000 ​÷​ $55,000
= 1.55
Debt-to-equity ratio = (Total liabilities/ Stockholders' equity)
= $150,000 ​÷​ $130,000
= 1.15
Return on sales = (Net income/Sales)
= $50,000 ​÷​ $410,000
= .12

The following additional information has been assembled:

(a) Arthur uses the LIFO method of inventory valuation. Beginning inventory was
$25,000 and ending inventory was $35,000. If Arthur had used FIFO, beginning
inventory would have been $50,000 and ending inventory would have been
$65,000.
(b) Arthur's sole depreciable asset was purchased on January 1, 2002. The asset cost
$130,000 and is being depreciated over 15 years with no estimated salvage value.
Although the 15-year life is within the acceptable range, most firms in Arthur's
industry depreciate similar assets over 10 years.
(c) For 2005, Arthur decided to recognize a $22,000 liability for future environmental
cleanup costs. Most other firms in Arthur's industry have similar environmental
cleanup obligations but have decided that the amounts of the obligations are not
reasonably estimable at this time; on average, these firms recognized only 5% of
their total environmental cleanup obligation.

Show how the values for the 3 ratios computed above differ if Arthur had used FIFO, depreciated
the asset over 8 years, and recognized only 5% of its environmental cleanup obligation. Compute
how the financial statements would differ if the alternative accounting methods had been used.
Do not treat the use of these alternative methods as accounting changes. Ignore any income tax
effects.

ANS:
Adjustments:
(a)
Using FIFO:
Ending inventory increases by $30,000 ($65,000 - $35,000).
Net income for 2005 increases by $5,000 [($65,000 - $35,000) - ($50,000 - $25,000)].
Beginning retained earnings increases by $25,000 ($50,000 - $25,000).

(b)
10-year useful life:
Book value at December 31, 2005:
15-year life: $130,000 - [($130,000 ​÷​ 15) ​×​ 4 years] = $95,333
10-year life: $130,000 - [($130,000 ​÷​ 10) ×​ ​ 4 years] = $78,000

27
 Book value decreases by $17,333 ($95,333 - $78,000).
Net income for 2005 decreases by $4,333 [($130,000 ​÷​ 10) - ($130,000 ​÷​ 15)]
Beginning retained earnings decreases by $13,000 [($130,000 ​÷​ 10) ×
​ ​ 3 years] - [($130,000 ​÷
​ ​ 3 years].
15) ×

(c)
Environmental cleanup obligation:
Net income for 2005 increases by $20,900 [($22,000 - ($22,000 ​×​ .05)].
Environmental cleanup obligation decreases by $20,900.

Adjusted current ratio: ($85,000 + $30,000) ​÷​ $55,000 = ​2.09

Adjusted debt-to-equity ratio: ($150,000 - $20,900) ​÷​ ($130,000 + $5,000 + $25,000 - $4,333 -
$13,000 + $20,900) = ​.78
Adjusted return on sales ratio: ($50,000 + $5,000 - $4,333 + $20,900) ​÷​ $410,000 = ​0.18

OBJ: LO 2

14. The following 3 ratios have been computed using the financial statements for the year ended
December 31, 2005, for CR Company:

Current ratio = (Current assets/Current liabilities)

= $80,000 ​÷​ $43,000
= 1.86
Debt-to-equity ratio = (Total liabilities/ Stockholders' equity)
= $110,000 ​÷​ $125,000
= .88
Return on sales = (Net income/Sales)
= $45,000 ​÷​ $400,000
= .11

The following additional information has been assembled:

(a) CR uses the FIFO method of inventory valuation. Beginning inventory was
$48,000 and ending inventory was $58,500. If CR had used LIFO, beginning
inventory would have been $36,000 and ending inventory would have been
$43,000.
(b) CR's sole depreciable asset was purchased on January 1, 2002. The asset cost
$120,000 and is being depreciated over 7 years with no estimated salvage value.
Although the 7-year life is within the acceptable range, most firms in CR's industry
depreciate similar assets over 12 years.

(c) For 2005, CR decided to recognize only 5% of an $18,000 liability for future
environmental cleanup costs. Most other firms in CR's industry have similar
environmental cleanup obligations but have decided that the amounts of the
obligations are reasonably estimable and have recognized the full amount of the
liability.

28
 Show how the values for the 3 ratios computed above differ if CR had used LIFO, depreciated the
asset over 12 years, and recognized the full amount of its, environmental cleanup obligation.
Compute how the financial statements would differ if the alternative accounting methods had
been used. Do not treat the use of these alternative methods as accounting changes. Ignore any
income tax effects.

ANS:
Adjustments:
(a)
Using LIFO:
Ending inventory decreases by $15,500 ($43,000 - $58,500).
Net income for 2005 decreases by $3,500 [($43,000 - $36,000) - ($58,500 - $48,000)].
Beginning retained earnings decreases by $12,000 ($36,000 - $48,000).

(b)
12-year useful life:
Book value at December 31, 2005:
7-year life: $120,000 - [($120,000 ​÷​ 7) ​×​ 4 years] = $51,429
12-year life: $120,000 - [($120,000 ​÷​ 12) × ​ ​ 4 years] = $80,000
Book value increases by $28,571 ($51,429 - $80,000).
Net income for 2005 increases by $7,143 [($120,000 ​÷​ 7) - ($120,000 ​÷​ 12)]
Beginning retained earnings increases by $21,428 [($120,000 ​÷​ 7) × ​ ​ 3 years] - [($130,000 ​÷​ 12)
×​ 3 years].

(c)
Environmental cleanup obligation:
Net income for 2005 decreases by $17,100 [($18,000 ​×​ .05) - $18,000].
Environmental cleanup obligation increases by $17,100.

Adjusted current ratio: ($80,000 - $15,500) ​÷​ $43,000 = ​1.5

Adjusted debt-to-equity ratio: ($110,000 + $17,100) ​÷​ ($125,000 - $3,500 - $12,000 + $7,143 +
$21,428 - $17,100) = ​1.05
Adjusted return on sales ratio: ($45,000 - $3,500 + $7,143 - $17,100) ​÷​ $400,000 = ​0.079

OBJ: LO 2

15. The following financial information is for DC Company, a non-U.S. firm with shares listed on a
U.S. stock exchange:

Net income computed according to home country GAAP ........ $ 40,000

Stockholders' equity, computed according to home country GAAP
...................................................... 170,000
Minority interest, recorded as an addition to stockholders'
equity .................................................... 35,000

Market value of investment securities acquired this year that

were reported at cost of $4,000 ...................... $ 5,000
Interest on the financing of self-constructed assets ...... 6,000

29
 If DC Company were following U.S. GAAP, the minority interest would have been classified as a
liability instead of as part of stockholders' equity. In addition, minority interest income of $4,000
for the year would have been excluded from the computation of net income. Under U.S. GAAP
the investment securities would have been classified as trading securities and the interest on
financing of self-constructed assets would have been capitalized rather than expensed.

Prepare reconciliations of DC's reported stockholders' equity and net income to U.S. GAAP.

ANS:

Reconciliation of stockholders' equity:

Stockholders' equity computed according to home country
GAAP .................................................... $170,000
Adjustments required to conform to U.S. GAAP:
Minority interest included in stockholders' equity ...... (35,000)
Unrealized gain on trading securities ($5,000 - $4,000) . 1,000
Interest on financing of self-constructed assets ........ 6,000​
Stockholders' equity according to U.S. GAAP ............. $142,000​

Reconciliation of net income:

Net income computed according to home country GAAP ...... $ 40,000
Minority interest income ................................ (4,000)
Unrealized gain on trading securities ($5,000 - $4,000) . 1,000
Interest on financing of self-constructed assets ........ 6,000​
Net income in accordance with U.S. GAAP ................. $ 43,000​

OBJ: LO 3

16. The following financial information is for Olaf Company, a non-U.S. firm with shares listed on a
U.S. stock exchange:

Net income computed according to home country GAAP ...... $ 350,000

Stockholders' equity, computed according to home country
GAAP .................................................... 4,100,000
Possible obligation for severance benefits to be paid to
employees in future years, recognized this year ......... 1,000,000
Minority interest, recorded as an addition to stockholders'
equity .................................... 30,000
Market value of investment securities acquired this year
that were reported at cost of $2,000 .................... $ 3,200
Interest on the financing of self-constructed assets .... 4,000

If Olaf Company were following U.S. GAAP, the minority interest would have been classified as
a liability instead of as part of stockholders' equity. In addition, minority interest income of
$3,000 for the year would have been excluded from the computation of net income. Under U.S.
GAAP the investment securities would have been classified as trading securities and the interest
on financing of self-constructed assets would have been capitalized rather than expensed.

Prepare reconciliations of Olaf's reported stockholders' equity and net income to U.S. GAAP.

30
 ANS:

Reconciliation of stockholders' equity:

Stockholders' equity computed according to home country
GAAP .................................................. $4,100,000
Adjustments required to conform to U.S. GAAP:
Possible obligation for severance benefits ............ 1,000,000
Minority interest included in stockholders' equity .... (30,000)
Unrealized gain on trading securities ($3,200 - $2,000) 1,200
Interest on financing of self-constructed assets ...... 4,000​
Stockholders' equity according to U.S. GAAP ........... $5,075,200​

Reconciliation of net income:

Net income computed according to home country GAAP .... $ 350,000
Possible obligation for severance benefits ............ 1,000,000
Minority interest income .............................. (3,000)
Unrealized gain on trading securities ($3,200 - $2,000) 1,200
Interest on financing of self-constructed assets ...... 4,000​
Net income in accordance with U.S. GAAP ............... $1,352,200​

OBJ: LO 3

17. Assume that you have just been hired as the controller of the Trent Manufacturing Company. In
order to be fully apprised of the financial and operating condition of the company, you have
decided to analyze several of the key accounts appearing on the company's financial statements.
An account of obvious interest to you is the company's trade accounts receivable.
Identify specific attributes of the accounts receivable that you would examine as well as any
ratios that might be useful to you in your analysis.

ANS:
An analysis of the accounts receivable of the company might include the following:

1. Identify receivables with the following characteristics and assess their effect on the company's
financial health generally:

a. Receivables from customers having severe financial difficulties.

b. Receivables from customers in economically unstable foreign countries.

2. Determine if the receivables are concentrated in just a few customers or are diversified among
many customers.

3. Nothing is said in the facts of the problem about whether Trent's trade receivables are from
other business enterprises or consumers. Trade receivables from consumers would be riskier than
those from other enterprises.

31
 4. Calculate the accounts receivable turnover. A high turnover rate usually shows that the
company is collecting quickly from customers. An excessively high turnover might indicate a
credit policy that is too stringent with the result that sales are lost. A low ratio may indicate that
large amounts of receivables are uncollectible as a result of weak collection policies or credit
terms that are too lenient. Quarterly or monthly sales figures may be required for use in the
turnover ratio if sales vary greatly during the year.

5. Calculate the accounts receivable-to-total-assets and accounts-receivable-to sales ratios to

determine if receivables are accumulating beyond what would reasonable be expected.

6. Calculate the sales-returns-to-sales and sales-returns-to-accounts receivable ratios. An upward

trend in these ratios may indicate errors in filling orders or problems with the quality of
merchandise sold.

7. Calculate the-bad-debts-to-accounts-receivable and bad-debts-to-net-sales ratios. These ratios

give some indication as to the adequacy of the bad debt provision the company is making in its
financial statements.

OBJ: LO 1

18. Laura Anderson has just been assigned as the senior accountant on the audit of Larsen
Manufacturing Company. Laura currently is planning the audit and has been considering what
procedures to perform in examining the company's inventories of raw materials, work-in-process,
and finished goods. She has determined that the calculation of certain ratios and other financial
analysis techniques will prove useful to her in deciding how to approach the audit of the
company's inventory accounts.

Identify the ratios to be calculated and the factors to be considered in Laura's analysis of the
company's inventory accounts.

32
ANS:
Laura should consider the following in her analysis of the company's inventory accounts:

1. The increase in inventory should be compared to the increase in sales. If the

inventory is increasing at a faster rate, then the company may accumulating inventory
it cannot sell. Unsaleable inventory likely will adversely affect future cash flows.

2. Inquiries should be made of management regarding the potential for implementing

just-in-time inventory procedures to minimize the investment in inventory and to
provide greater assurance of the production of high quality products.

3. The balances in the raw materials, work-in-process, and finished goods accounts
should be reviewed. A decrease in raw materials accompanied by an increase in
work-in-process and finished goods may indicate a possible future production
slowdown.

4. The inventory turnover ratio should be calculated for each major inventory category
and by department. Low turnover ratios may result from overstocking, obsolescence,
or a weak marketing effort. Low turnover may be acceptable for a new product that
has just begun to be marketed. A rate of turnover that is too high may indicate that
inventories are not adequate to serve customer needs resulting in a loss of valuable
business.

5. The number of days inventory is held should be calculated and compared to industry
figures and prior years. The trend for the ratio of inventory to sales also should be
examined.

6. A determination should be made regarding any inventories that might pose a health
or environmental hazard that such inventories have not been banned by a regulatory
agency. Such a ban could result in the need to write off large amounts of inventory.

7. The nature of the inventory should be evaluated to determine if the items in inventory
are susceptible to price variability or fads. Inventory items also may be specialized,
perishable, highly technological, or luxury items. All of these factors can affect future
demand and salability.

8. A determination should be made as to whether any inventory is pledged as collateral

for a loan.

9. Appropriate insurance coverage should be evidenced for inventory.

10 Storage sites for inventory should be evaluated for security that is adequate to protect
the inventory.

11. Pricing and quantity errors as well as appropriate costing of the inventory should be
considered.

OBJ: LO 1

33