LOS b: Analyze and evaluate the balance sheet for the current value of assets and liabilities.

Q1. A firm has booked as a sale, the transfer of $100 million in short-term accounts receivable to Public Finance Co., subject to

recourse. The notes to the financial statements disclose that as of the end of the fiscal year, $80 million remained uncollected.

In order to reflect this on the balance sheet, which of the following adjustments must be made?

A)   Decrease cash and increase accounts receivable.

B)   Increase accounts receivable and increase current liabilities.

C)   Decrease retained earnings and increase accounts receivable.

 Q2. The balance sheet shows real estate owned at $192,000. An analyst estimates the value of the property to be $4 Million and

adjusts the balance sheet accordingly. What liability account(s) will you adjust and by how much, if you assume the effective tax

rate is 36%?

A)       Increase retained earnings by $3,808,000.

B)       Increase retained earnings by $2,437,120 and increase deferred taxes by $1,370,880.

C)       Increase retained earnings by $2,437,120.

Q3. Assume that inventory costs are increasing in line with an overall inflation rate of 3 percent. If a firm reports

inventory using the last in, first out (LIFO) method, which of the following is most accurate?

A)     The less expensive inventory is flowing out to COGS.

B)     Lower profits and lower taxes are reported because new inventory is flowing out to COGS.

C)     LIFO reserve measures the accumulation of taxes paid.

Q4. The financial statement footnotes provide the following data:

§      Inventory valued at cost as determined by last in, first out (LIFO).

§      LIFO reserve is $5 million (ignore deferred taxes).

§      Operating leases finance other operational facilities and have a present value of $10 million.

§      $5 million of goodwill from previous acquisitions are intangible assets.

§      Due to a increase in interest rates, NGS’ long-term debt has a current market value of $70 million.

Once the balance sheet has been adjusted and restated, what is the total stockholders’ equity?

A)   $167.

B)   $195.

C)   $172.

Q5. Long-term debt-to-equity ratios based on the historical balance sheet and the adjusted balance sheet, in this

    instance, would be:

         Historical balance sheet            Adjusted balance sheet

A)   35.9%                                           48.9%

B)   39.5%                                           41.0%

C)   39.5%                                           55.9%

LOS b: Analyze and evaluate the balance sheet for the current value of assets and liabilities. fficeffice" />

Q1. A firm has booked as a sale, the transfer of $100 million in short-term accounts receivable to Public Finance Co., subject to

recourse. The notes to the financial statements disclose that as of the end of the fiscal year, $80 million remained uncollected.

In order to reflect this on the balance sheet, which of the following adjustments must be made?

A)   Decrease cash and increase accounts receivable.

B)   Increase accounts receivable and increase current liabilities.

C)   Decrease retained earnings and increase accounts receivable.

Correct answer is B)

Since the accounts receivable were sold with recourse, the risk on uncollected accounts remains with the company.

Q2. The balance sheet shows real estate owned at $192,000. An analyst estimates the value of the property to be $4 Million and

adjusts the balance sheet accordingly. What liability account(s) will you adjust and by how much, if you assume the effective tax

rate is 36%?

A)       Increase retained earnings by $3,808,000.

B)       Increase retained earnings by $2,437,120 and increase deferred taxes by $1,370,880.

C)       Increase retained earnings by $2,437,120.

Correct answer is A)

Since the property has not been sold, there is not a tax effect. The entire market value adjustment is included in retained earnings.

Q3. Assume that inventory costs are increasing in line with an overall inflation rate of 3 percent. If a firm reports

inventory using the last in, first out (LIFO) method, which of the following is most accurate?

A)     The less expensive inventory is flowing out to COGS.

B)     Lower profits and lower taxes are reported because new inventory is flowing out to COGS.

C)     LIFO reserve measures the accumulation of taxes paid.

Correct answer is B)

LIFO firm reports lower profits and lower taxes because all of the new, mores expensive inventory is flowing out to COGS thus, LIFO reserve measures the accumulation of taxes not paid and profits not recognized.

NGS Corporation Balance Sheet
(in millions)
Assets			Liabilities & Owners’ Equity
Cash	$20		Accounts payable	$25
Marketable securities	50		Notes payable	10
Accounts receivable	30		Total current liabilities	$35
Inventories	50
Total current assets	$150
			Long-term debt	$75
			Common stock (20M shs)	40
Net property, plant & equip.	$145		Retained earnings	150
Intangible assets	5		Total stockholders’ equity	$190
Total assets	$300		Total liabilities & equity	$300

Q4. The financial statement footnotes provide the following data:

§      Inventory valued at cost as determined by last in, first out (LIFO).

§      LIFO reserve is $5 million (ignore deferred taxes).

§      Operating leases finance other operational facilities and have a present value of $10 million.

§      $5 million of goodwill from previous acquisitions are intangible assets.

§      Due to a increase in interest rates, NGS’ long-term debt has a current market value of $70 million.

Once the balance sheet has been adjusted and restated, what is the total stockholders’ equity?

A)   $167.

B)   $195.

C)   $172.

Correct answer is B)

Equity adjustments follow:

+$5 (inventory adjustment)
?$5 (goodwill adjustment)
+$5 (long-term debt adjustment)
+$5 Million.

Q5. Long-term debt-to-equity ratios based on the historical balance sheet and the adjusted balance sheet, in this

    instance, would be:

         Historical balance sheet            Adjusted balance sheet

A)   35.9%                                           48.9%

B)   39.5%                                           41.0%

C)   39.5%                                           55.9%

Correct answer is B)

$75 / 190 = 39.5% based on historical balance sheet.

Adjusted debt = 70 market value + 10 operating lease = 80

$80 / 195 = 41.0% based on adjusted balance sheet.