Financial Statements Analysis Fall term 2022-2023

Tutorial 2

Balance Sheet

Questions

1. Differentiate between depreciation, amortization and depletion.

Depreciation: allocation of asset’s cost over useful life

Amortization: spreading the cost of an intangible asset

Depletion: allocation of cost of natural resource

2. Should depreciation be recognized on a building in a year in which the cost of replacing the
building rises? Explain.

Yes. In fact, depreciation is the process of allocating the economic benefits of a non-current
assets over the periods of benefits or useful life. However, the increase in the replacement cost
of the building may lead to the revaluation of the fixed asset if the GAAP allow the revaluation
model.

3. Differentiate between marketable securities and long-term investments.

Classification criterion: management intent: short-term or long-term

Marketable securities: temporary investments to be realized in cash in the short run. Generally,
they have low risk, low yield and are highly liquid.

Investments: long-term securities held for business purposes, maintaining sustainable

relationships with economic partners, obtaining economic benefits on the long run, future use in
operations, or for control. They are usually less liquid and riskier than marketable securities.

4. Many assets are handled at historical cost. Why does this accounting principle cause
difficulties in financial statement analysis?
Historical cost doesn’t measure the current value of assets. Fair value can be substantially
different from historical cost.
5. Describe fair value as it relates to assets and liabilities.

Fair value is the price that a company would receive to sell an asset (or transfer a liability) in an
orderly transaction between market participants on the date of measurement.

6. For level 3 valuation (fair value), the company must include the valuation technique used to
measure fair value, a of the changes in fair value during the period and a related discussion.
Why?
Level 3 valuation can be very subjective.

7. How is an unconsolidated subsidiary presented on a balance sheet?

If the subsidiary is not consolidated, it is presented as “investment” (non-current assets)

8. DeLand Company owns 100% of Little Florida, Inc. Will DeLand Company show a non-
controlling interest on its balance sheet? Would the answer change if it owned only 60%?
Will there ever be a case in which the subsidiary, Little Florida, is not consolidated?

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 Financial Statements Analysis Fall term 2022-2023

the parent company owns 100% of Little Florida, there will be no “non-controlling interest”
on its balance sheet. If it only owns 60%, noncontrolling interest exists and must be disclosed
on the consolidated statement. The subsidiary won’t be consolidated if DeLand Company
doesn’t control it. (Control is just temporary or doesn’t rest with the majority owner)

9. To be conservative, how should non-controlling interest on the balance sheet be handled for
primary analysis?
Even if the item is presented within equity on the consolidated balance sheet, it should be
considered as long-term liability for primary analysis (conservative approach) because it
represents the ownership interest of other shareholders.
10. Explain these preferred stock characteristics:
a. Accumulation of dividends: Cumulative feature: if the corporation fails to declare the usual
dividend on the cumulative preferred stock, past dividends become dividends in arrears.
Common shareholders cannot be paid any dividends until the preferred dividends in arrears
and current preferred dividends are paid.
b. Participation in excess of stated dividend rate: Preferred stockholders may receive an extra
dividend beyond the stated rate.
c. Convertibility into common stock: Preferred stockholders are allowed at their option to
convert the share of preferred stock at a specific exchange ratio into another security of the
corporation.
d. Callability by the corporation: Callable preferred stock may be retired (recalled) by the
corporation at its option.
e. Preference in liquidation: When corporation files for bankruptcy, preferred stockholders
have preference to have their claims settled before any payment to common stockholders.

11. What is redeemable preferred stock? Why should it be included with debt for purposes of
financial statement analysis?

Redeemable preferred stock has usually the following characteristics:

 No voting rights (preferred stock)

 Subject to mandatory redemption or retirement that is outside the control of the
issuer (redeemable)
 Fixed return
These features are debt characteristics rather than equity characteristics.

Problems

1 The assets of the Walt Disney Company on December 31, N are presented below. Amounts are
expressed in million dollars.

Cash and cash equivalents $2 722

Deferred income taxes (less than one year) 1018
Parks, resorts and other property, buildings and equipment 32 875
Property under finance lease 120
Accumulated depreciation of property, buildings and equipment (18 373)
Projects in progress 2 180
Inventories 1 442
Land 1 124
Receivables, net 5 784
Goodwill 24 100

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 Financial Statements Analysis Fall term 2022-2023

Investments 2 513
Other current assets 581
Allowance for doubtful accounts 670
Required: Answer the following questions:

a. Determine the net book value of property, buildings and equipment.

b. Determine the gross value of receivables.
c. Determine the total current assets.
d. Determine the total non-current assets.
a. Net book value of property, building and equipment=

Land+ Parks, resorts and other property, buildings and equipment+ Property under
finance lease- Accumulated depreciation on property, buildings and equipment=15 746

b. Gross receivables=Net receivables+ Allowance for doubtful accounts= 6 454

c. Current assets: cash and cash equivalents+ deferred income taxes+ Inventories+ Net
receivables=11 547
d. Non-current assets=Net book value of property, buildings and equipment+ Projects
in progress+ Goodwill+ Long-term investments=44 539

2 Listed below are the items of the liabilities section of Abbott Laboratories and subsidiaries on
December 31, N (amounts in thousands of dollars):

Trade payables 1 535 759

Salaries, wages and commissions 1 328 665
Accrued expenses 6 014 772
Long-term debt 12 523 517
Current portion of long-term debt 2 044 970
Non-current commitments and contingencies 780 356
Post-employment obligations 7 199 851
Income taxes payable 1 307 723
Dividends payable 680 749
Current obligation in connection with conclusion of the TAP pharmaceutical 36 105
Products Inc. joint venture
Required:

a. Determine the amount of the current liabilities.

b. Determine the amount of the non-current liabilities.
a. Current liabilities: Trade payables+ Salaries, wages and commissions+ Accrued expenses+
Current portion of long-term debt+ Income taxes payable +Dividends payable+ Current
obligation in connection with conclusion of joint venture= 12 948 743
b. Non-current liabilities=Long-term debt+ Non-current commitments and contingencies + Post-
employment obligations=20 503 724

3 The equity section of the comparative consolidated statement of financial position on December
31, N of Abbott Laboratories is presented below, the amounts are in thousands of dollars:

December December
31, N 31, N-1
Preferred shares, one dollar par value - -
Authorized- 1 000 000 shares, none issued

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 Financial Statements Analysis Fall term 2022-2023

Common shares, without par value 8 744 703 8 257 873

Authorized- 2 400 000 000 shares Issued at stated capital amount
Shares N: 1 619 689 876; N-1: 1 612 683 987
Common shares held in treasury, at cost- Shares: N: 72 705 928; N-1: (3 916 823) (3 310 347
61 516 398 )
Earnings employed in the business 18 927 101 17 054 027
Accumulated other comprehensive income (loss) (1 366 846) 854 074
Total Abbot shareholders’ equity ? ?
Noncontrolling interest 88 329 43 102
Total shareholders’ equity ? ?
Required:

a. The data presented pertain to a consolidated balance sheet. What does it mean to have a
consolidated balance sheet?
b. Determine the missing amounts in the equity section.
c. How many shares had been issued as of December 31, N?
d. How many shares were held in treasury on December 31, N?
e. How many shares were outstanding on December 31, N?
f. What is the treasury stock method used by the company?
g. Abbot Laboratories discloses the account Earnings employed in the business. What is this
account usually called?
a. The financial statements of the parent and the subsidiary are consolidated when the
subsidiary is controlled by the parent. The group Parent + Subsidiary constitutes one
economic whole.
b.

December 31, N December 31, N-1

Total Abbot shareholders’ equity 22 388 135 22 855 627
Total shareholders’ equity 22 476 464 22 898 729

c. 1 619 689 876

d. 72 705 928
e. 1 546 983 948
f. Cost method
g. Retained earnings

4 Corvallis Corporation owns 90% of the stock of little Harrisburg, Inc. at December 31, N. Little
Harrisburg had the following summarized balance sheet:

LITTLE HARRISBURG, INC.

Balance sheet
December 31, N

Current assets $150 000 Current liabilities $50 000

Non-current assets 600 000 Non-current liabilities 250 000
750 000 Capital stock 100 000
Retained earnings 350 000
750 000
The earnings of Little Harrisburg, Inc. for N were $80 000 after tax.

Required:

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 Financial Statements Analysis Fall term 2022-2023

a. What would be the amount of non-controlling interest on the balance sheet of Corvallis
Corporation?
b. What would be the non-controlling interest in share of earnings on the income statement of
Covallis Corporation?
a. 10%x450 000 = 45 000
b. 10%x80 000= 8 000

5 An item of equipment acquired on January 1 at a cost of $100 000 has an estimated life of 5 years.

Required: Assuming that the equipment will have a salvage value of $10 000, determine the
depreciation for each of the first three years by the:

a. Straight-line method
b. Declining-balance method
a. Straight-line depreciation:

Annual depreciation = (100 000 -10 000)/5= 18 000

b. Declining-balance method:

Year 1: 1/5x2x100 000= 40 000

Year 2: 1/5x2x60 000 = 24 000

Year 3: 1/5x2x36 000= 14 400

6 An item of equipment acquired on January 1 at a cost of $70 000 has an estimated use of 20 000
hours. During the first three years, the equipment was used 6 000 hours, 4 000 hours and 5 000
hours, respectively. The estimated salvage value of the equipment is $10 000.

Required: Determine the depreciation for each of the three years, using the unit-of-production
method.

Depreciation per machine hour: (70 000-10 000)/20 000= $3/machine hour

Year 1: 3x6 000= 18 000

Year 2: 3x4 000 = 12 000

Year 3: 3x5 000 = 15 000

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 Financial Statements Analysis Fall term 2022-2023

*7 Presented below are the different sections of the interim balance sheet of the company Société
d’articles Hygiéniques (SAH) on June 30, 2022. The amounts are expressed in dinars.

Immobilisations corporelles (valeur 268 608 930 Immobilisations financieres 105 968 712
brute)
Amortissements immibilisations 117 481 566 Stocks (valeur brute) 169 794 658
corporelles
Immobilisations incorporelles 3 139 618 Provision pour dépreciation 1 877 884
(valeur brute) des stocks
Amortissements immobilisations 2 244 629 Autres actifs courants (valeur 52 697 215
incorporelles brute)
Clients et comptes rattachés 136 421 725 Provisions autres actifs 959 258
(valeur brute) courants
Provisions sur clients et comptes 18 834 870 Liquidités et équivalents de 16 667 982
rattachés liquidités
Autres actifs non courants 1 397 957 Emprunts non courants 40 991 873
Placements et autres actifs 10 004 216 Autres passifs non courants 2 055 684
financiers
Capital social 65 345 762 Réserve légale 6 534 576
Subvention d’investissement 4 018 114 Fournisseurs et comptes 118 680 146
rattachés
Autres passifs courants 21 759 202 Prime d’émission 63 362 329
Autres passifs financiers courants 148 331 158 Résultats reportés 96 931 445
Résultats en attente d’affectation 23 224 095 Réserve spéciale de 14 825 308
réinvestissement
Concours bancaires 3 482 798 Résultat de l’exercice 13 760 316

Required: Present the related classified balance sheet.

Assets ; Contra-assets
Liabilities
Equity

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Financial Statements Analysis Fall term 2022-2023

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Financial Statements Analysis Fall term 2022-2023