时间证明Chapter 03 - Analyzing Financing Activities
Exercise 3-5—continued
Off-balance-sheet debt—such as industrial revenue bonds or pollution control financing where a municipality sells tax-free bonds guaranteed for payment—are cases where a supposedly debt-free balance sheet could look much worse if these obligations were recorded.
Finally, the practice of deferred taxes—such as taking some expenses for tax, but not book purposes, or through differences in timing for recognition of sales—is one that, while recorded on the balance sheet, is normally not recognized as a long-term obligation. However, if the rate of investment slows dramatically for some reason or if the sales trend is reversed, the sudden coming due of these tax liabilities could be a major problem.
(CFA Adapted)
Exercise 3-6 (20 minutes)
a. An estimated loss from a loss contingency is accrued with a charge to income if both of the following conditions are met:
? Information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss.
? The amount of loss can be reasonably estimated.
b. In this case, disclosure should be made for an estimated loss from a loss contingency that need not be accrued by a charge to income when there is at least a reasonable possibility that a loss may have been incurred. The disclosure should indicate the nature of the contingency and should estimate the possible loss or range of loss or state that such an estimate cannot be made.
Disclosure of a loss contingency involving an unasserted claim is required when it is probable that the claim will be asserted and there is a reasonable possibility that the outcome will be unfavorable.
Exercise 3-7 (15 minutes)
a. One reason that managers might want to resist recording a liability related to an ongoing lawsuit is that the recorded liability can cause deterioration in the financial position of the company. A second reason is that the opposing attorneys may use the disclosure inappropriately as an admission of liability.
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Exercise 3-7—continued
b. If a manager believes that it is inevitable that a liability will be recorded, the manager may want to time the recognition of the liability opportunistically. For example, if the company has a relatively bad period, the liability can be recorded in conjunction with a ―big bath.‖ If the company has a very good period, the manager might find that the liability can be recorded in that period without causing an unexpectedly bad earnings report.
Exercise 3-8 (40 minutes)
[Note: Unless otherwise indicated, much of the information to answer this exercise can be found in item [68] of Campbell’s financial statements.]
a. The causes of the $101.6 million increase are identified in the table below (see
Campbell’s Consol. Statement of Owners’ Equity and Changes in Number of Shares): Millions 11 10 Net Income .......................................................... $401.5 $ 4.4 (28) Cash Dividends ................................................... (142.2) (89) (126.9) (87) Treasury Stock Purchase ................................... (175.6) (41.1) (87) Treasury Stock Issued
Capital Surplus .............................................. 45.4 (91) 11.1 (87) Treasury Stock ............................................... 12.4 (91) 4.6 (87) Translation Adjustment ...................................... (29.9) (92) 61.4 (87) Sale of foreign operations .................................. (10.0) (93)
Increase in Stockholders' Equity ....................... 101.6a (86.5)b
a
1,793.4 [54] - 1,691.8 101.6
b
1,691.8 [54]
1,778.3 [87] (86.5)
b. The average price for treasury share purchases is computed as:
[($175.6 million1 / 3.395 million treasury shares purchased)] = $51.72
1
Treasury stock purchases from Statement of Cash Flows and Statement of Shareholders’ Equity
c. Book Value per Share of Common Stock is computed as:
[$1,793.4 [54] / 127.0* ] = $14.12
*135.6 [49] - 8.6 [52] – note: There is no preferred stock outstanding (Note: This value equals the company's computed amount [185] of $14.12.)
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Exercise 3-8—continued
d. The book value per share of common stock is $14.12. However, shares were
purchased during the year at an average of about $52 per share (an indicator of market value during the year). In fact, according to note 24 to the financial statements the stock traded in the $70 - $80 range in the fourth quarter of Year 11. There are several reasons why the market value of the stock is much higher than the book value of the stock. First, the market value impounds the investors’ beliefs about the future earning power of the company. Investors apparently have high expectations regarding future profitability. Second, the book value is recorded using accounting conventions such as historical cost and conservatism. Each of these conventions is designed to optimize the reliability of the information but can cause differences between the market and book values of a company’s stock.
Exercise 3-9 (30 minutes)
a. The principal transactions and events that reduce the amount of retained earnings include the following:
1. Operating losses (including extraordinary losses and other debit adjustments). 2. Stock dividends.
3. Dividends distributing corporate assets such as cash or in-kind. 4. Recapitalizations such as quasi-reorganizations.
b. The principal reason for making the distinction between contributed capital and retained earnings (earned capital) in the stockholders' equity section is to enable stockholders and creditors to identify dividend distributions as actual distributions of earnings or as returns of capital. This identification also is necessary to comply with most state statutes that provide that there should be no impairment of the corporation's legal or stated capital by the return of such capital to owners in the form of dividends. This concept of legal capital provides some measure of protection to creditors and imposes a liability upon the stockholders in the event of such impairment.
Knowledge of the distinction between contributed capital and earned capital provides a guide to the amount of dividends that can be distributed by the corporation. Assets represented by the earned capital, if in liquid form, may properly be distributed as dividends; but invested assets represented by contributed capital should ordinarily remain for continued operation of the corporation. If assets represented by contributed capital are distributed to shareholders, the distribution should be identified as a return of capital and, hence, is in the nature of a liquidating dividend. Knowledge of the amount of capital that has been earned over a period of years after adjustment for dividends also is of value to stockholders in judging dividend policy and
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Chapter 03 - Analyzing Financing Activities
obtaining an indication of past profits to the extent not distributed as dividends.
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Chapter 03 - Analyzing Financing Activities
Exercise 3-9—continued
c. The acquisition and reissuance of its own stock by a firm results only in the contraction or expansion of the amount of capital invested in it by stockholders. In other words, an acquisition of treasury shares by a corporation is viewed as a partial liquidation and the subsequent reissuance of these shares is viewed as an unrelated capital-raising activity. To characterize as gain or loss the changes in equity resulting from a corporation's acquisition and subsequent reissuance of its own shares at different prices is a misuse of accounting terminology. When a corporation acquires its own shares, it is not \anything nor has it incurred a \The price paid represents the amount by which the corporation has reduced its net assets or \reissues these shares it has not \anything. It has increased its total capitalization by the amount received.
It is the practice of referring to the acquisition and reissuance of treasury shares as a buying and selling activity that gives the superficial impression that, in this process, the firm is acquiring and disposing of assets and that, if different amounts per share are involved, a gain or loss results. Note, when a corporation \treasury shares it is not acquiring assets; nor is it disposing of any assets when these shares are subsequently \
Exercise 3-10 (25 minutes)
a. There are four basic rights inherent in ownership of common stock. The first right is that common shareholders may participate in the actual management of the corporation through participation and voting at the corporate stockholders meeting. Second, a common shareholder has the right to share in the profits of the corporation through dividends declared by the board of directors (elected by the common shareholders) of the corporation. Third, a common shareholder has a pro rata right to the residual assets of the corporation if it liquidates. Fourth, common shareholders have the right to maintain their interest (percent of ownership) in the corporation if the corporation issues additional common shares, by being given the opportunity to purchase a proportionate number of shares of the new offering. This fourth right is most commonly referred to as a \
b. Preferred stock is a form of capital stock that is afforded special privileges not normally afforded common shareholders in return for giving up one or more rights normally conveyed to common shareholders. The most common right given up by preferred shareholders is the right to participate in management (voting rights). In return, the corporation grants one or more preferences to the preferred shareholders. The most common preferences granted to preferred shareholders are these:
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