Question 2: What is the full disclosure principle in accountint? Why has disclosure increased substantially in the last 10 years?

Answer: The full disclosure principle in accounting calls for reporting in financial statements any financial facts significant enough to influence the judgement of an informed reader. Disclosure has increased because of the complexity of the business environment the necessity for timely information, and the desire for more information on the enterprise for control and monitoring purposes.

E24-6 (Ratio Analysis)

Howser Inc. is a manufacturer of electronic components and accessorie Selected financial ratios for Howser and the industry averages for firms page 1559 in your text.

Howser is being reviewed by several entities whose interests vary, and are part of the data being considered. Each of the parties listed on page action based on its evaluation of Howser's financial position. Instructions: a. C is listed below A

Describe the analytical use of each of the six ratios presented o The current ratio measures overall short-term liquidity and is an indi term debt-paying ability of the firm.

The quick ratio also is a measure of short-term liquidity. However, it more immediate liquidity than the current ratio and is an indicator of pay all of its immediate debts from cash or near-cash assets. The q an indicator of the degree of inventories in its current assets when c current ratio.

Inventory turnover is an indicator of the number of times a firm sells inventory level during the year. A low inventory turnover may indicat inventory accumulation or obsolete inventory.

Net sales to stockholders equity is an activity ratio that measures th the stockholders equity was turned over in sales volume. This ratio referred to as a net asset turnover ratio that measures net asset ma it is a measure of operational efficiency.

Net income to stockholders equity is a profitability ratio. It measures stockholders investment and is used to evaluate the companys suc generating income for the benefit of its stockholders (i.e., managem

Total liabilities to stockholders equity compares the amount of resou creditors to the resources provided by stockholders. Thus, it measu leverage in the companys financial structure and is used to evaluat degree of financial risk.

c.

Discuss what the financial ratios presented in the que answer by citing specific ratio levels and trends as we

Howser Inc. appears to have a strong current/liquidity pos current and quick ratios that have been improving over th addition, the current ratio is greater than the industry aver just slightly below. However, the increase in the current ra increase in inventory levels. This fact is confirmed by the turnover ratio that is also below the industry average. Ove inventory conditions may exist.

Howsers profitability is good as indicated by the profitabil increasing. Both profitability ratios are greater than the ind profit margin (net income to net sales) can be derived from income to stockholders equity and net sales to stockhold Howsers margin has increased each year (2011: 5.09%; 5.76%) and exceeds the industry average (3.86%).

The total liabilities to stockholders equity ratio has increa period and exceeds the industry average, indicating a hea high leverage position could be dangerous if sales volume income falls because interest expense is a fixed cash out

ents and accessories with total assets of $20,000,000. y averages for firms of similar size are presented on

interests vary, and the company's financial ratios arties listed on page 1559 must recommend an

x ratios presented on page 1559: quidity and is an indicator of the short-

b.

For each of the four entities described above presented in Illustration 24A-1 (on page 1549) as a basis for its decision regarding Howser.

liquidity. However, it is a measure of and is an indicator of a firms ability to cash assets. The quick ratio is also urrent assets when compared to the

r of times a firm sells its average turnover may indicate excessive

atio that measures the number of times es volume. This ratio could also be easures net asset management. Thus,

The two ratios that each of the four entities woul Howser Inc. are as follows: Citizens National Bank might employ the current to stockholders equity ratio. Charleston Company might employ either the cu with either the inventory turnover or total liabilitie Shannon Financial might employ net sales to sto stockholders equity. The Working Capital Management Committee m and the inventory turnover ratio.

ility ratio. It measures the return on te the companys success in lders (i.e., management effectiveness).

s the amount of resources provided by ders. Thus, it measures the extent of nd is used to evaluate or judge the

resented in the question reveal about Howser. Support your ls and trends as well as the interrelationships between these ratios:

g current/liquidity position as evidenced by the en improving over the three-year period. In han the industry average and the quick ratio is ease in the current ratio could be due to an t is confirmed by the deteriorating inventory ndustry average. Overstock or obsolete

cated by the profitability ratios that have been e greater than the industry average. The net s) can be derived from these two ratios (net et sales to stockholders equity), and h year (2011: 5.09%; 2012: 5.36%; 2013: erage (3.86%).

quity ratio has increased over the three-year rage, indicating a heavy reliance on debt. This gerous if sales volume, sales margin, or se is a fixed cash outlay.

es described above, identify two financial ratios, from those ratios 4A-1 (on page 1549), that would be most valuable regarding Howser.

the four entities would specifically use to examine

ht employ the current or quick ratio and the total liabilities

employ either the current or quick ratios in conjunction nover or total liabilities to stockholders equity ratio. mploy net sales to stockholders equity and net income to

gement Committee might review the current or quick ratio

Name: Problem: P24-3, Ratio Computations and Additional Analysis Course: Date:
Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% owns 15% of the common stock, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two $35,000 notes, which are due on June 30, 2011, and September 30, 2011. Another note of $6,000 is due on March 31, 2012, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburns cash flow problems are due primarily to the companys desire to finance a $300,000 plant expansion over the next 2 fiscal years through internally generated funds. The commercial loan officer of Topeka National Bank requested financial reports for the last 2 fiscal years. BRADBURN CORPORATION Statement of Financial Position March 31 Assets Cash Notes receivable Accounts receivable (net) Inventories (at cost) Plant & equipment (net of depreciation) Total assets Liabilities and Owners' Equity Accounts payable Notes payable Accrued liabilities Common stock (130,000 shares, $10 par) Retained earningsa Total liabilities and owners' equity
a

2011 $18,200 148,000 131,800 105,000 1,449,000 $1,852,000

2010 $12,500 132,000 125,500 50,000 1,420,500 $1,740,500

$79,000 76,000 9,000 1,300,000 388,000 $1,852,000

$91,000 61,500 6,000 1,300,000 282,000 $1,740,500

Cash dividends were paid at the rate of $1.00 per share in fiscal year 2010 and $2.00 per share in fiscal year 2011. SANDBURG CORPORATION Income Statement For The Fiscal Year Ended March 31 Sales Cost of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income after income taxes 2011 $3,000,000 1,530,000 1,470,000 860,000 610,000 244,000 $366,000 2010 $2,700,000 1,425,000 1,275,000 780,000 495,000 198,000 $297,000

Depreciation charges on the plant and equipment of $100,000 and $102,500 for the fiscal years ended March 31, 2010 and 2011, respectively, are included in cost of goods sold.

Problem 24-3, Page 8 of 11, 7/23/2012, 9:41 AM

Name: Problem: P24-3, Ratio Computations and Additional Analysis Course: Date:
Instructions: Fill in the provided matrix and utilize it as the matrix for "VLOOKUP" formulas within the cells below. Column 4 2011 Formula Formula Formula Formula Amount Amount Amount Amount Amount Amount Amount Amount Amount Amount Amount Amount Amount Column 5 2010 Formula

Average inventory - 2007 Average total assets Total Assets = Mar 31, 2002 Total Assets = Mar 31, 2006 Total Assets = Mar 31, 2007 Cost of goods sold Current assets Current liabilities Dividends Depreciation Gross margin Income before taxes Income taxes (40%) Inventories = EOY 2006 Inventories = EOY 2007 Net income after taxes Operating expenses Sales (a) Compute the following items for Bradburn Corporation: (1) Current ratio for fiscal years 2010 and 2011.

Amount Amount Amount Amount Amount Amount Amount Amount Amount Amount Amount Amount

2010 Current ratio =

Current assets ----------------------- = Current liabilities Current assets ----------------------- = Current liabilities

$320,000 ---------------- = $158,500 $403,000 ---------------- = $164,000

2.02

to 1

2011 Current ratio =

2.46

to 1

(2) Acid-test (quick) ratio for fiscal years 2010 and 2011. Current assets - Inventories ----------------------- = Current liabilities Current assets - Inventories ----------------------- = Current liabilities Formula ---------------- = Formula Formula ---------------- = Formula

2010 Quick ratio =

Formula to 1

2011 Quick ratio =

Formula to 1

(3) Inventory turnover for fiscal year 2011. Cost of goods sold ------------------------------------ = Average inventory Amount ---------------- = Formula

2011 Inventory Turnover =

Formula to 1

Problem 24-3, Page 9 of 11, 7/23/2012, 9:41 AM

Name: Problem: P24-3, Ratio Computations and Additional Analysis Course: Date:
(4) Return on assets for fiscal years 2010 and 2011. (Assume total assets were at March 31, 2009.) Net income ----------------------- = Average total assets Current assets ----------------------- = Current liabilities Formula ---------------- = Formula Formula ---------------- = Formula $1,688,500

2010 Return on assets =

Formula

2011 Return on assets =

Formula

(5) Percentage change in sales, cost of goods sold, gross margin, and net income after taxes from fiscal year 2010 to 2011. Omit "000" from the values. Percent Change 2010 2006 Change Sales Formula #VALUE! Formula Formula Formula Cost of goods sold Formula Formula Formula Formula Gross margin Formula Formula Formula Formula Net income after taxes Formula Formula Formula Note: The formulas in some cell formulas are "live" and need values placed in their source cells. (b) Identify and explain what other financial reports and/or financial analyses might be helpful to the commercial loan officer of Topeka National Bank in evaluating Daniel Browns request for a time extension on Bradburns notes. Other financial reports and financial analyses which might be helpful to the commercial loan officer of Spokane National Bank include: 1 Enter text answer as appropriate.

Enter text answer as appropriate.

Enter text answer as appropriate.

Enter text answer as appropriate.

Problem 24-3, Page 10 of 11, 7/23/2012, 9:41 AM

Name: Problem: P24-3, Ratio Computations and Additional Analysis Course: Date:

Problem 24-3, Page 11 of 11, 7/23/2012, 9:41 AM