Danh sach bai tap + cau hoi ly thuyet

Questions 3.1 – 3.18
3.3
Questions 4.1 – 4.15
Questions 6.1 – 6.15
Questions 7.1 – 7.9
Questions 8.1 – 8.12
Questions 9.1 – 9.15
9.3
Questions 10.10 – 10.24
Case 10.3
Questions 11.1 – 11.10
11.3 11.4

Exercise 3.1 + Problem 3.1, 3.2,
Problem 4.5 – 4.8
Problem 6.1, 6.5, 6.6, 6.7
Exercise 7.3 7.4 7.7 Problem 7.3
Exercise 8.1 8.2 8.5 8.6
Exercise 9.4 Problem 9.1 9.2
Exercise 10.1 Problem 10.3 10.4
11.17 11.19

Problem 11.1 11.2

3–1. Identify and describe the two major sources (as linked with business activities) of current
liabilities. (Xác định và mô tả hai nguồn chính (liên kết với các hoạt động kinh doanh) của nợ
ngắn hạn.)
1. The two major source of liabilities, for both current and noncurrent liabilities, are
operating and financing activities. Current liabilities of an operating nature—such as
accounts payable and operating expense accruals—represent claims on resources from
operating activities. Current liabilities such as notes payable, bonds, and the current

maturities of long-term debt reflect claims on resources from financing activities.

3–2. Identify the major disclosure requirements for financing-related current liabilities. (Xác
định các yêu cầu công bố thông tin chính cho khoản nợ ngắn hạn liên quan tài chính.)
2. The major disclosure requirements (in SEC FRR, Section 203) for financing-related
current liabilities such as short-term debt are:
a.
Footnote disclosure of compensating balance arrangements including those not
reduced to writing
b.
Balance sheet segregation of (1) legally restricted compensating balances and (2)
unrestricted compensating balances relating to long-term borrowing arrangements if the
compensating balance can be computed at a fixed amount at the balance sheet date.
c.
Disclosure of short-term bank and commercial paper borrowings:
i.
Commercial paper borrowings separately stated in the balance sheet.
ii.
Average interest rate and terms separately stated for short-term bank and
commercial paper borrowings at the balance sheet date.
iii.
Average interest rate, average outstanding borrowings, and maximum month-end
outstanding borrowings for short-term bank debt and commercial paper combined for
the period.
d.
Disclosure of amounts and terms of unused lines of credit for short-term
borrowing arrangements (with amounts supporting commercial paper separately stated)
and of unused commitments for long-term financing arrangements.

Note that the above disclosures are required for filings with the SEC but not

necessarily for disclosures in published annual reports. It should also be noted
that SFAS 6 states that certain short-term obligations should not necessarily be


classified as current liabilities if the company intends to refinance them on a
long-term basis and can demonstrate its ability to do so.
3–3. Describe the conditions necessary to demonstrate the ability of a company to refinance its
short-term debt on a long-term basis. (Mô tả các điều kiện cần thiết để chứng minh khả năng của
một công ty để tái tài trợ nợ ngắn hạn của nó trên cơ sở lâu dài.)
3. The conditions required by SFAS 6 that demonstrate the ability of the company to
refinance it short-term debt on a long-term basis are:
a.
The company has actually issued a long-term obligation or equity securities to
replace the short-term obligation after the date of the company's balance sheet but
before its release.
b.
The company has entered into an agreement with a bank or other source of capital
that permits the company to refinance the short-term obligation when it becomes due.

Note that financing agreements that are cancelable for violation of a provision
that can be evaluated differently by the parties to the agreement (such as ―a
material adverse change‖ or ―failure to maintain satisfactory operations ‖) do not
meet the second condition. Also, an operative violation of the agreement should
not have occurred.
3–4. Explain how bond discounts and premiums usually arise. Describe how they are accounted
for. (Giải thích cách mà phần bù và chiết khấu trái phiếu thường phát sinh. Mô tả cách thức mà
chúng được hạch toán.)
4. Since the interest rate that will prevail in the bond market at the time of issuance of
bonds can never be predetermined, bonds usually are sold in excess of par (premium) or
below par (discount). This premium or discount represents, in effect, an adjustment of

the coupon rate to the effective interest rate. The premium received is amortized over the
life of the issue, thus reducing the coupon rate of interest to the effective interest rate
incurred. Conversely, the discount also is amortized, thus increasing the effective
interest rate paid by the borrower.

3–5. Both convertibility and warrants attached to debt aim at increasing the attractiveness of debt
securities and lowering their interest cost. Describe how the costs of these two features affect
income and equity. (Cả hai khả năng chuyển đổi và bảo đảm gắn liền với nợ mục tiêu để tăng
tính hấp dẫn của chứng khoán nợ và giảm chi phí lãi vay của chúng. Mô tả cách thức chi phí của
hai tính năng này ảnh hưởng đến thu nhập và vốn chủ sở hữu.)
5. The accounting for convertibility and warrants impacts income and equity as follows:
a.
The convertible feature is attractive to investors. As a result, the debt will be
issued at a slightly lower interest rate and the resulting interest expense is less (and
conversely, equity is increased). Also, diluted earnings per share is reduced by the
assumed conversion. At conversion, a gain or loss on conversion may result when
equity instruments are issued.
b.
Similarly, warrants attached to bonds allow the bonds to pay a lower interest rate.
As a result, interest expense is reduced (and conversely, equity is increased). Also,
diluted earnings per share is affected because the warrants are assumed converted.


3–6. Explain how the issuance of convertible debt and warrants can affect the valuation analysis
conducted by current and potential stockholders. (Giải thích việc phát hành nợ chuyển đổi và bảo
đảm có thể ảnh hưởng đến việc phân tích định giá được tiến hành bởi các cổ đông hiện tại và
tiềm năng.)
6. It is important to the analysis of convertible debt and stock warrants to evaluate the
potential dilution of current and potential shareholders if the holders of these options
choose to convert them to stock. This potential dilution would represent a real wealth

transfer for existing shareholders. Currently, this potential dilution is given little formal
recognition in financial statements.

3–7. Describe the major disclosure requirements for long-term liabilities. (Mô tả các yêu cầu
công bố chính đối với nợ dài hạn.)
7. SFAS 47 requires note disclosure of commitments under unconditional purchase
obligations that provide financing to suppliers. It also requires disclosure of future
payments on long-term borrowings and redeemable stock. Required disclosures include:
For purchase obligations not recognized on purchaser's balance sheet:
a.
Description and term of obligation.
b.
Total fixed and determinable obligation. If determinable, also show these amounts
for each of the next five years.
c.
Description of any variable obligation.
d.
Amounts purchased under obligation for each period covered by an income
statement.
For purchase obligations recognized on purchaser's balance sheet, payments for each of
the next five years.
For long-term borrowings and redeemable stock:
a.
Maturities and sinking fund requirements for each of the next five years.
b.
Redemption requirements for each of the next five years.

3–8. Debt contracts usually place restrictions on the ability of a company to deploy resources and
to pursue business activities. These are often referred to as debt covenants. (Các hợp đồng nợ
thường đặt các hạn chế về khả năng của một công ty để triển khai các nguồn lực và theo đuổi các

hoạt động kinh doanh. Chúng thường được gọi là giao ước nợ.)
a. Identify where information about such restrictions is found. (Xác định nơi thông tin về những
hạn chế như vậy được tìm thấy.)
b. Define margin of safety as it applies to debt contracts and describe how the margin of safety
can impact assessment of the relative level of company risk. (Xác định biên an toàn khi áp dụng
cho các hợp đồng nợ và mô tả cách biên độ an toàn có thể ảnh hưởng đến đánh giá mức độ liên
quan của rủi ro công ty.)
8. a.
Information about debt covenant restrictions are available in the details of the
bond indentures of a company. Moreover, key restrictions usually are identified and
discussed in the financial statement notes.
b.
The margin of safety as it applies to debt contracts refers to the slack that the
company has before it would violate any of the debt covenant restrictions and be in
technical default. For example, if the debt covenant mandates a maximum debt to assets


ratio of 50% and the current debt to assets ratio is 40%, the company is said to have a
margin of safety of 10%. Technical default is costly to a company.
Thus, as the margin of safety decreases, the relative level of company risk increases.

3–9. Explain how analysis of financial statements is used to evaluate a company’s liabilities, both
existing and contingent. (Giải thích cách phân tích các báo cáo tài chính được sử dụng để đánh
giá công nợ của một công ty, cả hiện có và tiềm ẩn.)
9. Analysis of the terms and conditions of recorded liabilities is an area deserving an
analyst's careful attention. Here, the analyst must examine critically the description of
debt, its terms, conditions, and encumbrances with a desire to satisfy him/her as to the
ability of the company to meet principal and interest payments. Important analyses in the
evaluation of liabilities are the examination of features such as:
 Contractual terms of the debt agreement, including payment schedule

 Restrictions on deployment of resources and freedom of action
 Ability to engage in further financing
 Requirements relating to maintenance of working capital, debt to equity ratio, etc.
 Dilutive conversion features to which the debt is subject.
 Prohibitions on disbursements such as dividends
Moreover, we review the audit report since we expect auditors to require satisfactory
recording and disclosure of all existing liabilities. Auditor tests include the scrutiny of
board of director meeting minutes, the reading of contracts and agreements, and inquiry
of those who may have knowledge of company obligations and liabilities.

The analysis of contingencies (and commitments) also is aided by financial
statement analysis. However, the analysis of contingencies and commitments is
more challenging because these liabilities typically do not involve the recording
of assets and/or costs. Here, the analyst must rely on information provided in
notes to the financial statements and in management commentary found in the
text of the annual report and elsewhere. Due to the uncertainties involved, the
descriptions of commitments, and especially contingent liabilities, in the notes
are often vague and indeterminate. This means that the burden of assessing the
possible impact of contingencies and the probabilities of their occurrence is
passed to the analyst. Yet, the analyst assumes that if a contingency (and/or
commitment) is sufficiently serious, the auditor can qualify the audit report.
The analyst, while utilizing all information available, must nevertheless bring
his/her own critical evaluation to bear on the assessment of all existing liabilities
and contingencies to which the company may be subject. This process must
draw not only on available disclosures and reports, but also on an understanding
of industry conditions and practices.
3–10. a. Describe the criteria for classifying leases by a lessee. (Mô tả các tiêu chí để phân loại
hợp đồng thuê của bên thuê.)
b. Prepare a summary of accounting for leases by a lessee. (Chuẩn bị một bản tóm tắt của kế
toán cho hợp đồng thuê của bên thuê.)

10. a. A lease is classified and accounted for as a capital lease if at the inception of the
lease it meets one of four criteria: (1) the lease transfers ownership of the property to the
lessee by the end of the lease term; (2) the lease contains an option to purchase the
property at a bargain price; (3) the lease term is equal to 75 percent or more of the
estimated economic life of the property; or (4) the present value of the rentals and other
minimum lease payments, at the beginning of the lease term, equals 90 percent of the fair
value of the leased property less any related investment tax credit retained by the lessor.
If the lease does not meet any of those criteria, it is to be classified and accounted for as
an operating lease.

With regard to the last two of the above four criteria, if the beginning of the lease
term falls within the last 25 percent of the total estimated economic life of the
leased property, neither the 75 percent of economic life criterion nor the 90
percent recovery criterion is to be applied for purposes of classifying the lease
and as a consequence, such leases will be classified as operating leases.
b.
Summary of accounting for leases by lessees:
1.
The lessee records a capital lease as an asset and an obligation at an amount
equal to the present value of minimum lease payments during the lease term, excluding
executory costs (if determinable) such as insurance, maintenance, and taxes to be paid
by the lessor together with any profit thereon. However, the amount so determined
should not exceed the fair value of the leased property at the inception of the lease. If
executory costs are not determinable from provisions of the lease, an estimate of the
amount shall be made.
2.
Amortization, in a manner consistent with the lessee's normal depreciation policy,
is called for over the term of the lease except where the lease transfers title or contains a

bargain purchase option; in the latter cases amortization should follow the estimated
economic life.

3.
In accounting for an operating lease the lessee will charge rentals to
expenses as they become payable, except when rentals do not become payable
on a straight-line basis. In the latter case they should be expensed on such a
basis or on any other systematic or rational basis that reflects the time pattern of
benefits serviced from the leased property.
3–11.A a. Identify the different classifications of leases by a lessor. Describe the criteria for
classifying each lease type. (Xác định các phân loại khác nhau của hợp đồng thuê của bên cho
thuê. Mô tả các tiêu chí để phân loại từng loại thuê.)
b. Explain the accounting procedures for leases by a lessor. (Giải thích các quy trình kế toán cho
hợp đồng thuê của bên cho thuê.)
11. a.
1.
2.
3.

The major classifications of leases by lessors are:
Sales-type leases
Direct financing leases
Operating leases

The criteria for classifying each type are as follows: If a lease meets any one of
the four criteria for capitalization (see question 10a above) plus two additional
criteria (see below), it is to be classified and accounted for as either a sales-type
lease (if manufacturer or dealer profit is involved) or a direct financing lease. The
additional criteria are (1) collectibility of the minimum lease payments is
reasonable predictable, and (2) no important uncertainties surround the amount

of unreimbursable costs yet to be incurred by the lessor under the lease. A lease


not meeting these criteria is to be classified and accounted for as an operating
lease.
b.

The accounting procedures for leases by lessors are:

Sales-type leases
1.
The minimum lease payments plus the unguaranteed residual value accruing to
the benefit of the lessor are recorded as the gross investment in the lease.
2.
The difference between gross investment and the sum of the present value of its
two components is recorded as unearned income. The net investment equals gross
investment less unearned income. Unearned income is amortized to income over the
lease term so as to produce a constant periodic rate of return on the net investment in
the lease. Contingent rentals are credited to income when they become receivable.
3.
At the termination of the existing lease term of a lease being renewed, the net
investment in the lease is adjusted to the fair value of the leased property to the lessor at
that date, and the difference, if any, recognized as gain or loss. The same procedure
applies to direct financing leases (see below.)

4.
The present value of the minimum lease payments discounted at the
interest rate implicit in the lease is recorded as the sales price. The cost, or
carrying amount, if different, of the leased property, and any initial direct costs (of
negotiating and consummating the lease), less the present value of the

unguaranteed residual value is charged against income in the same period.
5.
The estimated residual value is periodically reviewed. If it is determined to be
excessive, the accounting for the transaction is revised using the changed estimate. The
resulting reduction in net investment is recognized as a loss in the period in which the
estimate is changed. No upward adjustment of the estimated residual value is made. (A
similar provision applies to direct financing leases.)
Direct-financing leases
1.
The minimum lease payments (net of executory costs) plus the unguaranteed
residual value plus the initial direct costs are recorded as the gross investment.
2.
The difference between the gross investment and the cost, or carrying amount, if
different, of the leased property, is recorded as unearned income. Net investment equals
gross investment less unearned income. The unearned income is amortized to income
over the lease term. The initial direct costs are amortized in the same portion as the
unearned income. Contingent rentals are credited to income when they become
receivable.
Operating leases

The lessor will include property accounted for as an operating lease in the
balance sheet and will depreciate it in accordance with his normal depreciation
policy. Rent should be taken into income over the lease term as it becomes
receivable except that if it departs from a straight-line basis income should be
recognized on such basis or on some other systematic or rational basis. Initial
costs are deferred and allocated over the lease term.


3–12.A Describe the provisions concerning leases involving real estate. (Mô tả các quy định về
thuê liên quan đến bất động sản.)

12.
Where land only is involved the lessee should account for it as a capital lease if
either of the enumerated criteria (1) or (2) is met. Land is not usually amortized.
In a case involving both land and building(s), if the capitalization criteria applicable to
land (see above) are met, the lease will retain the capital lease classification and the
lessor will account for it as a single unit. The lessee will have to capitalize the land and
buildings separately, the allocation between the two being in proportion to their
respective fair values at the inception of the lease.
If the capitalization criteria applicable to land are not met, and at the inception of the
lease the fair value of the land is less than 25 percent of total fair value of the leased
property both lessor and lessee shall consider the property as a single unit. The
estimated economic life of the building is to be attributed to the whole unit. In this case if
either of the enumerated criteria (3) or (4) is met the lessee should capitalize the land and
building as a single unit and amortize it.
If the conditions above prevail but the fair value of land is 25 percent or more of the total
fair value of the leased property, both the lessee and the lessor should consider the land
and the building separately for purposes of applying capitalization criteria (3) and (4). If
either of the criteria is met by the building element of the lease it should be accounted for
as a capital lease by the lessee and amortized. The land element of the lease is to be
accounted for as an operating lease. If the building element meets neither capitalization
criteria, both land and buildings should be accounted for as a single operating lease.

Equipment which is part of a real estate lease should be considered separately
and the minimum lease payments applicable to it should be estimated by
whatever means are appropriate in the circumstances. Leases of certain facilities
such as airport, bus terminal, or port facilities from governmental units or
authorities are to be classified as operating leases.
3–13. Discuss the implications of lease accounting for the analysis of financial statements. (Thảo
luận về những tác động của kế toán hợp đồng thuê để phân tích các báo cáo tài chính.)
13.

In the books of the lessee, the primary consideration regarding leases is
the appropriate classification of operating leases. When leases are classified as
operating leases, the lease payment is recorded as rent expense. However, lease
assets and liabilities are kept off the balance sheet. Because of this, many
companies avail themselves of operating lease treatment even when the
underlying economics justify capitalizing the leases. If this is done, the asset and
liabilities of a company are underreported and its debt-to-equity ratios are biased
downward. Often such leases are a form of ―off balance sheet‖ financing.
Therefore, an analyst must carefully examine the classification of operating
leases and capitalize the leases when the underlying economic justify.
3–14.A When a lease is considered an operating lease for both the lessor and the lessee, describe
what amounts will be found on the balance sheets of both the lessor and the lessee related to the
lease obligation and the leased asset. (Khi một hợp đồng thuê được xem là thuê hoạt động cho cả
hai bên cho thuê và bên thuê, mô tả những gì số tiền đã được tìm thấy trên bảng cân đối của cả
hai bên cho thuê và bên thuê liên quan đến nghĩa vụ thuê và tài sản cho thuê.)


14.
For the lessor, when a lease is considered an operating lease, the leased asset
remains on its books. For the lessee, it will not report an asset or an obligation on its
balance sheet.

3–15.A When a lease is considered a capital lease for both the lessor and the lessee, describe
what amounts will be found on the balance sheets of both the lessor and the lessee related to the
lease obligation and the leased asset. (Khi một hợp đồng thuê được coi là một hợp đồng thuê vốn
cho cả hai bên cho thuê và bên thuê, mô tả những gì số tiền đã được tìm thấy trên bảng cân đối
của cả hai bên cho thuê và bên thuê liên quan đến nghĩa vụ thuê và tài sản cho thuê.)
15.
When a lease is considered a capital lease for both the lessor and the lessee, the
lessor will report lease payments receivable on its balance sheet. The lessee will report

the leased asset and a lease obligation totaling the present value of future lease
payments.

3–16. Discuss how the lessee reflects the cost of leased equipment in the income statement for
(a) assets leased under operating leases and (b) assets leased under capital leases. (Thảo luận về
cách bên thuê phản ánh chi phí của thiết bị được cho thuê trong báo cáo thu nhập cho (a) Tài sản
cho thuê theo hợp đồng thuê hoạt động và (b) các tài sản cho thuê theo hợp đồng thuê vốn.)
16. a. Rent expense
b. Interest expense and depreciation expense

3–17.A Discuss how the lessor reflects the benefits of leasing in the income statement under (a)
an operating lease and (b) a capital lease. (Thảo luận về cách bên cho thuê phản ánh lợi ích của
việc cho thuê trong báo cáo thu nhập theo (a) là thuê hoạt động và (b) một hợp đồng thuê vốn.)
17. a. Leasing revenue
b. Interest revenue (and possibly gain on sale in the initial year of the lease)

3–18. Companies use various financing methods to avoid reporting debt on the balance sheet.
Identify and describe some of these off-balance-sheet financing methods. (Các công ty sử dụng
phương pháp tài chính khác nhau để tránh báo cáo nợ trên bảng cân đối. Xác định và mô tả một
số trong những phương pháp tài chính ngoại bảng.)
18.
Property, plant, and equipment can be financed by having an outside party
acquire the facilities while the company agrees to do enough business with the facility to
provide funds sufficient to service the debt. Examples of these kinds of arrangements
are through-put agreements, in which the company agrees to run a specified amount of
goods through a processing facility or "take or pay" arrangements in which the company
guarantees to pay for a specified quantity of goods whether needed or not.
A variation of the above arrangements involves the creation of separate entities for
ownership and the financing of the facilities (such as joint ventures or limited
partnerships) which are not consolidated with the company's financial statements and

are, thus, excluded from its liabilities.

Companies have attempted to finance inventory without reporting on their
balance sheets the inventory or the related liability. These are generally product


financing arrangements in which an enterprise sells and agrees to repurchase
inventory with the repurchase price equal to the original sales price plus carrying
and financing costs or other similar transactions such as a guarantee of resale
prices to third parties.
4–1. Companies typically report compensating balances that are required under a loan agreement
as unrestricted cash classified within current assets.
a. For purposes of financial statement analysis, is this a useful classification? Explain.
b. Describe how you would evaluate compensating balances.
1. a. No. When analyzing cash, the most liquid of current assets, the analyst is
interested in the availability of cash in meeting the company's obligations. A
restriction under compensating balance arrangements does, at worst, remove
these cash balances from immediate availability as means of payment. Indeed,
use of such balances can have repercussions for the company that can affect its
future access to bank credit.

b. The analyst should exclude cash restricted under compensating balance
agreements from current assets. SEC Accounting Series Release 148
requires that a company that has borrowed money from a bank segregate
on its balance sheet any cash subject to withdrawal or usage restrictions
under compensating balance agreements with the lending bank. These
requirements may, as is often the case in such situations, move companies
and their banker to alter the form of their contractual agreements while
retaining their substance. The analyst must be ever alert to such attempts
to distort analysis measurements by presentations whose form is not a

true reflection of their substance. One measure of a company’s
vulnerability in this area is the ratio of restricted cash to total cash.
4–2. a. Explain the concept of a company’s operating cycle and its meaning. (Giải thích các khái
niệm về chu kỳ kinh doanh của công ty và ý nghĩa của nó.)
b. Discuss the significance of the operating cycle to classification of current versus noncurrent
items in a balance sheet. Cite examples. (Thảo luận về ý nghĩa của các chu kỳ kinh doanh để
phân loại các khoản mục current với noncurrent trong một bảng cân đối. Cho ví dụ.)
c. Is the operating cycle concept useful in measuring the current debt-paying ability of a
company and the liquidity of its working capital components? ( khái niệm chu kỳ kinh doanh có
hữu ích trong việc đo lường khả năng chi trả trong ngắn hạn của một công ty và tính thanh khoản
của các thành phần vốn lưu động của nó hay không?)
d. Describe the impact of the operating cycle concept for classification of current assets in the
following industries: (1) tobacco, (2) liquor, and (3) retailing. (Mô tả các tác động của các khái
niệm chu kỳ kinh doanh để phân loại tài sản ngắn hạn trong ngành công nghiệp sau: (1) thuốc lá,
(2) rượu, và (3) bán lẻ.)
2. a. The operating cycle concept is important in the classification of assets and
liabilities as either current or noncurrent. The operating cycle encompasses the
period of time from the commitment of cash for purchases until the collection of
receivables resulting from the sale of goods or services. The diagram near the
beginning of Chapter 4 illustrates this concept.


b. If the normal collection interval of a receivables is longer than a year (such
as with longer term installment receivables), then their inclusion as current
assets is proper provided the operating cycle is equal to or greater than the
obligation due date for the receivables. Similarly, if inventories, by
business need or custom, have to be kept on average for more than 12
months, then this normal inventory holding period becomes part of the
operating cycle and such inventories are included among current assets.
c. The limitations of the current ratio (which is computed from items defined

as working capital) as a measure of shortterm liquidity are discussed in
Chapter 11. Still, if we accept the proposition that it is useful to measure
the current resources available to pay current obligations, then it is difficult
to see how extension of "current" from the customary 12 months to
periods of 36 months or longer can serve a useful purpose. The operating
cycle concept may help companies show the kind of positive current
position that they otherwise might not be able to show, but this concept is
of doubtful value or validity from the point of view of a financial analyst that
must assess a company’s shortterm liquidity.
d. (1) Tobacco Industry. The tobacco leaf must go through an aging, curing,
and drying process extending over several years. This tobacco inventory
(green leaves), that may not be used in the production of a salable product
for many years, is classified as current under the operating cycle concept.
This would occur even if longterm loans (classified among noncurrent
liabilities) were taken out to finance the carrying of this inventory.
(2) Liquor Industry. The liquor industry has an operating cycle extending
beyond the customary 12 months. In this case, the holding of liquor
inventory for aging purposes over many years provides sufficient
justification for inclusion of such inventories among current assets.
(3) Retailing Industry. In retailing, the sale of "large ticket" items on the
installment plan can extend the operating cycle to, for example, 36 months
or longer. As such, these installment receivables are reported among
current assets.
4–3. a. Identify the main concerns in analysis of accounts receivable. (Xác định các mối quan
tâm chính trong phân tích các khoản phải thu.)
b. Describe information, other than that usually available in financial statements, that we should
collect to assess the risk of noncollectibility of receivables.
3. a. The two most important questions facing the financial analyst with respect to
receivables are: (1) Is the receivable genuine, due, and enforceable? and (2) Has
the probability of collection been properly assessed? While the unqualified

opinion of an independent auditor lends some assurance with regard to these
questions, the financial analyst must recognize the possibility of an error of
judgment as well as the lack of complete independence.

b. Description of the receivables in the notes to financial statements usually
do not contain sufficient clues to allow a reliable judgment as to whether a
receivable is genuine, due, and enforceable. Consequently, knowledge of


industry practices and supplementary sources of information must be used
for additional assurance, e.g.:
• In some industries, such as compact discs, toys, or books, a substantial
right of merchandise return exists and allowance must be made for this.
• Most provisions for uncollectible accounts are based on past
experience although they should also make allowances for current and
emerging industry conditions. In practice, the accountant is likely to
attach more importance to the former than to the latter. The analyst
must, in such cases, use one’s own judgment and knowledge of
industry conditions to assess the adequacy of the provision for
uncollectible accounts.
• Information that would be helpful in assessing the general level of
collection risks with receivables is not usually found in published
financial statements. Such information can, of course, be sought from
the company directly. Examples of such information are: (1) What is
customer concentration? What percent of total receivables is due from
one or a few major customers? Would failure of any one customer have
a material impact on the company's financial condition? (2) What is the
age pattern of the receivables? (3) What proportion of notes receivable
represent renewals of old notes? (4) Have allowances been made for
trade discounts, returns, or other credits to which customers are

entitled?
• The analyst, in assessing current financial position and a company's
ability to meet its obligations currently—as expressed by such
measures as the current ratio—must recognize the full impact of
accounting conventions that relate to classification of receivables as
"current." For example, the operating cycle concept allows the inclusion
of installment receivables, which may not be fully collectible for years.
In balancing these against current obligations, allowance for such
differences in timing of cash flows should be made.
4–4. a. What is meant by the factoring or securitization of receivables? (ý nghĩa của việc phân
tích hoặc chứng khoán hóa các khoản phải thu là gì?)
b. What does selling receivables with recourse mean? What does it mean to sell them without
recourse?
c. How does selling receivables (particularly with recourse) potentially distort the balance sheet?
4.

a.
Factoring or securitization of receivables refers to the practice of
selling all or a portion of a company’s receivables to a third party.
b. When receivables are sold with recourse, the third party purchaser of
the receivables retains the right to collect from the company that sold
the receivable if the receivable proves uncollectible. When receivables
are sold without recourse, the purchaser of the receivables assumes the
collection risk.
c. When receivables are sold with recourse, the balance sheet reports the
cash received from the sale of the receivable. However, the balance


sheet may or may not report the contingent liability to the receivables
purchaser for uncollectible receivables purchased with recourse—this

depends on who assumes the risk of ownership.
4–5. a. Discuss the consequences for each of the acceptable inventory methods in recording costs
of inventories and in determination of income. (Thảo luận về hậu quả đối với mỗi phương pháp
hàng tồn kho chấp nhận được trong việc ghi lại chi phí hàng tồn kho và xác định thu nhập.)
b. Comment on the variation in practice regarding the inclusion of costs in inventories. Give
examples of at least two sources of such cost variations. (Nhận xét về sự thay đổi trong thực tế
liên quan đến sự bao gồm các chi phí hàng tồn kho. Cho ví dụ về ít nhất hai nguồn của các biến
thể chi phí như vậy.)
5. a. Few useful generalizations about the effect of differing methods of inventory
valuation on financial analysis can be made. Yet, we provide some guidance.
• In the case of LIFO, we know that under conditions of fluctuating price levels,
it will have a smoothing effect on income. Moreover, the LIFO method yields, in
times of price inflation, an unrealistically low inventory amount. This, in turn,
lowers the current ratio and tends to increase the inventory turnover ratio. We
also know that the LIFO method affords management an opportunity to
manipulate profits by allowing inventory to be depleted in poor years, thus
drawing on the low cost pool to inflate income. A judgment on all of these
consequences can only be made on the basis of an assessment of all
surrounding circumstances. For example, a slight change in a current ratio of
4:1 may be of no significance, whereas the same change in a ratio of 1.5:1 may
be of far greater importance.

•

The use of FIFO for the valuation of inventories will generally result in a
higher inventory on the balance sheet and a lower cost of goods sold
(and higher income) in comparison to LIFO.
• The average cost method smoothes out cost fluctuations by using a
weighted average cost in valuing inventories and in pricing cost of
goods sold. The resulting net income will be close to an average of the

net income under LIFO and FIFO.
• The "lowerofcostormarket" principle of inventory accounting has
additional implications for the analyst. In times of rising prices it tends
to undervalue inventories regardless of the cost method used. This, in
turn, will depress the current ratio below its true level since the other
current assets (as well as current liabilities) are not valued on a
consistent basis with the methods used in valuing inventories.
b. In practice we can find wide variations in the kinds of costs that are
included in inventory. Practice varies particularly with respect to the
inclusion or exclusion of (1) various classes of overhead costs, (2)
freightin, and (3) general and administrative costs. This variety in practices
can have a significant effect on comparability across companies.
4–6. a. Describe the importance of the level of activity on the unit cost of goods produced by a
manufacturer. (Mô tả tầm quan trọng của mức độ hoạt động vào chi phí đơn vị hàng hoá được
sản xuất bởi nhà sản xuất.)


b. Allocation of overhead costs requires certain assumptions. Explain and illustrate cost
allocations and their links to activity levels with an example. (Phân bổ chi phí chung đòi hỏi một
số giả định. Giải thích và minh họa cho việc phân bổ chi phí và liên kết của chúng với mức độ
hoạt động với một ví dụ.)
6. a. The allocation of overhead costs to all units of production must be done on
a rational basis designed to get the best approximation of actual cost.
However, this is far from easy. The greatest difficulty stems from the fact
that a good part of overhead is fixed costs, i.e., costs that do not vary with
production but vary mostly with the lapse of time. Examples are rent
payments and the factory manager's salary. Thus, assuming only a single
product is produced, fixed costs are $100,000, and 10,000 units are
produced, then each unit will absorb $10 of fixed costs. However, if 5,000
units are produced, each unit will absorb $20 of fixed costs. This shows

that level of activity is an important determinant of unit cost—wide
fluctuations in output can yield wide fluctuations in unit cost.
b. To allocate fixed costs to units, an assumption initially must be made as to
how many units the company expects to produce. This determines over
how many units the overhead costs is allocated. That calculation requires
estimates of sales and related production. To the extent that actual
production differs from estimated production, overhead costs will be either
overapplied or underapplied. That means that production and inventory are
charged with more than total overhead costs or with an insufficient amount
of overhead costs.
4–7. Explain the major objective(s) of LIFO inventory accounting. Discuss the consequences of
using LIFO in both measurement of income and the valuation of inventories for the analysis of
financial statements. (Giải thích các mục tiêu chính của kế toán hàng tồn kho LIFO. Thảo luận về
hậu quả của việc sử dụng LIFO trong cả hai phép đo lường thu nhập và xác định giá trị hàng tồn
kho để phân tích các báo cáo tài chính.)
7. The major objective of the LIFO method of inventory accounting is to charge
cost of goods sold with the most recent costs incurred. When the price level is
stable, the results under either the FIFO or the LIFO method will be the same.
When price levels change, the use of these different methods can yield
significantly different financial results. One of the primary aims of LIFO is to
obtain a better matching of costs and revenues in times of inflation. Under the
LIFO method, the income statement is given priority over the balance sheet.
This means that while a matching of more current costs with revenues occurs
in times of price inflation (deflation), the inventory carrying amounts in the
balance sheet will be unrealistically low (high). Note that use of the LIFO
method is encouraged by its acceptance for tax purposes. The tax law
stipulates that its use for tax purposes makes mandatory its adoption for
financial reporting.

4–8. Discuss current disclosures for inventory valuation methods and describe how these
disclosures are useful in our analysis. Identify additional types of inventory disclosures that
would be useful for analysis purposes.
8. In most annual reports, insufficient information is given to allow the analyst to
convert inventories accounted for under one method to a figure reflecting a
different method of inventory accounting. Most analysts want such
information to better compare the financial statements of companies that use
different inventory accounting methods. Converting an inventory figure from
one method to another is made even more difficult by the use of different
methods for various components of inventory. Still, analysts must, in most
cases, make an overall assessment of the impact of different inventory
methods on the comparability of inventory figures. Such an assessment
should be based on a thorough understanding of the inventory methods in
use and the effect they are likely to have on inventory values. The differences
that arise between informed approximations and exact figures using additional
data generally are not materially different.
To be most useful, disclosures of inventory methods must give, in addition to
methods used, an identification of the inventory components (in amounts)
where such methods are used. More important, disclosure of the dollar
difference between the method in use and the method most prevalent in the
industry would be very useful.
4–9. Companies typically apply the lower-of-cost-or-market (LCM) method for inventory
valuation. (Các công ty thường áp dụng các phương pháp lower-of-cost-or-market (LCM) xác
định giá trị hàng tồn kho.)
a. Define cost as it applies to inventory valuation. (Xác định chi phí khi áp dụng cho định giá
hàng tồn kho.)
b. Define market as it applies to inventory valuation. (Xác định thị trường khi áp dụng để định
giá hàng tồn kho.)
c. Discuss the rationale behind the LCM rule. (Thảo luận về lý do đằng sau nguyên tắc LCM.)
d. Identify arguments against the use of LCM. (Xác định các luận cứ chống lại việc sử dụng của

LCM.)
9

a. Cost, defined generally as the price paid or consideration given to acquire an
asset, is the primary basis in accounting for inventories. As applied to inventories,
cost generally means the sum of the applicable expenditures and charges directly
or indirectly incurred in bringing an article to its existing condition and location.
These applicable expenditures and charges include all acquisition and production
costs—but they exclude selling expenses and general and administrative
expenses not clearly related to production.

b. Market, as applied to the valuations of inventories, means the current bid
price at the balance sheet date for the inventory in the volume for which it
is usually purchased in. The term is applicable to inventories of purchased
goods and to manufactured goods (involving materials, labor, and
overhead). More generally, market means current replacement cost—
although, it must not exceed the net realizable value (estimated selling
price less predicted costs of completion and disposal) and must not be


less than net realizable value reduced by an allowance for a normal profit
margin.
c. The usual basis for carrying forward inventory to the next period is cost.
Departure from cost is required, however, when the utility of the goods
included in inventory is less than their cost. This loss in utility should be
recognized as a loss of the current period, the period in which it occurred.
Furthermore, the subsequent period should be charged for goods at an
amount that measures their expected contribution to that period. In other
words, the subsequent period should be charged for inventory at prices no
higher than those that would have been paid if the inventory had been

obtained at the beginning of that period. (Historically, the
lowerofcostormarket rule arose from the accounting convention of
providing for all losses and anticipating no profits—conservatism.) In
accordance with the foregoing reasoning the rule of "cost or market,
whichever is lower" may be applied to each item in the inventory, to the
total of the components of each major category, or to the total of the
inventory, whichever most clearly reflects the economic reality. The LCM
rule is usually applied to each item, but if individual inventory items enter
into the same category or categories of finished product, alternative
procedures are suitable.
d. Arguments against use of the lowerofcostormarket method of valuing
inventories include:
(1) The method requires the reporting of estimated losses (all or a portion
of the excess of actual cost over replacement cost) as income charges
even though the losses have not been sustained to date and may never be
sustained. Under a consistent criterion of realization, a drop in selling price
below cost is no more a sustained loss than a rise above cost is a realized
gain.
(2) A price shrinkage is brought into the income statement before the loss
has been sustained through sale. Furthermore, if the charge for the
inventory writedown is not made to a special loss account, the cost figure
for goods actually sold is inflated by the amount of the estimated shrinkage
in price of the unsold goods. The title "Cost of Goods Sold" therefore
becomes a misnomer.
(3) The method is inconsistent in application in a given year because it
recognizes the propriety of implied price reductions but gives no
recognition in the accounts or financial statements to the effect of price
advances.
(4) The method is inconsistent in application in one year as opposed to
another because the inventory of a company may be valued at cost at one

year-end and at market at the next yearend.
(5) The lowerofcostormarket method values inventory in the balance sheet
conservatively. Its effect on the income statement, however, may be the
opposite. Although the income statement for the year in which the
unsustained loss is taken is reported conservatively, the net income for the


subsequent period may be distorted if the expected reductions in sales
prices do not materialize.
(6) In the application of the lower of cost or market rule, a prospective
"normal profit" is used in determining inventory values in certain cases.
Since normal profit is an estimated figure based upon past experiences
(and might not be attained in the future), it is not objective in nature and
presents an opportunity for manipulation of the results of operations.
4–10. Compare and contrast the effects of LIFO and FIFO inventory costing methods on
earnings in an inflationary period. (So sánh và đối chiếu tác động của phương pháp định giá hàng
tồn kho LIFO và FIFO lên thu nhập trong một chu kỳ kinh doanh)
10
LIFO tends to yield lower reported earnings when prices rise as compared
to FIFO. The following illustration highlights these effects:
Period
Units in Inventory
Cost per Unit
Total Cost
Period 1……………… 5

Period 2……………… 5
Period 3……………… 5

$5

$25

10
15

50
75

Under LIFO, if 10 units are sold, then cost of goods sold is $125, computed as
(5 x $15) + (5 x $10). Also, the LIFO inventory value is $25, computed as 5 x $5.
If units are sold for $20, then gross profit is $75, computed as (10 x $20) $125.
Under FIFO, if 10 units are sold, then cost of goods sold is $75, computed as
(5 x $5) + (5 x $10). Gross profit would be $125, computed as $200 $75.
Inventory would be valued at $75, computed as 5 x $15—inflating the balance
sheet. This shows that FIFO tends to increase income and taxes in inflationary
periods.
4–11. Manufacturers report inventory in the form of raw materials, work-in-process, and finished
goods. For each category, discuss how an increase might be viewed as a positive or a negative
indicator of future performance depending on the circumstances that led to the inventory build
up. (Các nhà sản xuất báo cáo hàng tồn kho trong các dạng nguyên liệu, đang trong quá trình sản
suất, và thành phẩm. Đối với mỗi loại, thảo luận làm cách nào mốt sự gia tăng có thể được xem
như là một chỉ số tích cực hay tiêu cực của hiệu suất trong tương lai tùy thuộc vào hoàn cảnh dẫn
đến việc xây dựng hàng tồn kho.)
11.

Increases in raw materials can, in certain instances, be a positive sign that
the company is building inventories to meet expected demand. However,
increases in both raw materials and work-in-process inventories, can reflect
inefficient operations that have slowed production. Increases in finished

goods can reflect the building of warehoused inventory to meet large demand
or it can represent the stock piling of finished goods that are not in great
demand. The crucial part of analysis is to interpret these changes in the
context of current and projected industry conditions.
4–12. Comment on the following: Depreciation accounting is imperfect for analysis purposes.
(Bình luận câu phát biểu sau: kế toán khấu hao là không hoàn hảo cho mục đích phân tích.)
12.

The observation is correct in pointing out that an analyst must subject the
data regarding an entity's depreciation policies to critical analysis and


scrutiny. The company can choose among several acceptable but vastly
different depreciation methods. The reasons a particular choice(s) is made by
the company and the effect on reported depreciation expense and
accumulated depreciation should be assessed.
4–13. Analysts cannot unequivocally accept the depreciation amount. One must try to estimate
the age and efficiency of plant assets. It is also useful to compare depreciation, current and
accumulated, with gross plant assets, and to make comparisons with similar companies. While an
analyst cannot adjust earnings for depreciation with precision, an analyst doesn’t require
precision. Comment on these statements.
13.

In the absence of more precise data, an analyst is better off adjusting
depreciation charges on the basis of his/her estimates and assumptions than
not adjusting them at all. Analyses such as those described in the chapter can
help to create a more useful estimate of periodic depreciation expense and
accumulated depreciation.
4–14. Identify analytical tools useful in evaluating deprecation expense. Explain why they are
useful.

14.

There are a number of measures relating to plant assets that are useful in
comparing depreciation policies over time as well as for intercompany
comparisons.
The average total life span of plant and equipment can be approximated as:
Gross Plant and Equipment ÷ Current Year Depreciation Expense.
The average age of plant and equipment can be computed as:
Accumulated Depreciation ÷ Current Year Depreciation Expense.
The average remaining life of plant and equipment is computed as:
Net Depreciated Plant and Equipment ÷ Current Year Depreciation
Expense.
Also, drawing on the above relations, we can compute:
Average Total Life Span = Average Age + Average Remaining Life.
The above ratios are helpful in assessing a company's depreciation policies
and assumptions over time. The ratios can be computed on a historical cost
basis as well as on a current cost basis.

4–15. Analysts must be alert to what aspects of goodwill in their analysis of financial statements?
15.
One of the more common solutions applied by analysts to the analysis of
goodwill is to simply ignore it. That is, they ignore the asset shown on the
balance sheet. As for the income statement, under current accounting
standards, goodwill is no longer amortized, but is subjected to an impairment
test annually and written down if required. Often, however, the write-down
expense is treated with skepticism and is frequently ignored. By ignoring
goodwill, analysts ignore investments of very substantial resources in what
may often be a company's most important and valuable asset. Ignoring the
impact of goodwill on reported income is no solution to the analysis of this
complex item. Even considering the limited information available, an analyst is

better off evaluating the accounting numbers for goodwill rather than
dismissing them altogether.
Goodwill is measured by the excess of cost over the fair market value of
tangible net assets acquired in a transaction accounted for as a purchase. It is
the excess of the purchase price over the fair value of all the tangible assets
acquired, arrived at by carefully ascertaining the value of such assets—at
least in theory. The analyst must be alert to the makeup and the method of
valuation of Goodwill as well as to the method of its ultimate disposition. One
way of disposing of the Goodwill account, frequently preferred by
management, is to write it off at a time when it would have the least impact on
the market's assessment of the company's performance. (for example, in a
period of losses or reduced earnings).
6–1. Explain why an analyst attaches great importance to evaluation of the income statement.
(Giải thích lý do tại sao một nhà phân tích coi trọng đánh giá các báo cáo thu nhập.)
1.

The income statement portrays the net results of operations of an
enterprise. Since results are what enterprises are established to achieve and
since their value is, in large measure, determined by the size and quality of
these results, it follows that the analyst attaches great importance to the
income statement.
6–2. Define income. Distinguish income from cash flow. (Định nghĩa thu nhập. Phân biệt thu
nhập với dòng tiền.)
2. Income summarizes in financial terms the operating activities of a company.
Income is the amount of revenues and gains for the period in excess of
expenses and losses, all computed under accrual accounting. Income
provides a measure of the change in shareholder wealth for a period and an
indication of a company’s future earning power. Accounting income differs

from cash flows because certain revenues and gains are recognized in periods
before or after cash is received and certain expenses and losses are
recognized in periods before or after cash is paid.
6–3. What are the two basic economic concepts of income? What implications do they have for
analysis? (Hai khái niệm kinh tế cơ bản của thu nhập là gì? Chúng có tác động gì đến việc phân
tích?)
3. Economic income is net cash flows plus the change in the present value of
future cash flows. Another similar concept, the Hicksian concept of income,
considers income for the period to be the amount that can be withdrawn from
the company in a period without changing the net wealth of the company.
Hicksian income equals cash flow plus the change in the fair value of net
assets.
6–4. Explain how accountants measure income. (Giải thích cách kế toán đo lường thu nhập.)


4. Accounting income is the excess of revenues and gains over expenses and
losses measured using accrual accounting. As such, revenues (and gains) are
recognized when earned and expenses (losses) are matched against the
revenues (and gains).
6–5. Distinguish between net income, comprehensive income, and continuing income. Cite
examples of items that create differences between these three income measures.
5. Net income is the excess of the revenues and gains of the company over the
expenses and losses of the company. Net income often is called the “bottom
line,” although that is a misnomer because certain unrealized holding gains
and losses are charged directly to equity and bypass net income.
Comprehensive income includes all changes in equity that result from nonowner transactions (excluding items such as dividends and stock issuances).
Items creating differences between net income and comprehensive income
include unrealized gains and losses on available for sale securities, foreign
currency translation adjustments, minimum pension liability adjustments, and
unrealized holding gains or losses on derivative instruments. Comprehensive

income is the ultimate “bottom line” income number. Continuing income is a
measure of net income earned by ongoing segments of the company.
Continuing income differs from net income because continuing income
excludes the income or loss of segments of the company that are to be
discontinued or sold (it also excludes extraordinary items and effects from
changes in accounting principles).
6–6. Although comprehensive income is the bottom line income number, it is rarely reported in
the income statement. Where will you typically find details regarding comprehensive income?
6. Details regarding comprehensive income are reported by the vast majority of
companies in the statement of stockholders’ equity rather than the income
statement.
6–7. Analysts often refer to the core income of a company. What is meant by the term core
income? (Thu nhập chính là gì?)
7. Core income is a measure of income that excludes all non-recurring items that
are reported as separate items on the income statement.
6–8. Distinguish between operating and nonoperating income. Cite examples of items that are
typically included in each category. (Phân biệt giữa thu nhập hoạt động và không hoạt động. cho
ví dụ.)
8. Operating income is a measure of firm performance from operating activities.
Examples of operating income include product sales, cost of product sales,
and selling, general, and administrative costs. Non-operating income includes


all components of income not included in operating income. Examples of
non-operating income include interest revenue and interest expense.
6–9. Operating vs. nonoperating and recurring vs. nonrecurring are two distinct dimensions of
classifying income. Explain this statement and discuss whether or not you agree with it. (hoạt
động với không hoạt động, thường xuyên với không thường xuyên là hai cách phân loại chính
của thu nhập. giải thích và thảo luận câu trên.)
9. Operating versus non-operating and recurring versus non-recurring are

distinct dimensions of classifying income. While there is overlap across
selected items, these dimensions reflect different characteristics of business
activities. For example, the interest income and interest expense of most
companies recur in net income; hence, they are included in recurring income.
However, these items are non-operating in nature. Similarly, non-recurring
items such as restructuring charge are operating in nature.
6–10. How does accounting define an extraordinary item? Cite three examples of such an item.
What are the analysis implications of such an item? (làm cách nào để xác định một khoản mục
nào đó là bất thường. cho 3 ví dụ)
10. Accounting standards (APB 30) restricted the use of the "extraordinary"
category by requiring that an extraordinary item be both unusual in nature and
infrequent in occurrence. These attributes are defined as follows:
a. Unusual nature of the underlying event or transaction should possess a high
degree of abnormality and be of a type clearly unrelated to, or only incidentally
related to, the ordinary and typical activities of the entity, taking into account the
environment in which the entity operates.
b. Infrequency of occurrence of the underlying event or transaction should be of a
type that would not reasonably be expected to recur in the foreseeable future,
taking into account the environment in which the entity operates.

Three examples of extraordinary items are:
•
Major casualty losses from an event such as an earthquake, flood, or fire.
•
A gain or loss from expropriation of property.
•
A gain or loss from condemnation of land by eminent domain.
6–11. Describe the accounting treatment for discontinued operations. How should an analyst
treat discontinued operations? (mô tả cách mà kế toán xử lý các hoạt động không liên tục. làm
cách nào để phân tích các hoạt động không liên tục.)

11. To qualify as discontinued operations, the assets and business activities of
the divested segment must be clearly distinguishable from the assets and
business activities of the remaining entity. Accounting and reporting for
discontinued operations is two-fold. First, the income statement for the
current and prior two years are restated after excluding the effects of the
discontinued operations from the line items that determine continuing income.
Second, gains or losses pertaining to the discontinued operations are


reported separately, net of related tax effects. An analyst should separate and
ignore discontinued operations in predicting future performance and financial
condition.
6–12. What conditions are necessary for an item to qualify as a prior period adjustment?
12. To qualify as a prior period adjustment, an item must meet the following
requirements:
• Material in amount.
• Specifically identifiable with the business activities of specific prior periods.
• Not attributable to economic events occurring subsequent to the prior period.
• Dependent primarily on determinations by persons other than management.
• Not reasonably estimable prior to such determination.
6–13. Identify some accounting sources of income distortion.
13. Distortions in revenues (gains) and expenses (losses) can arise from several
accounting sources. These include choices in the timing of transactions
(such as revenue recognition and expense matching), selections from the
variety of generally accepted principles and methods available, the
introduction of conservative or aggressive estimates and assumptions, and
choices in how revenues, gains, expenses, and losses are classified and
presented in financial statements. Generally, a company wishing to increase
current income at the expense of future income will engage in one or more of
the following practices:

(a)
(b)
(c)

(d)
(e)
(f)
(g)
(h)
(i)

It will choose inventory methods that allow for maximum inventory carrying
values and minimum current charges to cost of goods or services sold.
It will choose depreciation methods and useful lives of property that will result in
minimum current charges as depreciation expense.
It will defer all managed costs to the future such as, for example: pre-operating,
moving, rearrangement and startup costs, and marketing costs. Such costs would
be carried as deferred charges or included with the costs of other assets such as
property, plant, and equipment.
It will amortize assets and defer costs over the largest possible period. Such
assets include goodwill, leasehold improvements, patents, and copyrights.
It will elect the method requiring the lowest possible pension and other
employment compensation cost accruals.
It will inventory rather than expense administrative costs, taxes, and similar items.
It will choose the most accelerated methods of income recognition such as in the
areas of leasing, franchising, real estate sales, and contracting.
It immediately will recognize as revenue, rather than defer the taking up of
benefits, items such as investment tax credits.
Companies that wish to “manage” the size of accounting income can regulate the
flow of income and expense by means of reserves for future costs and losses.

6–14. For each of the three items, (1) depreciation, (2) inventory, and (3) installment sales,
explain: (Đối với mỗi một trong ba mặt hàng, (1) khấu hao, (2) hàng tồn kho, và (3) bán hàng trả
góp, giải thích:)


a. Two acceptable accounting methods for reporting purposes. (Hai phương pháp kế toán được
chấp nhận cho mục đích báo cáo.)
b. How each of the two acceptable accounting methods identified affect current period income.
(Làm thế nào mỗi một trong hai phương pháp kế toán được chấp nhận xác định ảnh hưởng đến
thu nhập giai đoạn hiện nay.)
14. (1) Depreciation
a. Straight Line: This is calculated by taking the salvage value (S) from the
original cost (C) and dividing by the useful life of the asset in question;
that is, (C-S)/(Useful life). SumofYears'Digits: This depreciation formula
is: (CS) x (X/Y); where C and S are the same as above, X is the
remaining years (that is, if item is being depreciated over 5 years and
this is the first year, then X=5), and Y equals the "sumofyears'digits"
(that is, for a 5-year asset, Y=5+4+3+2+1=15).
b. Straight line is easily understood and provides level depreciation and
earnings effects. The sumoftheyears'digits gives heavier weight to
earlier years and causes higher depreciation and lower earnings in the
early years and lower depreciation and higher earnings toward the end
of the asset's life.
(2) Inventory
a. LIFO (lastin, firstout) method: The LIFO method assumes the inventory
employed are those most recently acquired. FIFO (first-in, firstout)
method: The FIFO method assumes the first inventory items acquired
are used first.
b. The effect on earnings depends on whether the economy is in an

inflationary or deflationary period. In times of inflation (the more usual
case), LIFO inventory accounting would result in lower earnings being
reported than would be the case had FIFO been employed.
(3) Installment sales
a. Accrual method: Assumes income is recognized when the sale is made
(earned). Installment method: Assumes income is recognized only when
cash is received as the various installments come in.
b. The installment method is commonly used for tax purposes while the
accrual method is employed in financial statements. The accrual
method would result in a higher earnings figure being reported than the
installment method.
6–15. Accounting practice distinguishes among different types of accounting changes. Identify
three different types of accounting changes.
15.
(a)
(b)
(c)

Three different types of accounting changes include:
Changes in accounting principle
Changes in accounting estimate
Changes in reporting entity


7–1. What is the meaning of the term cash flow? Why is this term subject to confusion and
misrepresentation?
1. The term cash flow was probably first coined by analysts. They recognized
that the accrual system of income measurement permits the introduction of a
variety of alternative accounting treatments and consequent distortions. The
crude concept of cash flow—net income plus major noncash expenses (such

as depreciation)—was derived to bypass these distortions and bring income
measurement closer to the discipline of actual cash flows. This cash flow
measure, still a popular surrogate for cash from operations (CFO), is crude
because it falls short of reliably approximating in most cases the correct
measure of CFO.
Confusion with the term cash flow derives from several sources. One source
of confusion stems from the initial and incorrect computation of the crude
measure of cash flow as income plus major noncash expenses. The figure
fails to reflect actual cash flows. Another and more serious confusion arises
from the assertion by some, and particularly by managers dissatisfied by the
level of their reported net income, that cash flow is a measure of performance
superior to or more valid than net income. This assertion implicitly assumes
that depreciation, and other noncash costs, are not genuine expenses.
Experience shows that only net income is properly regarded as a measure of
performance and can be related to the equity investment as an indicator of
operating performance. If we add back depreciation to net income and
compute the resulting return on investment, we are, in effect, confusing the
return on investment with an element of return on investment in fixed assets.
7–2. What information can a user of financial statements obtain from the statement of cash
flows?
2.

•
•
•
•
•
•
•
•

•

While fragmentary information on the sources and uses of cash can be obtained from
comparative balance sheets and from income statements, a comprehensive picture of this
important area of activity can be gained only from a statement of cash flows (SCF). The SCF
provides information to help answer questions such as:
What amount of cash is generated by operations?
What utilization is made of cash provided by operations?
What is the source of cash invested in new plant and equipment?
What use is made of cash from a new bond issue or the issuance of common stock?
How is it possible to continue the regular dividend in the face of an operating loss?
How is debt repayment achieved?
What is the source of cash used to redeem the preferred stock?
How is the increase in investments financed?
Why, despite record profits, is the cash position lower than last year?

7–3. Describe the three major activities the statement of cash flows reports. Cite examples of
cash flows for each activity.


3.

SFAS 95 requires that the statement of cash flows classify cash receipts
and cash payments by operating, financing and investing activities.

Operating activities encompass all the earningrelated activities of the
enterprise. They encompass, in addition to all the income and expense items
found on the income statement, all the net inflows and outflows of cash that
operations impose on the enterprise. Such operations include activities such
as the extension of credit to customers, investment in inventories, and

obtaining credit from suppliers. This means operating activities relate to all
items in the statement of income (with minor exceptions) as well as to balance
sheet items that relate to operations mostly working capital accounts such as
accounts receivable, inventories, prepayments, accounts payable, and
accruals. SFAS 95 also specifies that operating activities include all
transactions and events that are not of an investing or financing nature.
Financing activities include obtaining resources from owners and providing
them with a return of or a return on (dividends) their investment. They also
include obtaining resources from creditors and repaying the amounts
borrowed or otherwise settling the obligations.
Investing activities include acquiring and selling or otherwise disposing of
both securities that are not cash equivalents and productive assets that are
expected to generate revenues over the longterm. They also include lending
money and collecting on such loans.
7–4. Explain the three categories of adjustments in converting net income to cash flows from
operations. (Giải thích ba loại điều chỉnh trong việc chuyển đổi thu nhập ròng sang dòng tiền từ
hoạt động.)
4. We can distinguish among three categories of adjustments that convert
accrual basis net income to cash from operations: (i) Expenses, losses,
revenues, and gains that do not use or generate cash such as those involving
noncash accounts (except those in ii), (ii) Net changes in noncash accounts
(mostly in the operating working capital group) that relate to operations—
these modify the accrualbased revenue and expense items included in
income, (iii) Gains and losses (such as on sales of assets) that are transferred
to other sections of the SCF so as to show the entire cash proceeds of the
sale.
7–5. Describe the two methods of reporting cash flow from operations. Mô tả hai phương pháp
báo cáo dòng tiền từ hoạt động.
5. The two methods of reporting cash flow from operations are:
Indirect Method: Under this method net income is adjusted for noncash items

required to convert it to CFO. The advantage of this method is that it is a
reconciliation that discloses the differences between net income and CFO.
Some analysts estimate future cash flows by first estimating future income
levels and then adjusting these for leads and lags between income and CFO
(that is, noncash adjustments).


Direct (or InflowOutflow) Method: This method lists the gross cash receipts
and disbursements related to operations. Most respondents to the Exposure
Draft that preceded SFAS 95 preferred this method because this presentation
discloses the total amount of cash that flows into the enterprise and out of the
enterprise due to operations. This gives analysts a better measure of the size
of cash inflows and outflows over which management has some degree of
discretion. As the risks that lenders are exposed to relate more to fluctuations
in CFO than to fluctuations in net income, information on the amounts of
operating cash receipts and payments is important in assessing the nature of
those fluctuations.
7–6. Contrast the purpose of the income statement with that of cash flow from operations.
6. The function of the income statement is to measure the profitability of the
enterprise for a given period. This is done by matching expenses and losses
with the revenues and gains earned. While no other statement measures
profitability as well as the income statement, it does not show the timing of
cash flows and the effect of operations on liquidity and solvency. The latter is
reported on by the SCF. Cash from operations (CFO) reflects a broader
concept of operations relative to net income. It encompasses all
earningrelated activities of the enterprise. CFO is concerned not only with
expenses and revenues but also with the cash demands of these activities,
such as investments in customer receivables and in inventories as well as the
financing provided by suppliers of goods and services. CFO focuses on the
liquidity aspect of operations and is not a measure of profitability because it

does not include important costs such as the use of longlived assets in
operations or important revenues such as the equity in the earnings of
nonconsolidated subsidiaries or affiliates.
7–7. Discuss the importance to analysis of the statement of cash flows. Identify factors entering
into the interpretation of cash flows from operations.
7. The SCF sheds light on (i) the effects of earning activities on cash resources,
(ii) what assets are acquired, and (iii) how assets are financed. It also can
highlight more clearly the distinction between net income and cash provided
by operations. The ability of an enterprise to generate cash from operations on
a consistent basis is an important indicator of financial health. No business
can survive over the long run without generating cash from its operations.
However, the interpretation of CFO figures and trends must be made with care
and with a full understanding of all surrounding circumstances.
Prosperous as well as failing entities can find themselves unable to generate
cash from operations at any given time, but for different reasons. The entity
caught in the "prosperity squeeze" of having to invest its cash in receivables
and inventories to meet everincreasing customer demand will often find that
its profitability will facilitate financing by equity as well as by debt. That same
profitability should ultimately turn CFO into a positive figure. The
unsuccessful firm, on the other hand, will find its cash drained by slowdowns
in receivable and inventory turnovers, by operating losses, or by a