Kelly Tough, president of Tu-Rock Industries Inc., believes that reporting operating cash flow per share on the income statement would be a useful addition to the company’s just completed financial statements. Please read a transcript of the discussion which took place between Kelly Tough and Tu-Rock controller, Tripp Kelso, in January, after the close of the fiscal year. Kelly: I have been reviewing our financial statements for the last year. I am disappointed that our net income per share has dropped by 10% from last year. This is not going to look good to our shareholders. Isn’t there anything we can do about this? Tripp: What do you mean? The past is the past, and the numbers are in. There isn’t much that can be done about it. Our financial statements were prepared according to generally accepted accounting principles, and I don’t see much leeway for significant change at this point. Kelly: No, no. I’m not suggesting that we “cook the books.” But look at the cash flow from operating activities on the statement of cash flows. Kelly: The cash flow from operating activities has increased by 20%. This is very good news—and, I might add, useful information. The higher cash flow from operating activities will give our creditors comfort. Tripp: Well, the cash flow from operating activities is on the statement of cash flows, so I guess users will be able to see the improved cash flow figures there. Kelly: This is true, but somehow I feel that this information should be given a much higher profile. I don’t like this information being “buried” in the statement of cash flows. You know as well as I do that many users will focus on the income statement. Therefore, I think we ought to include an operating cash flow per share number on the face of the income statement—someplace under the earnings per share number. In this way users will get the complete picture of our operating performance. Yes, our earnings per share dropped this year, but our cash flow from operating activities improved! And all the information is in one place where users can see and compare the figures. What do you think? Tripp: I’ve never really thought about it like that before. I guess we could put the operating cash flow per share on the income statement, under the earnings per share. Users would really benefit from this disclosure. Thanks for the idea—I’ll start working on it. Kelly: Glad to be of service. How would you interpret this situation? Is Tripp behaving in an ethical and professional manner?

Objectives

To analyze the financial statements of a publicly traded company

Scenario/Deliverables

Obtain an annual report from a publicly traded corporation that is interesting to you. Be sure the company has property and equipment, intangible assets, and long-term debt on its balance sheet. Using techniques you have learned in the previous weeks, respond to the following questions.

1. What is the amount of property and equipment on the balance sheet for the two most recent years? What is the amount of accumulated depreciation and the depreciation expense? What amounts are on the cash flow statement for the most recent year that relate to depreciation, gains and sales of property and equipment, and purchases and sale of property of equipment? What amounts are permitted for inclusion in the capitalized cost of property and equipment?
2. Looking at the footnote disclosures of the company, what are the individual components of property and equipment? For example, what are the amounts for land, building, equipment, accumulated depreciation, and so forth? How do companies account for non-monetary exchange and dispositions of property and equipment?
3. Does the company have intangible assets? If so, what are the types of intangible assets (patent, copyrights, etc.) and their amounts? What is the amount of accumulated amortization and amortization expense? What amounts on the most recent cash flow statement relate to the purchase and sale of intangible assets? How do intangible assets differ from property and equipment? What costs do we include in intangible assets?
4. Does the company have goodwill? What are the footnote disclosures relating to goodwill and the related acquisition? Please also describe the calculation of goodwill and how we account for differences between fair value and book value of assets acquired.
5. What are the company’s depreciation methods? What is the range of estimated useful lives used for depreciating its assets? Does the company use the same depreciation methods for financial statements and tax returns? If not, please describe the methods used for tax purposes.
6. What are the company’s footnote disclosures relating to impairment? Please also describe how to determine whether an impairment exists and how to calculate the impairment loss.
7. What are the amounts and descriptions of the company’s current liabilities for the most recent year? Does the company have any contingent liabilities? If yes, please describe them. Does the company have any subsequent events disclosed in its footnotes? If so, please describe them.
8. What are the amounts and descriptions for all of the company’s long-term liabilities on its balance sheet for the two most recent years? What is the interest expense for the two most recent years? What amounts are included in the cash flow statements for proceeds from issuance of debt and repayment of debt for the most recent year? For each note payable discussed in the footnotes disclosures, what is the interest rate, total amount borrowed, and maturity date?
9. Does the company have bonds payable? If so, what are the amounts? Please also describe how bonds payable differ from notes payable and how to account for the issuance of bonds at par, at a discount, and at a premium. How is the discount and premium amortized? What is the effective interest method?
10. Does the company have capital leases? If so, what are the amounts and terms of the leases? What are the four criteria for a lease to be considered a capital lease? What are the additional criteria for the lessor? What is the difference between a sales-type lease and a direct-financing lease?

Guidelines

• Papers must be 7 pages in length. Use a 12-point font, with double spacing, and include a front page, table of contents, introduction, body of the report, summary or conclusion, and works cited.
• Even though this is not a scientific-type writing assignment, references are still very important. At least three authoritative, outside references are required (articles and web pages with anonymous authors are not acceptable). These should be listed on the Works Cited page.
• Appropriate citation is required.