Question

Provide brief but complete responses.

5A. Typically, items in the balance sheet are grouped by whether they are current or long-term.

1. Discuss the factors that determine whether an asset or liability should be classified as current or long-term in a balance sheet.
2. Name six items that could be classified as current or long-term in the balance sheet. State what factors that determine the correct classification for each.

5B. What effect does intraperiod tax allocation have reported net income? Discuss how you cam to this conclusion.

5C. Discuss the reasoning why the items in Other Comprehensive Income (what are they?) are placed there and not on the Income Statement.

5D. What kinds of questions about future cash flows do investors and creditors try answer with the income statement?

5E. What is the basis for treating an item on the income statement as either operating or nonoperating? Why do we care about this?

5F. Why do investors and creditors care about earnings quality? How do earnings management practices affect the quality of earnings?

5G. Does earnings management always produce higher income? Explain.

Answer 1

5A

a. Factors for determination of asset and liability as a current or long term are:

1. Short term assets and liabilities are held by a company for one year or less than one year, whereas long term assets and liabilities are for more than one year.

2. Short term assets and liabilities are more flexible than the long term assets and liabilities.

3. Short term assets and liabilities involve lesser risk as compared to the long term assets and liabilities.

b. Items that could be classified as current or long term are:

1. Cash: Cash is the most liquid asset of the company that can be used to dissolve obligation at any point in time.

2. Accounts receivable: Account receivable is the income that has been earned but not yet received from the customers. It is held by the company for one year or less.

3. Stock inventory: Inventory is the asset of the company that is held by the company for one year or less.

4. Marketable security: Marketable security capital of the company that can be sold at any time. Therefore, it would be considered a short term asset.

5. Land: Land is the fixed asset of the company because it is held for more than one year by the company.

6. Equipment: Equipment is held by the company to do its production function. It is held by the company for more than a year.

5B.

Intraperiod tax allocation is deducted from the revenues in the income statement of the company. Intraperiod tax allocation is an expense for the company and expenses are deducted from the revenues in the income statement of the company.

5C.

Other Comprehensive Income is the income that has been earned but not yet received. As the income has not been received yet, it cannot be posted in the income statement of the company. Therefore, it is posted as other comprehensive income.

5D.

The revenues received and cost incurred, as presented in the income statement, would be posted in the cash flow statement of the company. The income that has not been received and the expenses that have not been incurred as presented in the income statement would not be shown in the cash flow statement.

The investors would be able to answer regarding the revenue received in cash and expenses incurred in cash as presented in the income statement.

5E.

The items related to the operations of the company are posted as an operating item whereas, the items that not directly related to the operations are posted as non-operating items. It is required in order to identify the business-related items and nonbusiness related items.

5F.

Investors and creditors are the stakeholders of the company and the earnings affect the earnings of the stakeholders of the company. The higher the earning quality, the higher will be the benefit to the investors and creditors.

The better planning of the management would lead to an increase in the earning quality of the company.

5G.

The earning management does not necessarily provide a higher income to the company. It depends on the planning, its execution, and other factors that affect the income of the comppany.