Assignment Choice 1: Statement of Cash Flows and Balance Sheet
Lander Inc. had the following balance sheet at December 31, 2014:
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LANDER, INC. Balance Sheet December 31, 2014
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Cash
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$45,300
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Accounts payable
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$33,800
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Accounts receivable
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$18,900
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Bonds payable
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$35,000
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Investments
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$25,000
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Common stock
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$190,000
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Plant assets (net)
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$78,000
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Retained earnings
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$18,400
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Land
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$110,000
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Total Assets
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$277,200
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Total Liabilities & Equity
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$277,200
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During 2015, the following events occurred:
1. Lander liquidated its available-for-sale investment portfolio at a loss of $6,500.
2. A tract of land was purchased for $31,000 cash.
3. An additional $20,000 in common stock was issued at par.
4. Dividends totalling $5,000 were declared and paid to stockholders.
5. Net income for 2015 was $29,000, including $7,000 in depreciation expense.
6. A second tract of land was purchased through the issuance of $25,000 in additional bonds.
7. At December 31, 2015, cash was $72,650, accounts receivable was $35,250, and accounts payable was $32,500.
In an Excel spreadsheet:
- Prepare a statement of cash flows for the year 2015 for Lander.
- Prepare the balance sheet as it would appear as of December 31, 2015.
Assignment Choice 2: Limitations of Financial Statements
Recently, the field of accounting was attacked in an opinion article written by an economist. The article specifically pointed out errors in financial statements.
The article charged that the balance sheet is outdated and useless, and cited as an example the accounting practice of not recognizing many intangible assets. As a specific illustration, the article claimed that the name recognition, reputation, and goodwill of the Coca-Cola trademark are worth over $67 billion, but these assets are not reported on Coca-Cola's balance sheet.
The article argued that for the income statement, different estimates and methods affect the net income amount. For example, a company may be more optimistic than another, which will result in different expense and net income amounts. An accountant may also choose the straight-line depreciation method, while another chooses accelerated depreciation. These methods will yield different net income amounts.
The article also pointed out a flaw in the statement of cash flows. It stated that comparability of financial information is important in the accounting profession. However, interest paid is listed as an operating activity, while dividends paid is listed as a financing activity. This makes comparability of the performance of companies that make different financing choices (debt versus equity) difficult or even impossible.