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Comprehensive Learning Assignment –I

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Somesh Chhetri
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Westcliff University
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BUS 622 Financial Statement Analysis

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Professor: Dr. Rajesh Sharma & Padam Mahata

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March 29, 2021

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Abstract

This paper comprises of the treatment of intangible assets along with how the changes in

current ration with the change in current assets and current liabilities. Furthermore, it also

includes the treatment of income/loss from discontinued operations.

Keywords: Intangible assets, current assets, current liabilites

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Intangible assets

Intangible assets are those assets which do not exist physically and comprises of the

Goodwill, brand recognition, intellectual property (patents, trademarks, copyrights etc.)

[ CITATION Ken201 \l 1033 ]

Generally, some users of financial statements believe that the quality of accounting

information for intangible assets is low because firms seldom report intangible asset resources on

the balance sheet. Intangible assets are generally created internally and do not possess any fair

market value or book value due to which they are not included in the balance sheet and are

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charged to the expenses in the period incurred..[ CITATION Mav20 \l 1033 ]

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Current assets and current liabilities

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Current assets includes those assets which are held by the company and expected to be either
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sold, consumed, used or exhausted within a year.[ CITATION Ada20 \l 1033 ] Current Liabilities
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refers to the short term debt obligations of a company that are to be paid off within a year.
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[ CITATION Ali20 \l 1033 ]

We have,
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Current Ratio = Current Assets / Current Liabilities

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= $400,000 / $275,000 = 1.46 times

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a. Refinanced a $60,000 long-term mortgage with a short-term note.

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Current Liabilities = $275000 + $60000 = $335,000

Current Ratio = $400,000 / 335,000 = 1.194 times

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The current ratio has decreased with the increase in current liabilities.

b. Purchased $108,000 of merchandise inventory with short-term accounts payable.

Current Assets = $400,000 + 108,000 = 508,000

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Current Liabilities = $275,000 + 108,000 = 383,000

Current Ratio = 508,000 / 383,000 = 1.326 times

The current ratio has decreased with the increase in both current assets and current liabilities.

c. Paid $50,000 of short-term accounts payable.

Current Liabilities = $275,000 - $50,000 = $225,000

Current Ratio = $400,000 / $225,000 = 1.78 times

The current ratio has increased with the decrease in current liabilities.

d. Collected $90,000 of short-term accounts receivable.

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Current Assets = $400,000 + $90,000 = $490,000

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Current Ratio = $490,000 / $275,000 = 1.78 times

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The current ratio has increased with the increase in current assets.
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Discontinued operations
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The income/loss from discontinued operations are the line items in the income statement
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of a company which are included below the income derived from continuing operations and

before the net income.

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Basically, the income from the discontinued operations is treated separately to the income
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from continued operations for the purpose of communicating users the portion of income
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generated from the assets that are disposed-off and the earnings to be expected only from assets
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other than the disposed ones.[ CITATION Jan12 \l 1033 ]

For 2012 income statement,

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Amount to be reported as profit/loss from discontinued operations

Realized loss from 1/1/12 to 8/31/12 + realized loss from 9/1/12 to 12/31/12

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= $200000 + $135000

= $335000

Amount to be reported as profit/loss from discontinued operations net of taxes

= $335000*0.65

=$217750

b. Calculate the amount of income that should be shown on the 2013 income statement as a result

of the operating profit and the gain on disposal (net of tax).

For 2013 Income statement

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The amount of income that should be shown on the 2013 income statement as a result of the

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operating profit and the gain on disposal (net of tax).

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= Expected profit from 1/1/13 to 3/31/13 + Gain from sale of business segment
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= $475000 + $375500
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= $850500
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Net of taxes = $850500 * 0.65 = $552825

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Solution,
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Given,
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Table 1.
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Income Statement of Motor Corporation in USD

Particulars 2012 2011

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Operating income $ 900,000 $ 600,000

Gain on sale of division $ 450,000 $0

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Total $1,350,000 $ 600,000

Provision for income taxes ($ 405,000) ($ 180,000)

Net income $945,000 $ 420,000

Gain on disposition =$450000

Pre-tax net losses in 2012 = $320000

Pre-tax net losses in 2011= $250000

Income tax rate = 30%

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Particulars Amount Amount

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Operating income 900000 600000

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Gain on sale of division 450000
1350000 600000

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Loss from discontinued operations -1220000 -670000
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Provision for income taxes -450000 -180000
Earnings Before taxes -320000 -250000
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Conclusion

Intangible assets are those assets which do not exist physically and comprises of the

Goodwill, brand recognition, intellectual property (patents, trademarks, copyrights etc.)

[ CITATION Ken201 \l 1033 ]

Generally, some users of financial statements believe that the quality of accounting

information for intangible assets is low because firms seldom report intangible asset resources on

the balance sheet. Intangible assets are generally created internally and do not possess any fair

market value or book value due to which they are not included in the balance sheet and are

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charged to the expenses in the period incurred..[ CITATION Mav20 \l 1033 ]

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Current assets includes those assets which are held by the company and expected to be

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either sold, consumed, used or exhausted within a year.[ CITATION Ada20 \l 1033 ] Current
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Liabilities refers to the short term debt obligations of a company that are to be paid off within a

year.[ CITATION Ali20 \l 1033 ]

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The income/loss from discontinued operations are the line items in the income statement
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of a company which are included below the income derived from continuing operations and

before the net income.[ CITATION Fre20 \l 1033 ]

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Basically, the income from the discontinued operations is treated separately to the income

from continued operations for the purpose of communicating users the portion of income
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generated from the assets that are disposed-off and the earnings to be expected only from assets
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other than the disposed ones.[ CITATION Jan12 \l 1033 ]

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References

Adam, H., & James, M. (2020). Current Assets. Retrieved from

https://www.investopedia.com/terms/c/currentassets.asp#:~:text=Current%20assets

%20are%20all%20the,liabilities%2C%20and%20other%20liquid%20assets.

Alicia, T., & Mansa, J. (2020). Current Liabilities. Retrieved from

https://www.investopedia.com/terms/c/currentliabilities.asp

Freshbooks. (2020). Discontinued Operations: Its Impact on Financial Reporting. Retrieved from

https://www.freshbooks.com/hub/accounting/discontinued-operations

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Jan, O. (2012). Income from Discountinued Operations. Retrieved from

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https://xplaind.com/275683/discontinued-operations-income#:~:text=Income%20(or

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%20Loss)%20from%20Discontinued,discontinued%20segment%20for%20the
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%20period.

Kenton, W., & Kindness, D. (2020). Intangible Asset. Retrieved from

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https://www.investopedia.com/terms/i/intangibleasset.asp
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Maverick, J. (2020). How Do Intangible Assets Show on a Balance Sheet? Retrieved from

https://www.investopedia.com/ask/answers/013015/how-do-intangible-assets-appear-
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balance-sheet.asp#:~:text=The%20reason%20for%20not%20appearing,the

%20acquisition%20of%20another%20firm.
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