LDP 3.1 Spreading F/S

Question 1

Spreading financial statements has three purposes:

Answer 1

1) To record reclassifications you make about current and noncurrent assets and liabilities
2) To simplify the statements’ format by combining similar accounts into fewer accounts that are easier to analyze
3) To facilitate analysis by providing additional detail found in the Notes to the financial statements or by interviewing the customer

Question 2

Some common balance sheet adjustments include:

Answer 2

1) Prepaid expenses
2) Stale accounts receivable - ie. reclassify uncollectible receivables
3) Notes receivable from related parties - generally reclassified as noncurrent to avoid overstating working capital
4) Overdrafts - to current liability instead of negative cash
5) Accounts payable to affiliates - treat as current liability
6) Leasehold improvements - If the facility isn’t owned by the borrowing entity, leasehold improvements should be considered intangible assets.

Question 3

Some common income statement adjustments include:

Answer 3

1) Non-operating income and expense - For example, gain or loss on the sale of an asset would generally be reclassified as other income or expense if a borrower includes it in operating income, because it is a nonrecurring and noncore income or expense item.
2) Revenues or expenses from discontinued operations
3) Other comprehensible income - watch for unrealized gains or losses on marketable securities available for sale, as well as gains or losses related to changes in foreign currency exchange rates. These should be shown in the balance sheet’s equity section. Do not include them in any portion of the income statement.

Question 4

Common Size F/S

Answer 4

• on a common size balance sheet, each asset, liability, and net worth account is calculated as a percent of total assets.
• On a common size income statement, each revenue and expense is calculated as a percent of total revenues, or sales.