IIM Bangalore
EGMP 68
Solutions to Question Set 1
The following 15 questions consist of (a) questions that we will be covering in class and (b)
questions that you can answer outside of class (practice questions). You do not need to turn these
in; they are meant to help your learning process.
Question Set 1:
1. Assets and liabilities appear on the balance sheet as either current or non-current. What is the
difference between a current item and a noncurrent item? Why would users of financial
statements be interested in this distinction?
Solution:
A current item is expected to result in a cash receipt (for assets such as accounts receivable) or a cash
payment (for liabilities such as accounts payable) within approximately one year or less of the balance
sheet date. A non-current item is expected to generate cash over periods longer than a year (for example,
assets, such as factory buildings that will be used to produce goods for sale over many years) or use cash
over periods longer than a year (liabilities such as a long-term loan). Users of financial statements would
likely be interested in this distinction because they can learn about the amount of net cash flows a firm
can generate within one year of the balance sheet date.
2. What is the difference between the historical cost and fair value basis of measuring amounts
on a balance sheet?
Solution:
Historical cost and fair values apply to both assets and liabilities.
For assets, historical cost is the acquisition cost of an asset. For liabilities, it is the amount of
funds originally obtained (for example, a loan). For the balance sheets prepared after the
acquisition date of the asset/liability, a firm may be able to estimate the price at which an
asset can be sold or bought (liability can be paid) – this is the fair value of the asset
1
, (liability). In the case of assets, we refer to the estimated selling price as realizable value and
the estimated purchase price as replacement cost.
3. How does a profit and loss account connect two successive balance sheets?
Solution:
A profit and loss account connects two balance sheets through its effect on retained earnings.
Net profit that is not paid to shareholders as dividends increases retained earnings. And
Retained Earnings is one of the elements of Shareholder’s Equity on the Balance Sheet.
4. The balance sheet of Alcatel-Lucent, a French communications firm, for the year ended
December 31, 2007, showed current assets of €20,000 million, current liabilities of €15,849
million, shareholders’ equity of €17,154 million, and non-current assets of €29,402 million.
Alcatel-Lucent reports all amounts in millions of euros (€). Compute the amount of
noncurrent liabilities on Alacatel-Lucent’s balance sheet at the end of 2007.
Solution:
Current Assets + Noncurrent Assets = Current Liabilities + Noncurrent Liabilities + Shareholders
Equity
20,000 + 29,402 = 15,849 +? + 17,154
Noncurrent Liabilities = €16,399
5. The balance sheet of Sterlite Industries, an Indian producer of copper, showed retained
earnings of ₹26,575 on March 31, 2006. On March 31, 2007, the balance in retained earnings
was ₹70,463. Sterlite declared dividends during the year ended March 31, 2007, of ₹3,544.
Sterlite reports all amounts in millions of Indian Rupees (₹). Compute Sterlite’s net profit for
the year ended March 31, 2007.
Solution:
Beginning Balance RE + Net profit – Dividends = Ending Balance RE
26,575 +? – 3,544 = 70,463
Net profit = 70,463 – 26,575 + 3,544
= ₹47,432
2
EGMP 68
Solutions to Question Set 1
The following 15 questions consist of (a) questions that we will be covering in class and (b)
questions that you can answer outside of class (practice questions). You do not need to turn these
in; they are meant to help your learning process.
Question Set 1:
1. Assets and liabilities appear on the balance sheet as either current or non-current. What is the
difference between a current item and a noncurrent item? Why would users of financial
statements be interested in this distinction?
Solution:
A current item is expected to result in a cash receipt (for assets such as accounts receivable) or a cash
payment (for liabilities such as accounts payable) within approximately one year or less of the balance
sheet date. A non-current item is expected to generate cash over periods longer than a year (for example,
assets, such as factory buildings that will be used to produce goods for sale over many years) or use cash
over periods longer than a year (liabilities such as a long-term loan). Users of financial statements would
likely be interested in this distinction because they can learn about the amount of net cash flows a firm
can generate within one year of the balance sheet date.
2. What is the difference between the historical cost and fair value basis of measuring amounts
on a balance sheet?
Solution:
Historical cost and fair values apply to both assets and liabilities.
For assets, historical cost is the acquisition cost of an asset. For liabilities, it is the amount of
funds originally obtained (for example, a loan). For the balance sheets prepared after the
acquisition date of the asset/liability, a firm may be able to estimate the price at which an
asset can be sold or bought (liability can be paid) – this is the fair value of the asset
1
, (liability). In the case of assets, we refer to the estimated selling price as realizable value and
the estimated purchase price as replacement cost.
3. How does a profit and loss account connect two successive balance sheets?
Solution:
A profit and loss account connects two balance sheets through its effect on retained earnings.
Net profit that is not paid to shareholders as dividends increases retained earnings. And
Retained Earnings is one of the elements of Shareholder’s Equity on the Balance Sheet.
4. The balance sheet of Alcatel-Lucent, a French communications firm, for the year ended
December 31, 2007, showed current assets of €20,000 million, current liabilities of €15,849
million, shareholders’ equity of €17,154 million, and non-current assets of €29,402 million.
Alcatel-Lucent reports all amounts in millions of euros (€). Compute the amount of
noncurrent liabilities on Alacatel-Lucent’s balance sheet at the end of 2007.
Solution:
Current Assets + Noncurrent Assets = Current Liabilities + Noncurrent Liabilities + Shareholders
Equity
20,000 + 29,402 = 15,849 +? + 17,154
Noncurrent Liabilities = €16,399
5. The balance sheet of Sterlite Industries, an Indian producer of copper, showed retained
earnings of ₹26,575 on March 31, 2006. On March 31, 2007, the balance in retained earnings
was ₹70,463. Sterlite declared dividends during the year ended March 31, 2007, of ₹3,544.
Sterlite reports all amounts in millions of Indian Rupees (₹). Compute Sterlite’s net profit for
the year ended March 31, 2007.
Solution:
Beginning Balance RE + Net profit – Dividends = Ending Balance RE
26,575 +? – 3,544 = 70,463
Net profit = 70,463 – 26,575 + 3,544
= ₹47,432
2
