Broadening Your Perspective On Financial Reporting And Analy

Broadening Your Perspective Financial Reporting and Analysis BYP3-1

Analyze the given financial data of Tootsie Roll Industries and related companies to understand account behaviors, their normal balances, and typical transaction effects. Identify adjustments for deferrals and accruals based on the financial statements. Compare Tootsie Roll's financials with Hershey’s to evaluate accrual accounting evidence. Use core accounting principles, particularly focusing on the nature of assets, liabilities, and equity accounts, and their typical debit or credit increases. Develop insights into the financial statement structures, emphasizing the importance of adjusting entries and the implications of different transaction types.

Paper For Above instruction

The comprehensive analysis of Tootsie Roll Industries’ financial statements and comparative review with The Hershey Company offers profound insights into the fundamental principles of financial reporting and analysis. The core of this exploration revolves around understanding account behaviors, identifying typical balances, transaction effects, and evaluating the use of accrual accounting—an essential backbone in accurate financial representation.

Part A: Account Behavior and Normal Balances

To begin, it is essential to recognize the increase and decrease sides for each account and their normal balances. Asset accounts such as Accounts Receivable, Prepaid Expenses, and Net Property, Plant, and Equipment typically have debit balances. Increases in assets are recorded on the debit side, and decreases on the credit side. For example, an increase in Accounts Receivable, which signifies more sales on credit, would be debited, while a decrease, such as collection of receivables, would be credited.

Liability accounts like Accounts Payable normally have credit balances. An increase in Accounts Payable, indicating more owed to suppliers, is a credit, whereas a decrease, such as payments made, is a debit. Similarly, for Equity accounts such as Common Stock and Retained Earnings, increases are credits, reflecting ownership interests or accumulated earnings, respectively.

Income statement accounts also follow typical patterns; for instance, Net Product Sales and Rental Revenue naturally increase with credits, whereas expenses like Selling, Marketing, and Administrative Expenses increase with debits. Recognizing these patterns aids in precise journal entry recording and financial statement analysis.

Part B: Probable Corresponding Accounts and Transaction Effects

When analyzing typical transactions, it is crucial to identify the other involved account. For example, when Accounts Receivable decreases, it often results from cash collections, affecting Cash (an asset account increased by debits). Conversely, a decrease in Accounts Payable typically results from paying off liabilities, reducing Cash (credit to cash). An increase in Prepaid Expenses indicates the payment of expenses in advance, decreasing Cash and increasing Prepaid Expenses (an asset).

Further, increased interest expense may correspond to accrued interest payable, adding to liabilities, and is affected by interest payable accounts. An increase in Property, Plant, and Equipment generally involves Purchasing or Capitalizing new assets, impacting cash or liabilities such as accounts payable or notes payable.

Part C: Involved Accounts in Typical Transactions

Specific transactions involve a set of accounts. For example, an increase in Interest Expense usually results from accruing interest that has not yet been paid, involving a debit to Interest Expense and a credit to Accrued Liabilities or Interest Payable. When Property, Plant, and Equipment increase, it typically involves a debit to the asset account and a credit to Cash or Accounts Payable, reflecting cash payments or liabilities incurred for acquisitions.

Understanding these dynamics is fundamental in preparing adjusting entries, which are necessary for proper financial reporting, ensuring that revenues and expenses are recognized in the appropriate periods as per accrual accounting principles.

Part D: Comparative Analysis between Tootsie Roll and Hershey

Comparison of the two companies’ financials reveals evident use of accrual accounting. Both companies’ balance sheets feature significant receivables, payables, inventories, and property, plant, and equipment, suggesting they record revenues and expenses when earned or incurred, not when cash is received or paid.

In Hershey, accounts such as Accounts Receivable and Inventories indicate the company records sales and inventory adjustments on an accrual basis, affecting associated revenue and cost recognition. Similarly, Tootsie Roll’s entries like Prepaid Expenses, Accounts Receivable, and Net Property, Plant, and Equipment further exemplify typical accrual accounting practices, as these accounts reflect transactions recognized when they occur, regardless of cash flow timing.

The evidence of such practices reinforces the importance of understanding the nature of these accounts and their account relationships for accurate financial reporting, analysis, and managerial decision-making.

Part E: Adjustments for Deferrals and Accruals

In Tootsie Roll’s income statement, items such as depreciation and amortization are typical adjustments for deferrals, allocating costs over time to match revenues appropriately. For instance, depreciation expense of $17,859, reported for 2009 and 2008, increases accumulated depreciation—a contra-asset account—and decreases net property, plant, and equipment on the balance sheet.

Prepaid expenses, which decrease when expenses are recognized, are also deferral accounts. Their adjustments involve debiting expenses and crediting prepaid assets. Similarly, deferred income taxes and unearned revenue are typical deferrals that warrant specific journal entries.

For accruals, items such as accrued interest and other accrued liabilities are recognized when incurred but not yet paid. The entries involve debiting expenses and crediting liabilities. These adjustments ensure financial statements accurately reflect the economic events during a period.

Part F: Using Financial Statements for Adjusting Entries

Examining Tootsie Roll’s cash flow statement shows cash paid for income taxes of approximately $22,364, while income tax expense for the period may differ due to accrued taxes or deferred tax adjustments. Depreciation expense, noted on the statements, is derived from detailed notes, illustrating the systematic allocation of asset costs over their useful lives.

In Hershey, the use of accrual accounting is evinced by accounts related to deferred taxes and accrued liabilities, impacting the income statement and reflecting the matching principle. Companies recognize expenses when incurred and revenues when earned, regardless of cash transactions, ensuring the most accurate fiscal picture.

Conclusion

In conclusion, understanding account behaviors, adjusting entries for deferrals and accruals, and comparative analysis of financials underscores the vital role of accrual accounting principles in financial reporting. Recognizing typical account behaviors and their impacts enhances the clarity of financial statements, supports informed decision-making, and ensures compliance with Generally Accepted Accounting Principles (GAAP). The comparison between Tootsie Roll and Hershey exemplifies the application of these principles in the confectionery industry, emphasizing the importance of accurate, timely financial information for managers, investors, and regulators alike.

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