ACC 2010 Module 2 Balance Sheet and Disclosures Written Assignment Example

Kittatinny Outdoor Gear, Inc.: A Classified Balance Sheet, Three Ratios and the Notes That Go With Them

Student Name

Bachelor of Science in Business Administration, Thomas Edison State University

ACC-2010: Intermediate Accounting I

Mentor Name

Month Day, Year

Kittatinny Outdoor Gear, Inc.: A Classified Balance Sheet, Three Ratios and the Notes That Go With Them

Introduction

The balance sheet reports what a company owns, what it owes and what remains for shareholders at one moment (Spiceland et al., 2020). Its classifications matter as much as its totals, because lenders and investors use the split between current and noncurrent items to judge whether the company can pay what comes due. This assignment prepares Kittatinny's balance sheet at December 31, 2025, analyzes it and decides what the notes must add.

Part A: Classified Balance Sheet

Three classifications deserve comment. The land held for a future plant is an investment, not property in use, because it does not yet serve operations. The bond sinking fund is restricted for debt repayment, so it is noncurrent even though it holds cash and securities. And $50,000 of the note payable is due in 2026, so it moves to current liabilities while the rest stays long term.

Part B: Ratios

The current ratio shows more than three dollars of current assets for every dollar due within a year, and even after excluding inventory and prepaid items, quick assets cover current liabilities one and a half times. Short-term liquidity looks comfortable. The debt to equity ratio tells a different story about long-term structure: creditors supply $1.36 for every dollar shareholders have invested, mostly through the note and bonds. That is not alarming for a manufacturer with substantial plant, but it means fixed interest and principal payments that must be met in slow seasons. Inventory makes up nearly half of current assets, so the current ratio depends on selling tents and packs at expected prices, which is why the acid-test ratio is the more cautious measure for a seasonal business.

Part C: Disclosure Decisions

1. Inventory method. Kittatinny uses FIFO. The summary of significant accounting policies, usually the first note, must state the method, because users cannot compare inventory or margins across companies without knowing it.

2. A fire on February 14, 2026 destroyed $85,000 of inventory before the statements were issued. The fire did not exist at the balance sheet date, so inventory at December 31 is not adjusted. Because the loss is material, it is disclosed as a nonrecognized subsequent event, with its nature and amount, under the subsequent events standard (Financial Accounting Standards Board [FASB], 2009). Had the fire revealed a condition that already existed at year end, such as goods already spoiled in December, the inventory figure itself would have been adjusted.

3. The company leases its showroom from an LLC owned by the chief executive. Related party transactions must be disclosed, with the relationship, the terms and the amounts, because they may not be at arm's length.

4. Kittatinny's note payable carries a covenant requiring a current ratio of at least 2.0. The note should describe the covenant and the company's compliance, since a breach could make the whole note due immediately.

Graham et al. (2005) found that executives care intensely about meeting expectations and smoothing reported results, which is one reason disclosure rules require items like related party leases and covenants to be spelled out rather than left to management's discretion.

References

Financial Accounting Standards Board. (2009). Subsequent events (Statement of Financial Accounting Standards No. 165).

Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40(1-3), 3-73. https://doi.org/10.1016/j.jacceco.2005.01.002

Spiceland, J. D., Nelson, M. W., & Thomas, W. B. (2020). Intermediate accounting (10th ed.). McGraw-Hill Education.