Solution manual financial accounting 4e by wild chapter13

A 2-to-1 current ratio may not be adequate if the company's current assets consist of a large proportion of slow-turning accounts, notes, and merchandise inventory.. Profit margin, tota

Trang 1

2 Total assets (or equivalently, the total of liabilities plus equity) are assigned a value

of 100% on a common-size balance sheet Net sales (revenues) are assigned a value

of 100% on a common-size income statement

3 Financial reporting includes the entire process of preparing and issuing financial information about a company Financial statements are an important part of financial reporting but they are less than the whole

4 The nature of a company's business, the composition of its current assets, and the turnover of its current assets are three important factors that should be considered

in deciding whether a current ratio is good or bad

5 A 2-to-1 current ratio may not be adequate if the company's current assets consist of

a large proportion of slow-turning accounts, notes, and merchandise inventory The general nature of the business also may make the 2-to-1 rule of thumb inadequate

6 Adequate working capital enables a company to carry sufficient inventories, meet current debts, take advantage of cash discounts, and extend favorable terms to customers Working capital is a major factor in determining the short-term liquidity position of a company

7 When evaluated in light of a company's credit terms, the number of days' sales uncollected indicates how quickly accounts receivable are converted into cash This provides information about the relevance of accounts receivable balances in meeting the current obligations of the business

8 A high accounts receivable turnover implies that accounts are collected quickly, thereby providing cash that can be used to meet obligations A high turnover also means that a given sales volume can be supported with a lower investment in accounts receivable

Trang 2

9 Users are interested in the capital structure of a company, as measured by debt and equity ratios, for at least two reasons First, as a company includes more debt in its capital structure, the risk that it will be unable to meet interest and principal payments increases Second, the existence of debt introduces financial leverage If the company can earn a rate of return on its investments that exceeds the rate of interest paid to creditors, the debt will increase the rate of return to stockholders

10 Inventory turnover reflects on the efficiency of inventory management That is, a high inventory turnover means that a given sales volume can be supported with a smaller investment in inventory This insight into the speed with which inventory is sold determines the relevance of the available inventory in meeting the current obligations of the business, which is a focus of short-term liquidity

11 Since management is responsible for a company's performance, all ratios that are useful in evaluating a company are of some usefulness in assessing management performance Profit margin, total asset turnover, return on total assets, and return

on stockholders' equity are especially useful for assessing management's responsibility for operating efficiently and profitably

12 The ratio of pledged assets to secured liabilities must be interpreted with care because the book value of the pledged assets is used in calculating the ratio, and the book value is unlikely to always approximate the assets‘ market value

13 Almost all companies have some liabilities Since total assets equals total liabilities plus equity, total assets is almost always higher than common stockholders' equity Thus, the denominator in return on total assets is larger than common stockholders' equity Since the numerator is the same for both, and return on total assets has a

larger denominator, it yields a smaller percent [Instructor note: A more complete

measure of return on assets would add back (Interest Expense x {1 – Tax Rate}) to net income in the numerator—reflecting the after-tax cost of debt We leave the rationale for this adjustment to advanced courses.]

14 This gain is considered to be unusual but not infrequent It would be included in the calculation of income from continuing operations, with other unusual or infrequent gains and losses—in a category often labeled Other Gains and Losses

15 Return on total assets (2005):

$2,087,434

$3,789,382

$984 ($10,294 + $8,652)/2

Trang 3

QUICK STUDY Quick Study 13-1 (5 minutes)

Items not part of general-purpose financial statements:

1 Stock price information and analysis

3 Management discussions and analysis of financial performance

5 Company news releases

9 Prospectus

Quick Study 13-2 (10 minutes)

The four usual standards of comparisons are:

Intracompany The company under analysis provides standards for

comparisons based on prior performance and relations between its financial items

Competitor One or more direct competitors of the company under

analysis can provide standards for comparisons

Industry Industry statistics can provide standards of comparisons

Published industry statistics are available from several services such as Dun & Bradstreet, Standard and Poor's, and Moody's

Guidelines (Rules of Thumb) General standards of comparisons can

develop from past experiences Examples are the 2-to-1 level for the current ratio or 1-to-1 level for the acid-test ratio

All of these standards of comparisons are useful when properly applied Yet, analysis measures taken from a selected competitor or group of competitors are often the best standards of comparisons Also, intracompany and industry measures are important parts of all analyses The standard that is least likely to provide a good basis for comparison is the use of guidelines, or rules of thumb Guidelines must be applied with care, and then only if they seem reasonable in light of past experience and industry's norms

Trang 4

2007 100.0% (the given base amount)

2008 2007

Dollar Change

Percent Change

Short-term investments $220,000 $160,000 $60,000 37.5%

Accounts receivable 38,000 44,000 (6,000) -13.6%

Notes payable 60,000 0 60,000 (not calculable)

1 Accounts Receivable Turnover and the Days' Sales Uncollected

2 Working Capital, also called net working capital

3 Profit Margin and the Total Asset Turnover

Return on Total Assets

Trang 5

1 Profit Margin Ratio 9% 8% Favorable

2 Debt Ratio 47% 42% Unfavorable

3 Gross Margin Ratio 34% 46% Unfavorable

4 Acid-test Ratio 1.00 1.15 Unfavorable

5 Accounts Receivable Turnover 5.5 6.7 Unfavorable

6 Basic Earnings Per Share $1.25 $1.10 Favorable

7 Inventory Turnover 3.6 3.4 Favorable

8 Dividend Yield 2% 1.2% Favorable

Quick Study 13-8 A (5 minutes)

This material error should be reported on the statement of retained earnings (and/or the statement of stockholders‘ equity) as a prior period adjustment to the beginning retained earnings balance Also, if prior year‘s financial numbers are reported, they should be revised to show the correct numbers

Trang 6

EXERCISES Exercise 13-1 (20 minutes)

Sales 189 181 168 156 100 Cost of goods sold 191 182 172 159 100 Accounts receivable 201 192 182 169 100

Analysis: The trend in sales is positive While this is better than no growth, one

cannot definitively say whether the sales trend is favorable without additional information about the economic conditions in which this trend occurred such as inflation rates and competitors‘ performances

Given the trend in sales, the comparative trends in both cost of goods sold and accounts receivable are somewhat unfavorable In particular, for the most recent year, both are increasing at slightly faster rates (indexes for cost of goods sold is

191 and accounts receivable is 201) compared to sales (index is 189)

Exercise 13-2 (25 minutes)

Answer: Net income decreased

Supporting calculations: When the sum of each year's common-size cost of goods sold and total expenses is subtracted from the common-size sales percent, the net income percent is as follows:

2007 net income percent: 100.0 - 59.1 - 15.1 = 25.8% of sales

Next, notice that if 2007 sales are assumed to be $100, then sales for 2008 are

$104.20 and the sales for 2009 are $105.40 If the net income percents for the three years are applied to these amounts, the net incomes are:

Trang 7

$740,000 in 2008

Parker has a greater amount of working capital This by itself does not indicate whether the company is more capable of meeting its current obligations However, support is provided by the current ratio and acid-test ratio, which show Parker is in a more liquid position than Morgan This evidence does not mean that Morgan's liquidity is inadequate Such a conclusion would require more information such as norms for the industry or its other competitors Notably, Morgan's acid-test ratios approximate the traditional rule of thumb (1 to 1)

This evidence also shows that Parker's working capital, current ratio, and acid-test ratio all increased dramatically over the three-year period This trend toward greater liquidity may be positive, but it can also suggest that Parker holds an excess amount of highly liquid assets that typically earn low returns The accounts receivable turnover and inventory turnover indicate that Morgan

is more efficient in collecting its accounts receivable and in generating sales from available inventory However, these statistics also may suggest that Morgan is too conservative in granting credit and investing in inventory This could have a negative impact on sales and net income Parker's ratios may be acceptable, but no definitive determination can be made without having information on industry (or other competitors‘) standards

Trang 8

C OMPARATIVE A NALYSIS R EPORT

Clay's profit margins are higher than Roak's However, Roak has significantly higher total asset turnover ratios As a result, Roak generates

a substantially higher return on total assets

The trends of both companies include evidence of growth in sales, total asset turnover, and return on total assets However, Clay's rates of improvement are better than Roak's These differences may result from the fact that Clay is only three years old, while Roak is a somewhat more established company Clay's operations are considerably smaller than Roak's, but that will not persist many more years if both companies continue to grow at their current rates

To some extent, Roak's higher total asset turnover ratios may result from the fact that its assets may have been purchased years earlier If the turnover calculations had been based on current values, the differences might be less striking The relative ages of the assets also may explain some of the difference in profit margins Assuming Clay's assets are newer, they may require smaller maintenance expenses

Finally, Roak successfully employed financial leverage in 2010 Its return

on total assets is 9.0% compared to the 7% interest rate it paid to obtain financing from creditors In contrast, Clay's return is only 5.9% as compared to the 7% interest rate paid to creditors

Trang 9

Simeon Company Common-Size Comparative Balance Sheets

December 31, 2007-2009

Assets

Cash 6.1% 8.0% 10.0% Accounts receivable, net 17.1 14.0 13.3

Merchandise inventory 21.5 18.5 14.3

Prepaid expenses 2.0 2.1 1.3

Plant assets, net 53.3 57.3 61.1 Total assets 100.0% 100.0% 100.0% Liabilities and Equity

Accounts payable 24.8% 16.9% 13.6% Long-term notes payable secured by

mortgages on plant assets 18.8 22.9 22.1 Common stock, $10 par value 31.3 36.7 43.3

Retained earnings 25.1 23.5 21.0 Total liabilities and equity 100.0% 100.0% 100.0%

*

Column does not equal 100.0 due to rounding

Analysis: Several observations can be made

(1) Cash as a percent of assets has declined—this is favorable provided sufficient cash is available for operations

(2) Accounts receivable have increased as a percent of assets—this may be unfavorable in that assets are tied up in an unproductive manner and there would

be additional assets exposed to the risk of uncollection; it could be favorable if increased sales outweigh these costs and risk

(3) Plant assets have declined as a percent of assets—this is favorable if the company is operating more efficiently; it could be unfavorable if the company is downsizing due to poor performance

(4) Accounts payable have markedly increased as a percent of assets—this could reveal liquidity constraints

Trang 10

‗1.88 to 1‘—both suggest a potential liquidity problem Still, we must recognize that industry standards could show that the 2007 ratios were too high (instead of 2009 ratios as being too low)

Trang 11

to 2009 appear dramatic, it seems that Simeon is becoming less efficient in managing its inventory and in collecting its receivables

$532,000 ($62,500 + $50,200)/2

$411,225 ($112,500 + $82,500)/2

$345,500 ($82,500 + $54,000)/2

$112,500

$411,225

$82,500

$345,500

Trang 12

$163,500 + $131,100 294,600 56.3

$163,500 + $104,750 _ _ 268,250 60.3 Total liabilities and equity $523,000 100.0% $445,000 100.0%

Trang 13

2009, the profit margin unfavorably decreased from 5.5% to 4.6% The decline in profit margin indicates that Simeon's ability to generate net income from sales has declined

$673,500 ($523,000 + $445,000)/2

$532,000 ($445,000 + $377,500)/2

$31,100 ($523,000 + $445,000)/2

$29,375 ($445,000 + $377,500)/2

Trang 14

Analysis and interpretation

The company‘s return on common stockholders‘ equity is good, but not great An 11% return makes it an acceptable investment provided its risk is not too high

The company ‘s price-earnings ratio is around 16 This suggests that the market does view this company to have some growth potential

The dividend yield is on the low side Thus, this stock would likely be

classified as a ―growth‖ stock, and the price-earnings ratio suggests that the market does perceive a high likelihood of some growth

Exercise 13-12 A (10 minutes)

1 A Income (loss) from continuing operations

2 C Extraordinary gain (loss)

6 B Gain (loss) from disposing of a discontinued segment

7 B Income (loss) from operating a discontinued segment

$31,100 ($294,600 + $268,250)/2

$29,375 ($268,250 + $242,750)/2

Trang 15

RANDA MERCHANDISING, INC

Income Statement For Year Ended December 31, 2008 Net sales $2,900,000 Expenses

Cost of goods sold $1,480,000

Salaries expense 640,000

Depreciation expense 232,500

Total expenses 2,352,500 Income from continuing operations before taxes 547,500 Income taxes expense 217,000 Income from continuing operations 330,500 Discontinued segment

Loss from operating wholesale business

segment (net of tax) (444,000)

Gain on sale of wholesale business

segment (net of tax) 775,000 331,000 Income before extraordinary gain 661,500 Extraordinary gain on condemnation of

company property (net of tax) 230,000 Net income $ 891,500

Trang 16

Part 2

KORBIN COMPANY Common-Size Comparative Income Statements For Years Ended December 31, 2009, 2008, and 2007

Trang 17

Problem 13-1A (Concluded)

Part 3

KORBIN COMPANY Balance Sheet Data in Trend Percents December 31, 2009, 2008, and 2007

Significant relations revealed

Korbin‘s selling expenses and income taxes consumed smaller portions of each sales dollar in 2008 than 2007 However, cost of goods sold and administrative expenses consumed a larger portion in 2008 Therefore, income

as a percent of sales declined from 2007 to 2008 In 2009, selling expenses, administrative expenses, and income tax took a greater portion of each sales dollar while the gross profit portion improved The reduction in cost of goods sold allowed income as a percent of sales to increase from 2008 to 2009

Korbin expanded its plant assets in 2008, financing the expansion through the sale of long-term investments, through a reduction in working capital (the current ratio decreased from 2.5-to-1 to 1.9-to-1), and perhaps through the sale

of a small amount of stock As to the stock increase, it is not possible to tell from these two statements whether the company sold shares or declared a stock dividend In either case, the increase in retained earnings during 2008 indicates that net income was larger than the reductions from cash (and perhaps stock) dividends In 2009, working capital increased, the current ratio

Trang 18

Problem 13-2A (120 minutes)

Part 1

HAROUN COMPANY Income Statement Trends For Years Ended December 31, 2009-2003

Trang 19

Problem 13-2A (concluded)

Part 2

Analysis and Interpretation

The statements and the trend percent data indicate that the company

significantly expanded its plant assets in 2007 Prior to that time, the company enjoyed increasing gross profit and net income

Sales grew steadily for the entire period of 2003 to 2009 However,

beginning in 2007, cost of goods sold and operating expenses increased dramatically relative to sales, resulting in a significant reduction in net income

In 2009, net income was only 52.7% of the 2003 base year amount

At the same time that net income was declining, assets were increasing

This indicates that Haroun was becoming less efficient in using its assets

to generate income

The short-term liquidity of the company continued to decline Accounts

receivable did not change significantly for the period of 2007 to 2009, but cash steadily declined and inventory sharply increased as did current liabilities

Trang 20

Trans-action

Current Assets

Quick Assets

Current Liabilities

Current Ratio

Acid-Test Ratio

Working Capital

Trang 21

1 Current ratio

= 3.6 to 1

Trang 22

Problem 13-4A (Concluded)

9 Total asset turnover

$29,052 ($240,200 + $189,400)/2

$29,052 ($152,800 + $112,748)/2

Định dạng
Số trang	45
Dung lượng	886,66 KB