Solution manual financial accounting 8th by harrison CH13

Financial Accounting 8/e Solutions Manual Pintal’s net income was a higher percentage of net sales.. Financial Accounting 8/e Solutions Manual Total current assets……….... Financial Accou

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Financial Accounting 8/e Solutions Manual

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(10-15 min.) S 13-3

Amount Percent Amount Percent Amount Percent Cash $ 7,500 1.5% $ 2,195 0.5% $ 1,990 0.5% Receivables, net 35,000 7.0 21,950 5.0 23,880 6.0 Inventory 260,000 52.0 193,160 44.0 147,260 37.0 Prepaid expenses 10,000 2.0 17,560 4.0 11,940 3.0 Property, plant, and

equipment, net 187,500 37.5 204,135 46.5 212,930 53.5 Total assets $500,000 100.0% $439,000 100.0% $398,000 100.0%

Inventory, as a percent of total assets, has grown dramatically Property, plant and equipment appears to be wearing out and is not being replaced due to the growth in inventory which has led

to a tight cash position

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Pintal’s net income was a higher percentage of net sales The students can argue that Pintal is more profitable because it earns a higher percentage of profit on each dollar of sales than Hartigan does

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Average net Days’ sales in

sales _

*($246 + $256) / 2 = $251

These measures look strong Turning over inventory 26 times

per year is fast, and collecting average receivables in only 9.6 days is also very fast

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(5-10 min.) S 13-8

(Dollar amounts in millions)

Gagon’s debt ratio is 81.4%

2 Times-interest-

3 The debt ratio is high The times-interest-earned ratio is high

Overall, the company’s ability to pay its liabilities and

interest expense looks mixed

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These rates of return are very strong

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(5-10 min.) S 13-10

(Amounts, except per-share amounts, in millions)

$500 − $24*

100 stock outstanding

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2

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(15-20 min.) S 13-12

Balance Sheet

(Dollars in thousands)

(f) = $7,300 (same as total assets)

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1050

TO: Merrimack Lowell Investment Committee

FROM: Student Name

SUBJECT: Investment Recommendation

I recommend that we invest in Graphit.net for the following reasons:

1 Graphit.net’s return on equity (ROE) is 8% higher than Data Doctors An investment in Graphit.net should therefore

on ROE, interest-coverage, and days’ sales in receivables, and Graphit.net outstrips Data Doctors on these measures

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(10 min.) S 13-14

(Dollars in thousands)

Beverly Software delivered

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1052

Group A

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(10-15 min.) E 13-16A

Sensible Music Co

Horizontal Analysis of Comparative Income Statement

Years Ended December 31, 2010 and 2009

INCREASE (DECREASE)

Expenses:

Selling and general

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Total current assets……… $ 43,000 21.7

Property, plant, and equipment, net.…… 117,000 59.1

Other assets……… 38,000 19.2

Total assets……… $198,000 100.0

LIABILITIES Total current liabilities……… $ 49,000 24.7

Long-term debt……… 109,000 55.1

Total liabilities……… 158,000 79.8

STOCKHOLDERS’ EQUITY

Total stockholders’ equity……… 40,000 20.2

Total liabilities and stockholders’ equity $198,000 100.0

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Sensible Music Co

Comparative Common-Size Income Statement Years Ended December 31, 2010 and 2009

2010 2009 Total revenue……….… 100.0% 100.0% Expenses:

Income tax expense……… 9.74 9.21 Total expenses……… 85.23 83.72 Net income……… 14.77% 16.28%

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3 California Fruit Growers paid dividends which were 62% its

dividends

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$129,000

b Acid-test (quick)

= $26,000 + $14,000 + $50,000 = 0.70

e Days’ sales in

= ($50,000 + $73,000) / 2 = 46 days

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long-term debt, and interest expense improved during 2010, as shown by the improvement in all four ratios

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1062

Req 1

Compton Bank Limited appears to represent the better investment Compton earns a greater net profit and has significantly more stockholders’ equity than does Barton Oil Pipeline, Inc

Req 2

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Exercises

Group B

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Fashion Music Co

Horizontal Analysis of Comparative Income Statement

Years Ended December 31, 2010 and 2009

INCREASE (DECREASE)

Total revenue………… $1,080,000 $919,000 $161,000 17.5% Expenses:

Selling and general

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Total current assets……… $ 45,000 15.15

Property, plant, and equipment, net.…… 210,000 70.71

Other assets……… 42,000 14.14

Total assets……… $297,000 100.0%

LIABILITIES Total current liabilities……… $ 53,000 17.85

Long-term debt……… 111,000 37.37

Total liabilities……… 164,000 55.22

STOCKHOLDERS’ EQUITY

Total stockholders’ equity……… 133,000 44.78

Total liabilities and stockholders’ equity $297,000 100.00

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(10-15 min.) E 13-30B

Fashion Music Co

Comparative Common-Size Income Statement Years Ended December 31, 2010 and 2009

2010 2009 Total revenue……….… 100.0% 100.0% Expenses:

Income tax expense……… 9.86 9.45 Total expenses……… 83.24 83.87 Net income……… 16.76% 16.13%

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(10-15 min.) E 13-32B

$133,000

b Acid-test (quick)

= $65,000 + $13,000 + $79,000 = 1.18

e Days’ sales in

= ($79,000 + $82,000) / 2 = 60 days

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long-term debt, and interest expense improved during 2010, as shown by the improvement in all four ratios

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(15-20 min.) E 13-36B

Req 1

Johnson Bank Limited appears to represent the better investment Johnson earns a greater net profit and has significantly more stockholders’ equity than does Houle Oil Pipeline, Inc

Req 2

the better investment

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1074

ORDER OF

Given Current assets……… $11,900

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147.2 ≈ 147 times)

2009: $1,932 / $35,299 = 0.055 2008: $732 / $30,968 = 0.024

*usually calculated based on weighted average

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Evaluation: Amble Shipping’s rate of return on net sales

compares unfavorably with the industry Return

on sales has never exceeded 5% which is considered a satisfactory return by the industry

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1078

Req 1

McDonough Products, Inc

Common-Size Income Statement Compared to Industry Average

Year Ended December 31, 2010

McDonough Products

INDUSTRY AVERAGE

McDonough Products, Inc

Common-Size Balance Sheet Compared to Industry Average

December 31, 2010

McDonough PRODUCTS

INDUSTRY AVERAGE

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(continued) P 13-52A

Req 2

that its ratios of gross profit to net sales, operating income to

net sales and net income to net sales are all worse than the

performance is worse than average for the industry

Req 3

its ratios of current assets, current liabilities, and stockholders’

equity to total assets are better than the industry averages Overall, the company’s financial position is better than average

for companies in its industry

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1080

Friendly Airline’s statement of cash flows reveals only one

strong point, a continuing purchase of plant assets The

company’s weaknesses include:

1 Net income is down significantly, with the company incurring

a net loss during 2011

2 Operating activities provided a much smaller proportion of

is an unfavorable signal about the company

3 The large payments on notes payable suggest that the company has a lot of debt Coupled with the loss during 2011 and the decrease in net cash provided by operations, the payments on notes payable may indicate that the company has too much debt

4 Purchases of property, plant, and equipment were down significantly from the prior year

5 The company’s cash balance decreased by $70,000 during

2011 to $10,000, which is dangerously low

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(continued) P 13-53A

Cloudview’s statement of cash flows reveals the following

strengths (no significant weaknesses):

1 During both years, operating activities were the major source

of cash

2 The company’s heavy investments in plant assets suggest expansion The use of cash, coupled with increasing income and net cash provided by operations, suggests successful operations

3 The cash balance is much higher than that of the other company and is increasing

Conclusion: Cloudview appears to be the stronger company

and thus the better investment

Student wording may vary

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Req 1 (ratios before the transactions)

(Dollar Amounts and Stock Quantities in Thousands)

Earnings per share

Req 2 (ratios after the transactions)

(Dollar Amounts and Stock Quantities in Thousands)

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as shown by the increase in the market price of the common stock This increase is consistent with the increase in return

earnings per share of common stock The price/earnings ratio showed a slight decline

Req 3

This problem gives you practice in computing and evaluating several of the ratios used in investment analysis By analyzing the two-year trends in the ratios, you can see whether the company’s abilities to pay its debts, sell its inventory, and generate profits have improved or deteriorated during this period Improving ratio values generally indicate an attractive investment, and deteriorating ratio values usually signal an unattractive investment

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g Earnings per share $61

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1086

Decision:

The common stock of DVR seems to fit the investment strategy better Its price/earnings ratio is than half of that of Express, and DVR appears to be in slightly better shape financially than Express On several of the ratios, the two companies are relatively close The ratios that tip the decision in favor of DVR are days’ sales in receivables, the debt ratio, and the return on common stockholders’ equity

analysis DVR appears to be the better investment

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65

=

0 7

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2010, as shown by the rise in the stock’s market price This increase in market price is consistent with the increase in earnings per share of common stock Return on common stockholders’ equity is high

Req 3

This problem gives you practice in computing and evaluating several of the ratios used in investment analysis By analyzing the two-year trends in the ratios, you can see whether the company’s abilities to pay its debts, sell its inventory, and generate profits have improved or deteriorated during this period Improving ratio values generally indicate an attractive investment, and deteriorating ratio values usually signal an unattractive investment

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(continued) P 13-62B

Decision:

CDROM.com’s common stock seems to fit the investment strategy better Its price/earnings ratio is lower than that of E- shop Stores, and CDROM.com appears to be in better shape financially than E-shop Stores, as indicated by all the ratio values except for the Acid-Test Ratio and Earnings per Share of Common Stock

analysis, that CDROM.com appears to be the better investment

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Debt Ratio

Interest- Earned Ratio

Times-Return

on Equity

Book Value Per Share

Req 2

*May be negative because of decreasing assets to shrink the company

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(20-30 min.) Decision Case 2

*Assuming stock price is unaffected by the accounting

difference If stock price is affected, the price/earnings

ratio could be higher (lower) for either company

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1094

CONCLUSION:

Overall, CNH will look better than Caterpillar because of:

Higher current ratio, times-interest-earned ratio, rate of

return measures, and book value per share of common stock

Lower debt ratio

Caterpillar may have the higher inventory turnover ratio and may have a higher price/earnings ratio Overall, CNH will appear stronger — based solely on the ratios

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(20-30 min.) Decision Case 3

To reduce losses and establish profitable operations, Outward Bound should take the following steps:

1 Make a dedicated effort to collect receivables and consider extending less credit to customers Receivables make up 15.2% of assets, compared to 11.0% for the industry average The company’s inability to collect its receivables may explain the shortage of cash (3.0% of total assets compared to 6.8% for the industry)

2 Reduce the amount of the company’s interest-bearing debt The company’s short-term notes payable equal 17.1% of total assets, compared to 14.0% for the industry average (Interest-bearing) long-term debt equals 19.7% of total assets, compared to 16.4% for the industry Outward Bound’s total interest-bearing debt is 36.8% of total assets, compared to only 30.4% for the industry This debt burden causes the company to pay more interest expense than the norm for the industry (5.8% of net sales, compared to only 1.3% for the average company in the industry) The high level

of interest expense drags profits down

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sales, compared to 64.8% for the industry average Consequently, gross profit is only 31.8% of net sales, which

is less than the 35.2% industry average

4 Cut operating expenses below their current level of 37.1% of sales by finding cheaper ways of doing business The company should consider operating out of a less expensive building, spending less on advertising, laying off employees, and other cost-cutting measures to trim operating expenses

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Ethical Issue

Req 1

The ethical issue is: Should Turnberry reclassify its investments from long-term to short-term?

Req 2 and Req 3

The stakeholders in the decision are Turnberry Corporation, its officers and directors, and its current and future creditors

Economic analysis: Reclassifying the long-term investments

as short-term will increase current assets and, therefore, increase the current ratio Turnberry’s financial position is not improved by this reclassification because the company’s asset position has not changed However, its short-term debt paying ability will appear to be improved and thus might entice current or future creditors to loan money to the corporation that they would otherwise not lend, subjecting them to possible loan losses in the future, should Turnberry prove unable to service their debt

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