Solution manual managerial accounting concept and applications by cabrera chapter 04 answer

Trend percentages represent the expression of several years� financial data in percentage form in terms of a base year.10.. Expenses including the cost of goods sold have been increasing

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satisfactory short-term solvency or working capital position of a business firm are:Favorable credit positionSatisfactory proportion of cash to the requirements

of the current volumeAbility to pay current debts in the regular course of businessAbility to extend more credit to customersAbility to replenish inventorypromptly3 These tests are:Improvement in the financial positionWell-balanced financial structure between borrowed funds and equityEffective employment of borrowed funds and equityAbility to declare satisfactory amount of dividends to shareholdersAbility to withstand adverse business conditionsAbility to engage inresearch and development in an attempt to provide new products or improve old products, methods or processes4 Some indicators of managerial efficiency are:Ability to earn a reasonable return on its investment of borrowed funds and equityAbility to control operating costs within reasonable limitsNo

overinvestment in fixed assets, receivables and inventories5 The techniques used in Financial Statement Analysis are:I Vertical analysis which shows the relationships of the items in the same year: also referred to as �static measure.�a Financial ratiosb Common-size statementsII Horizontal analysis which shows the changes or tendencies of an item for 2 or more years; also referred to as �dynamic measure.�a Comparative statements - showing

changes in absolute amount and percentagesb Trend percentagesIII Use of special reports or statementsa Statements of Changes in Financial Position

b Gross Profit / Net Income Variation Analysis6 Refer to page 133 of the textbook.7 Horizontal analysis involves the comparison of items on financial statements between years Analysis of comparative financial statements or the increase/decrease method of analysis and trend percentages are the two

techniques that may be applied under horizontal analysis Vertical analysis involves the study of items on a single statement for a single year, such as theanalysis of an income statement for some given year Common-size statement and financial ratios are techniques used in vertical analysis.8 Trends can indicate whether a situation is improving, remaining the same or deteriorating They can also give insight to the probable future course of events in a firm.9

Trend percentages represent the expression of several years� financial data in percentage form in terms of a base year.10 Refer to page 133 of the textbook.11 Observation of trends is useful primarily in determining whether a situation is improving, worsening, or remaining constant By

comparing current data with similar data of prior periods we gain insight into the direction in which future results are likely to move Some other standards

of comparison include comparison with other similar companies, comparison with industry standards, and comparison with previous years� information By

comparing analytical data for one company with some independent yardstick, the analyst hopes to determine how the position of the company in question compares with some standard of performance.12 Trend percentages are used to show theincrease or decrease in a financial statement amount over a period of years by comparing the amount in each year with the base-year amount A component

percentage is the percentage relationship between some financial amount and a total of which it is a part Measuring the change in sales over a period of several years would call for use of trend percentages The sales in the base year are assigned a weight of 100% The percentage for each later year is computed by dividing that year�s sales by the sales in the base year.13

Expenses (including the cost of goods sold) have been increasing at an even faster rate than net sales Thus Premiere is apparently having difficulty

in effectively controlling its expenses.14 A corporate net income of P1

million would be unreasonably low for a large corporation, with, say, P100 million in sales, P50 million in assets, and P40 million in equity A return ofonly P1 million for a company of this size would suggest that the owners could

do much better by investing in insured bank savings accounts or in government bonds which would be virtually risk-free and would pay a higher return On the other hand, a profit of P1 million would be unreasonably high for a

corporation which had sales of only P5 million, assets of, say, P3 million, and equity of perhaps one-half million pesos In other words, the net income of a corporation must be judged in relation to the scale of operations and the amountinvested.II True or FalseTrue#True#False#True#True##False#True#False#False

#True##III ProblemsProblem 1 (Percentage Changes)a Accounts receivable

decreased 16% (P24,000 decrease ( P150,000 = 16% decrease).b Marketable securities decreased 100% (P250,000 decrease ( P250,000 = 100% decrease).c A percentage change cannot be calculated because retained earnings showed a

negative amount (a deficit) in the base year and a positive amount in the

following year.d A percentage change cannot be calculated because of the zero amount of notes receivable in 2005, the base year.e Notes payable increased 7 �

% (P60,000 increase ( P800,000 = 7 �% increase).f Cash increased 3% (P2,400 increase ( P80,000 = 3% increase).g Sales increased 10% (P90,000 increase ( P900,000 = 10% increase).Problem 2 (Computing and Interpreting Rates of

Change)Requirement (a)Computation of percentage changes:1 Net sales increased 10% (P200,000 increase ( P2,000,000 = 10% increase).2 Total expenses

increased 11% (P198,000 increase ( P1,800,000 = 11% increase).Requirement (b)1

Total expenses grew faster than net sales Net income cannot also have grown faster than net sales, or the sum of the parts would exceed the size of the whole.2 Net income must represent a smaller percentage of net sales in

2006 than it did in 2005 Again, the reason is that the expenses have grown at

a faster rate than net sales Thus, total expenses represent a larger

percentage of total sales in 2006 than in 2005, and net income must represent a smaller percentage.Problem 3 (Financial Statement Analysis using Comparative Statements or Increase-Decrease Method)Requirement 1XYZ Corporation######BalanceSheet######As of December 31#########Change#####Peso #

sold#191,400#314,600#123,200#64.37%## Gross profit#

75,000#109,400#34,400#45.87%##Selling, general and administrative expenses# 35,500# 58,400#22,900#64.51%##Income before income

taxes#39,500#51,000#11,500#29.11%##Income taxes# 12,300# 16,400#4,100#33.33%##

Net income # 27,200# 34,600#7,400#27.21%##Requirement 2Short-term

financial position #####1 Current Assets#increased by 62.01%#while#Current Liabilities#increased by 138.76%## ( Unfavorable##2

Quick Assets#increased by 62.40%#while#Current Liabilities#increased by 138.76%## ( Unfavorable##3 Net Sales#increased by 59.16%#while#Accounts Receivable#increased by 93.06%## (

Unfavorable##4 Cost of Goods Sold#increased by

64.37%#while#Inventories#increased by 58.52%## (

Favorable##Leverage######5 Total Assets#increased by 80.58%#while#TotalLiabilities#increased by 138.76%## ( Unfavorable##6.

Total Liabilities#increased by 138.76%#while#Total Equity#increased by

Sales#increased by 59.16%#while#Cost of Goods Sold#increased by 64.37%##

( Unfavorable########8 Net Sales#increased by 59.16%#while#Selling, General & Administrative Expenses#increased by 64.51%##

( Unfavorable##9 Net Sales#increased by 59.16%#while#Net Income#increased by 27.21%## (

Unfavorable##10 Net Income#increased by 27.21%#while#Total

Assets#increased by 80.58%## ( Unfavorable##Problem 4 (Trend Percentages)Requirement (1)The trend percentages are:#Year 5#Year 4#Year 3#Year 2#Year

#130.0#106.0#108.0#110.0#100.0##Requirement (2)Sales:#The sales are

increasing at a steady rate, with a particularly strong gain in Year

4.#####Assets:#Cash declined from Year 3 through Year 5 This may have been due

to the growth in both inventories and accounts receivable In particular, the accounts receivable grew far faster than sales in Year 5 The decline in cash may reflect delays in collecting receivables This is a matter for management

to investigate further.###########Liabilities:#The current liabilities jumped up

in Year 5 This was probably due to the buildup in accounts receivable in that the company doesn�t have the cash needed to pay bills as they come due.##Problem

5 (Use of Trend Percentages)a 1 An unfavorable tendency could be

observed in Receivables in relation to Net Sales from 2003 � 2005 because

receivables had been increasing at a much faster rate than Net Sales This could indicate inefficiency in the collection of receivables or simply poor company credit policy The situation however, improved in 2006 and 2007 when sales started to move up at a faster rate than accounts receivable This would indicate improvement in the credit and collection policy or more cash sales werebeing generated 2 Unfavorable tendency in inventory persisted from 2003 to

2007 because it had been going up at a much faster rate than Net Sales If thiscontinues, the company will end up with over-investment in inventory because thebuying rate is faster than the selling price 3 Favorable tendencies could

be noted in Fixed Assets in relation to Net Sales because inspite of the minimaladditions to fixed assets made by the company from 2003 through 2007, sales had been increasing at a very encouraging rate 4 Net Income had likewise been increasing at a much faster rate than net sales This is favorable becausethis would indicate that the company had been successfully controlling the increases in Cost of Sales and Operating Expenses.b Review computations of the Trend Percentages It will be noted that the Trend Percentages in Total

Noncurrent Liabilities and Equity from 2005 to 2007 were interchanged

Correction should be made first before interpretation is done 1 The upward tendency in current assets had been accompanied by an upward trend in current liabilities It could be noted that current assets had been moving up

at a much faster rate than current liabilities This is favorable because the margin of safety of the short-term creditors is widened 2 Favorable tendencies could also be observed in noncurrent assets which had been increasingand which increases had been accompanied by downward trend in noncurrent

liabilities This would mean better security on the part of creditors and stronger financial position 3 There is an unfavorable tendency in Net Sales in relation to non-current assets Sales had not been increasing at the same rate as the increases in fixed assets This could indicate that more investments are made in noncurrent assets without considering whether or not they could sell the additional units of product they are producing.c The unfavorable trend in net income could be attributed to the following tendencies:Higher rates of increases in cost of sales as compared to sales.Higher rates of increases in selling, general and administrative expenses in relation to net

sales.Higher rates of increases in other financial expenses than the rates of increases in net sales.IV Multiple Choice QuestionsD#A, C,

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