(continued) P 5-61B
Req. 2
The current ratio improved from 1.38 to 1.74. The quick (acid-test) ratio
Req. 3
Challenge Exercises and Problem
(15-20 min.) E 5-62
Actual without
Bank Cards
Expected with
Bank Cards
Sales revenue ………………………….
$500,000
$550,000*
Cost of goods sold……………………..
$250,000
$275,000**
Uncollectible-account expense……….
12,000
—
Bank-card discount expense………….
—
9,000***
Other expenses………………………….
165,000
157,000****
Total expenses…………………………..
427,000
441,000
Net income……………………………….
$ 73,000
$109,000
Decision: Accept bank cards because of the expected increase in net
income.
(15-20 min.) E 5-63
T-accounts are helpful, as follows (in millions):
Allowance for Doubtful Accounts
Beg. bal.
67
(a)
4
Expense
8
End. bal.
71
Gross Accounts Receivable
Beg. bal. ($2,269 + $67)
2,336
Total revenue
26,667
Write-offs
4
Collections
26,346
(b)
End. bal. ($2,582 + $71)
2,653
(15-20 min.) P 5-64
Req. 1
Beginning Allowance balance $ 930
Req. 2
Beginning Acct Rec balance $ 9,430
+ Credit sales 16,500
Req. 3
Allowance for
Accounts Receivable Uncollectible Accounts
Beg. Bal 9,430
Cr. sales16,500
900 Returns
130 Write-offs
234 aDiscounts
15,366 bCollections
Write-offs 130
930 Beg. Bal
200 cUncoll. Acct.
exp.
End. Bal 9,300
1,000 End. Bal
Decision Cases
(20-25 min.) Decision Case 1
Clearview Cablevision, Inc.
Summary Income Statement
Year Ended December 31, 2014
Service revenue ………………………………………….
$940,000
Total expenses, excluding bad debt …………….
(670,000)
Bad-debt expense ($940,000 × .05) ………………
(47,000)
Net income …………………………………………………
$223,000
Computation:
Accounts Receivable
Dec. 31, 2013 Balance
110,000
2014 Revenues
940,000
2014 Collections
840,000
2014 Write-offs
30,000
Dec. 31, 2014 Balance
180,000
(15-20 min.) Decision Case 2
The trend of sales is increasing.
(Dollars in thousands)
2015
2014
Days’
sales in
receivables
=
($115* + $96*) / 2
($96* + $85*) / 2
$1,475 / 365 days
$1,001 / 365 days
=
26 days
= 33 days
_____
*Net accounts receivable
Days’ sales in receivables decreased nicely during 2015.
Cash collections from customers for 2015 and 2014:
2015
2014
Beginning net accounts receivable
$ 96
$ 85
+
Sales revenue
1,475
1,001
−
Ending net accounts receivable
(115)
(96)
=
Estimated cash collections
$1,456
$ 990
Collections from customers increased dramatically during 2015.
Ethical Issue
(20-30 minutes)
Req. 1
Req. 2 and Req. 3
The stakeholders to this decision are Sunnyvale Loan Company, its officers
and directors, its shareholders, its creditors, Sunnyvale’s banker, securities
analysts, and the equity and credit markets.
(continued) Ethical Issue
Legal analysis: As explained in chapter 4, material and intentional
manipulations of earnings are known as fraudulent financial reporting, and are
illegal. Such dealings will eventually result in adverse legal and regulatory
consequences for the company, as well as its officers and directors.
Focus on Financials: Amazon.com, Inc.
(30-40 min.)
Req. 1
a. According to Note 1, the “Marketable Securities” account includes
short- to intermediate-term fixed income securities and AAA-rated
money market funds.
b. According to Note 1, the company invests its excess cash in these
accounts. This is done in order to earn a return on excess cash
balances.
Req. 2
Amazon.com recognizes revenue from product sales or services
rendered when the following four criteria are met:
(continued) Amazon.com
• Collectability is reasonably assured.
Req. 3
“Net” means “net of allowance for doubtful accounts.” (“Other” likely
Req. 4
Req. 5
Req. 6
2012
2011
Current ratio:
(Dollar amounts in millions)
Total current assets
=
$21,296
=
1.12
$17,490
=
1.17
Total current liabilities
$19,002
$14,896
Quick ratio:
Quick assets
=
$14,812
=
0.78
$12,147
=
0.82
Total current liabilities
$19,002
$14,896
(continued) Amazon.com
As of the end of 2012, Amazon.Com, Inc.’s current ratio and quick ratio
decreased slightly from 2011, indicating that liquidity has slightly
Focus on Analysis: YUM! Brands, Inc.
(20 min.)
Req. 1
According to Note 2, YUM! Brands, Inc.’s revenue primarily comes from
the sales to consumers at company owned stores and fees from
Req. 2
In Note 2, the company indicates that the receivables primarily result
from business with its franchisees and licensees. This includes lease
(continued) YUM! Brands
Req. 3
a. Net Sales
=
$13,633
=
$37.35
365
365
b. Avg. Accts Rec.
=
($301 + $286)/2
8 days
Sales per day
$37.35
c. The trade receivables are due in 30 days whereas the average days’
Req. 4
Current ratio:
2012
2011
(Dollar amounts in millions)
Total current assets
=
=
0.87
$2,321
=
0.95
Total current liabilities
$2,450
Quick ratio:
Quick assets
=
=
0.49
$1,198+$286
=
0.61
Total current liabilities
$2,450
Net working capital:
Current assets – Current
liabilities
=
($1,909 – $2,188)
($2,321 – $2,450)
=
($279)
=
($129)
(continued) YUM! Brands
The current ratio, quick ratio, and net working capital have fallen
significantly from 2011 to 2012. Thus, the company’s liquidity has fallen
Group Project