384
c. No. Return on average assets before interest and taxes (third goal) is equal to return
on sales before interest and taxes (first goal) times turnover of average assets
(second goal). If Calcor Company achieved the first two goals, the return on
PROBLEM 11-13
a. A Company Z Score
X1
=
Working Capital
X1
=
$90,000
=
Total Assets
$300,000
X2
=
Retained Earnings
X2
=
$80,000
=
26.67
Total Assets
$300,000
X3
=
E.B.I.T.
X3
=
$70,000
=
Total Assets
$300,000
X4
=
Market Value of Equity
X4
=
$180,000
=
Book Value of Total Debt
$30,000
X5
=
Sales
X5
=
$430,000
=
143.33
Total Assets
$300,000
Z = 0.012 x 30.00
+ 0.014 x 26.67
Z = 0.36 Z = 6.53
+ 0.37
385
B Company Z Score
X1
=
Working Capital
X1
=
$120,000
=
42.86
Total Assets
$280,000
X2
=
Retained Earnings
X2
=
$90,000
=
32.14
Total Assets
$280,000
X3
=
E.B.I.T.
X3
=
$60,000
=
21.43
Total Assets
$280,000
X4
=
Market Value of Equity
X4
=
$168,750
=
337.50
Book Value of Total Debt
$50,000
X5
=
Sales
X5
=
$400,000
=
142.86
Total Assets
$280,000
Z = .012X1 + .014X2 + .033X3 + .006X4 + .010X5
Z = 0.012 x 42.86
+ 0.014 x 32.14
Z = 0.51 Z = 5.13
+ 0.45
C Company Z Score
X1
=
Working Capital
X1
=
$150,000
=
60.00
Total Assets
$250,000
X2
=
Retained Earnings
X2
=
$60,000
=
24.00
Total Assets
$250,000
X3
=
E.B.I.T
X3
=
$50,000
=
20.00
Total Assets
$250,000
X4
=
Market Value of Equity
X4
=
$148,500
=
185.63
Book Value of Total Debt
$80,000
X5
=
Sales
X5
=
$200,000
=
80.00
Total Assets
$250,000
386
Z = 0.012 x 60.00
+ 0.014 x 24.00
financial failure.
PROBLEM 11-14
a.
X1
=
Working Capital
X1
=
$152,800
=
30.90
Total Assets
$494,500
X2
=
Retained Earnings
X2
=
$248,000
=
50.15
Total Assets
$494,500
X3
=
E.B.I.T
X3
=
$84,000
=
16.99
Total Assets
$494,500
X4
=
Market Value of Equity
X4
=
$690,000
=
344.14
Book Value of Total Debt
$200,500
X5
=
Sales
X5
=
$860,000
=
173.91
Total Assets
$494,500
Z = .012X1 + .014X2 + .033X3 + .006X4 + .010X5
Z = 0.012 x 30.90
+ 0.014 x 50.15
387
+ 0.70
PROBLEM 11-15
2011 Net Income as Reported $90,200,000
Net Change in Inventory Reserve:
(b) Effective Federal Tax Rate 37.9%
(c) Change In Taxes (a x b) $ 1,516,000
PROBLEM 11-16
2011 Net Income as Reported $45,000,000
(c) Change in Taxes (axb) 1,896,000
PROBLEM 11-17
388
PROBLEM 11-18 PROVISION FOR OBSOLETE INVENTORY – ETHICAL
b. No. The inventory will be reduced and the reserve account will be reduced.
a. This promotion appears to be ethical and likely does not require special disclosure.
b. This promotion may not be ethical without special disclosure describing the
promotion and the risk. There needs to be a sales cutoff at December 31 not
389
CASES
CASE 11-1 SMOKE AND SMOKELESS
earnings and stock split.)
a. 1. 2010 Net earnings (in millions): $1,113
Net increase in inventory reserve:
2010
$197
2009
190
$7
3. Change in Taxes
4. Net increase in Income
[1 – 3]
5. Estimated Adjusted Income
2010 Net Earnings
$
Net Increase in Income
$
b.
1.
Days’ Sales in Inventory
=
Ending Inventory
Cost of Goods Sold/365
$1,055
=
$1,055
=
84.74 days
$4,544/365
12.45
2.
Working Capital
=
Current Assets – Current Liabilities
$4,802 – $4,372
=
$430
3.
Current Ratio
=
Current Assets
Current Liabilities
$7 X 39.4%
=
2.76
$7 – 2.76
=
4.24
390
$4,802
=
1.10
$4,372
4.
Acid-Test Ratio
=
Cash Equivalents + Marketable Securities + Net Receivables
Current Liabilities
$2,195 + $118
=
$2,313
=
.53%
$4,372
$4,372
5.
Debt Ratio
=
Total Liabilities
Total Assets
$4,372 + $3,701 + $518 + $1,668 + $309
=
$10,568
=
61.88%
$17,078
$17,078
c. 2010, with Adjustment for LIFO Reserve
Computations of Changes
Inventory
Inventory Reported
$
1,055
Increase in Inventory
197
Adjusted inventory
$
1,252
Cost of Goods Sold
Reported
$
4,544
Net Increase in Inventory Reserve
(7)
Adjusted Cost of Goods Sold
$
4,537
Current Assets
Reported
$
4,802
Increase in Inventory
197
Adjusted Current Assets
$
4,999
Current Liabilities
Reported
$
4,372.00
Increase in Taxes
2.76
Adjusted Current Liabilities
$
4,374.76
Total Liabilities
Reported
$
10,568.00
Increase in Taxes
2.76
Adjusted Total Liabilities
$
10,570.76
Total Assets
Reported
$
17,078
391
Increase in Inventory
197
Adjusted Total Assets
$
17,275
1.
Days’ Sales in Inventory
=
Ending Inventory
Cost of Goods Sold/365
$1,252
=
$1,252
=
100.72 days
$4,537/365
12.43
2.
Working Capital
=
Current Assets – Current Liabilities
$4,999 – $4,374.76
=
$624.24
3.
Current Ratio
=
Current Assets
Current Liabilities
$4,999
=
1.14
$4,374.76
4.
Acid-Test Ratio
=
Cash Equivalents + Marketable Securities + Net Receivables
Current Liabilities
$2,195 + $118
=
$2,313
=
.53
$4,374.76
$4,374.76
5.
Debt Ratio
=
Total Liabilities
Total Assets
$10,570.76
=
.61
$17,275
d.
No Adjustment
Adjustment
Days Sales in Inventory
84.74
Days
100.72
Days
Working Capital
$
430
$
624.24
Current Ratio
1.10
1.14
Acid-Test Ratio
.53
.53
Debt Ratio
61.88%
61.19%
392
e. 2009 Financial Statements
Diluted income per share for 2009 and 2008
2009
$
1.65
2008
$
2.28
f. 125 million
Note: The following is the inventory reserve for 2007 – 2010:
2007
$
51,000,000
2008
112,000,000
2009
190,000,000
2010
197,000,000
CASE 11-2 ACCOUNTING HOCUS-POCUS
Levitt, Securities and Exchange Commission.)
a. “Big Bath”
earnings.
b. In an acquisition, if there is a large write off of “in–process” research and
development, this amounts to a one time charge. This removes the future earnings
drag.
d. A company can account for immaterial items without regard to generally accepted
accounting standards. Thus the company could use “materiality” to improperly
393
CASE 11-3 TURN A CHEEK
second amendment.)
a. Each student will write a different position paper on why the Nike reply should be
viewed under the first amendment.
viewed under the fifth amendment.
Note: In June 2003, the United States Supreme Court declined to hear the case on
procedural grounds.
30, 2003.
In September 2003, Nike settled with California activist Marc Kasky in a deal that
obliges Nike to pay $1.5 million during the next three years to a Washington worker–
rights group. The money will be used “to promote workers’ education, increase training,
“Clouding the muddy-free speech waters is the acknowledgement from justices in both
California and federal courts that Nike’s campaign contained elements of commercial
and noncommercial speech.”