Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
1.
(×)
(×)
= times*
Sales tax payable
Social Security tax payable—employees
Accounts payable
Notes payable
Property taxes payable
= 4.8
$88,540
$20,400
0.05
$18,000.00
4,620.00
5,000.00
0.062
1,264.80
4,427.00
P9. Identification and Evaluation of Current Liabilities
The current liabilities of Luna Cycle Repair as of December 31, 2014, are as follows:
11-21
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1. a.
2. The fundamental reason present value is a useful tool in making business decisions
is that it allows the decision maker to compare various alternatives in the present,
when business decisions are actually made.
Factor: 8%, 4 periods
P10. Applications of Present Value
Present value of a single payment (Table 1 in Appendix B)
11-22
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Cases
C1. Conceptual Understanding: Frequent Flyer Plan
If the expense and corresponding liability of frequent-flier programs are recognized, op-
erating income would be reduced and current liabilities would be increased. This is an
Another estimate of the cost would be a percentage of variable operating costs. (This cal-
culation assumes that idle capacity is used for these passengers, with additional aircraft
Finally, some students may argue that only the marginal costs of serving passengers who
are flying free should be expensed because these people would fill seats that would other-
and handle any disputed mileage credits. These costs have already been expensed as
incurred.
Many students will acknowledge the need for increased personnel to issue free tickets,
compute and record mileage credit earned, mail monthly statements to frequent fliers,
The above computations illustrate why airlines are reluctant to recognize frequent-flier
programs in their financial statements. Recognition may have a significantly negative ef-
11-23
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
C1. Conceptual Understanding: Frequent Flyer Plan (Concluded)
11-24
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Payables turnover and days' payable computed and compared (in millions)
Payables Turnover
=Cost of Goods Sold +/‒ Change in Inventory
Accounts Payable
their industry peers.
Days' Payable = Number of Days in a Year
Payable Turnover
365
year-end level of payables 18.9 times a year, or every 19.3 days, whereas Oracle pays its
*Rounded
Cisco Systems pays its accounts payable over 11 days faster than Oracle. Cisco pays its
C4. Interpreting Financial Reports: Comparison of Two Companies’ Ratios with Industry Ratios
11-25
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
The FASB has established two conditions for determining when a contingency should be
C5. Annual Report Case: Commitments and Contingencies
also discusses various legal matters in which it is involved and legal proceedings aris-
ing from its normal course of business. It follows to say that the management cannot
It is important to consider commitments and contingencies because if they are subse-
In its 2011 annual report, CVS talks about commitments and contingencies in note 13.
entered in the accounting records: (1) the liability must be probable, and (2) it must be
reasonably estimated.
a lease obligation or satisfies a court ruling on a lost lawsuit) they will increase the com-
pany's current liabilities and impact its cash flows, so they need to be considered when
The note talks about lease guarantees on property leased by former CVS subsidiaries.
CVS disposed of many of its subsidiaries and the purchasers indemnified CVS of the
lease obligations, but if the purchaser or the subsidiary became insolvent, CVS would
cial condition, which is unlike the lease obligation guarantee situation.
guarantee that the results of these cases will not materially impact the company's finan-
have to satisfy the lease obligations. As of December 31, 2011, CVS guaranteed approx-
imately 75 such store leases with maximum lease term extending up to 2022. The note
11-26
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
(+)/2
times
20.5
19.8
365 days
=
Days' Payable =
$3,793 = times*
$75,207
2011 = $4,370 $4,026
$86,539 – $649
CVS:
Cost of Goods Sold +/‒ Change in Merchandise Inventory
Average Accounts Payable
C6. Comparison Case: Payables Analysis
Payables Turnover
Payables turnover and days' payable computed (in millions)
=
Payables Turnover
Payables Turnover =
Walgreens:
Cost of Goods Sold +/‒ Change in Merchandise Inventory
Average Accounts Payable
C6. Comparison Case: Payables Analysis (Concluded)
11-28
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
C7. Ethical Dilemma: Known Legal Violations
The alternatives available to Swift are as follows:
Alternative 1 is the worst choice because it is unethical to be associated with an ille-
gal activity. Swift would be subjecting himself to possible criminal action, and, if the
maneuver were discovered, it would be difficult for Swift ever to get an accounting job
again.
Although Alternative 3 is probably the least confrontational action, it is also unethical
This case actually happened to one of the author's students, who sought the author's
Failure to withhold and remit income and payroll taxes is a serious criminal offense.
11-29
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1.
2.
3.
4.
C8. Business Communication: Baseball Contract
Memorandum
Date: Today's Date
Re: Management Contract Offer
Management's offer does not accurately reflect the value to you because it does not
To: Devon Turner
From: Student
by using a table to calculate the present value of the offer:
Because the offer lies so far in the future, it is actually worth only about $6.0 million
If you refuse the new contract, you could have a few bad years or become in-
Other considerations in evaluating the offer are as follows:
The choice of interest rate should be considered. The bank prime rate may not
Whether or not the contract is guaranteed if you are injured or otherwise cannot
play will affect the amount of risk.
a present value of $10.5 million per year, you might propose a signing bonus of
$17,850,000 ($42,000,000 – $24,150,000). Since management is unlikely to agree to
this bonus, the range of the possible bonus is from zero or no bonus to $17,850,000.
Note to Instructor: Answers will vary depending on the company selected by the
C9. Continuing Case: Annual Report Project
students.
The new contract may not adequately reflect increases in salaries over the next
11-30
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
