Accounting Chapter 13 Fargo and Ball have nearly equal current ratios

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 13

800

Problem 13-4B (50 minutes)

1. Current ratio

= 2.5 to 1

$6,100 + $6,900 + $15,100

4. Inventory turnover

= 15.3 times

5. Days’ sales in inventory

$6,100 + $6,900 + $15,100 + $13,500 + $2,000

$11,500 + $3,300 + $2,600

$236,100

($13,500 + $17,400)/2

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 13

801

Problem 13–4B (Concluded)

8. Profit margin ratio

= 7.5%

11. Return on common stockholders’ equity

$23,800

$315,500

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 13

802

Problem 13-5B (60 minutes)

Part 1

Fargo Company

Ball Company

a. Current ratio

= 2.3 to 1

= 2.1 to 1

$393,600

$667,500

d. Inventory turnover

= 3.0 times = 5.9 times

Short-term credit risk analysis: Fargo and Ball have nearly equal current

ratios and equal acid-test ratios. However, Ball both turns its merchandise

and collects its accounts receivable much more rapidly than Fargo. On this

basis, Ball probably is the better short-term credit risk.

$290,600

($86,800 + $105,100)/2

$205,200

$90,500

$208,100

$97,000

$480,000

($82,000 + $80,500)/2

803

Problem 13-5B (Concluded)

Part 2

Fargo Company

Ball Company

a. Profit margin ratio

= 8.6% = 9.2%

$33,850

($382,100 + $383,400)/2

d. Return on common stockholders’ equity

= 17.8% = 23.7%

Investment analysis: Ball’s profit margin, total asset turnover, return on total

assets, and return on common stockholders’ equity are all higher than

$33,850

$393,600

$33,850

($198,600 + $182,100)/2

$61,700

$667,500

$61,700

($270,100 + $250,700)/2

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 13

804

Problem 13–6BA (60 minutes)

Part 1 Effect of income taxes (debits or losses in parentheses)

Pretax

25% Tax

Effect

After–Tax

l. Loss from operating a discontinued segment …………………….

(120,000)

(30,000)

(90,000)

12,000

Part 2 Income from continuing operations (and its components)

c.

Net sales ……………………………………………………….

$2,640,000

b.

Interest revenue …………………………………………………….

20,000

j.

Total revenues and gains ………………………………………

$1,040,000

Depreciation expense—Equipment ………………………..

Depreciation expense—Buildings ………………………….

k.

Loss on sale of equipment …………………………………….

e.

Loss on hurricane damage …………………………………….

i.

Loss from settling lawsuit ……………………………………..

36,000

Total expenses and losses …………………………………….

1,732,000

Income from continuing operations before taxes …………

996,000

d.

Income tax expense (25%) ……………………………………..

(249,000)

Income from continuing operations after taxes ……………

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 13

805

Problem 13–6BA (Concluded)

Part 3 Income from discontinued segment

l.

Loss from operating a discontinued segment (after-tax) ………………

$ (90,000)

Part 4 Net income

Income from continuing operations after taxes …………………………..

$747,000

Income (loss) from discontinued segment …………………………..

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 13

SERIAL PROBLEM — SP 13

Serial Problem — SP 13, Business Solutions (45 minutes)

1. Gross margin with services revenue

Gross margin = Total revenue – Cost of goods sold

= $44,000 – $14,052 = $29,948

2. Current ratio = $95,568 / $875 = 109.2

Acid-test ratio = $90,924 / $875 = 103.9

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 13

Company Analysis — AA 13-1 (30 minutes)

1. Trend percents for selected income statement accounts

$ millions

Fiscal

2017

Fiscal

2016

Fiscal

2015

Net Sales ………………………………………………………

98.1%

92.3%

100.0%

$229,234

$215,639

$233,715

93.8%

100.0%

$141,048

$131,376

$140,089

86.1%

84.3%

100.0%

104.9%

100.0%

82.3%

82.0%

100.0%

90.6%

85.6%

100.0%

2. Common-size percents for asset categories and accounts

$ millions

Sep. 30, 2017

Sep. 24, 2016

Total current assets ………………………………………

34.3%

33.2%

$128,645

$106,869

3. More liquid

Explanation: Using current assets as a percent of total assets to

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 13

Comparative Analysis — AA 13-2 (25 minutes)

1.

$ millions

Apple

Google

Cash and equivalents ………….

5.4%

$20,289

5.4%

$10,715

1.3%

4,855

0.4%

141,048

2. Decrease

3. Google

Explanation: Apple’s cost of sales percent is higher at 61.5% compared

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 13

809

Global Analysis — AA 13-3 (20 minutes)

1.

KRW in millions

Samsung

Cash and equivalents ………………………………….

10.1%

₩30,545,130

Accounts receivable, net ……………………………..

Retained earnings ……………………………………….

71.5%

54.0%

Revenues ……………………………………………………

2. 46.0%

Explanation: Samsung’s cost of sales percent is 54.0%. This implies that

3. Outperform

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 13

810

Ethics Challenge — BTN 13-1

1. The CEO appears to have selectively chosen from the 11 available

ratios to present only the ones that show trends that are favorable to

2. The consequences of this action by the CEO might be mixed. It is likely

that the analysts will ask other questions that may reveal some

negative trends such as the trends in return and profit margins. The

CEO’s actions may become transparent to the analysts as they

discover the presence of less favorable trends through their questions.

Communicating in Practice — BTN 13-2

There is no set solution to this activity. Each team’s memorandum will

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 13

811

Taking It to the Net — BTN 13-3

($ thousands)

As of 12/31/2015

As of 12/31/2016

1. Profit margin ratio ……………..

$512,951/$7,386,626 = 6.9%

$720,044/$7,440,181 = 9.7%

2. Gross profit ratio ………………

$3,382,675/$7,386,626 = 45.8%

$3,157,891/$7,440,181 = 42.4%

Teamwork in Action — BTN 13-4

Part 1

Team reports should look something like the following:

Horizontal Analysis

Horizontal analysis is comparing a company’s financial statement amounts

across time. We compare data from comparative statements that are

Example: Assume that prior year sales equal $240,000, and current year

sales equal $300,000. Horizontal analysis of sales yields a $60,000 increase

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 13

812

Teamwork in Action (Concluded)

If a horizontal comparison is made over a number of periods, the

comparisons are made to corresponding amounts in a selected period

called the base period. Each subsequent period’s amount is compared to

the base period. The change is expressed as a percent of the base period.

This is commonly referred to as trend analysis.

Vertical Analysis

Vertical analysis is comparing a company’s financial statement amounts to

Example: Total assets for the period being analyzed = $500,000 (base

number). Cash balance is $100,000. Cash is computed to be 20% of total

Part 2

Explanations of the four categories or areas of ratio analysis follow:

a. Liquidity analysis measures the availability of resources to meet short–

term cash requirements. Efficiency analysis measures how productive a

company is in using its assets.

Part 3

Each team member presents results to the entire team.

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 13

813

Entrepreneurial Decision — BTN 13-5

1. No. Although the current ratio improved over the three-year period, the

acid-test ratio declined and accounts receivable and merchandise

inventory turned more slowly. These conditions indicate that an

increasing portion of the current assets consisted of accounts

receivable and inventories from which current liabilities could not be

paid.

Hitting the Road — BTN 13-6

One possible strategy to fulfill the requirements of this assignment is:

Assume that a $37,500 salary will be earned upon graduation at age 25.

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 13

814