Accounting Chapter 13 Homework Cocacola More Solvent Than Pepsico Copyright 2013

PROBLEM 13-4B

(a) LIQUIDITY

2013 2014 Change

Current

ratio

$520,000

$165,000 = 3.15:1 $670, 000

$330,000 = 2.03:1 (36%)

PROFITABILITY

Profit

margin

$90,000

$940,000 = 9.6% $130,000

$1,050,000 = 12.4% 29%

PROBLEM 13-4B (Continued)

(b) 2014 2015 % Change

1. Return on

2. Debt

to assets

$510,000 = 39%

1,315,000 $390,000 =29%

1,350,000 (26%)

PROBLEM 13-5B

(a) Ratio Edgewater Ritter

(All Dollars Are in Millions)

(1) Current

(2) Accounts receivable

turnover

(3) Average collection

coverage

(13) Cash debt coverage

5.32:1 ($885.7 ÷ $166.5)

4.6 ($1,356.0 ÷ $293.2)

.70 ($124.5 ÷ $177.2d)

.63 ($124.5 ÷ $196.5e)

2.83:1 ($617.2 ÷ $218.0)

7.3 ($1,436.5 ÷ $196.1)

.15 ($38.6 ÷ $251.8i)

.14 ($38.6 ÷ $278.9j)

(b) The comparison of the two companies shows the following:

Liquidity—Edgewater’s current ratio and current cash debt coverage are

much better than Ritter’s. However, Ritter has better accounts

receivable and inventory turnovers.

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BYP 13-1 FINANCIAL REPORTING PROBLEM

(a) TOOTSIE ROLL INDUSTRIES, INC.

Trend Analysis of Net Sales and Net Earnings

For the Five Years Ended 2011

Base Period 2007—($ in thousands)

2011 2010 2009 2008 2007

(1) Net sales

$528,369

$517,149

$495,592

$492,051

$492,742

Net sales changed very little from 2007 to 2009, but increased slightly

(b) (000’s omitted)

1. Debt to Assets Ratio

2011: ($857,856 – $665,935) ÷ $857,856 = 22%

Tootsie Roll’s long-term solvency is not in jeopardy. The debt to assets

BYP 13-1 (Continued)

(c) (000’s omitted)

1. Profit Margin

2. Asset Turnover

3. Return on Assets

4. Return on Common Stockholders’ Equity

All of the profitability ratios except asset turnover decreased in 2011.

Stockholders are earning an acceptable 6.6% on their investment.

(d) Substantial amounts of important information about a company are not

in its financial statements. Events involving such things as industry

changes, management changes, competitors’ actions, technological

BYP 13-2 COMPARATIVE ANALYSIS PROBLEM

(

a

)

Hershey Tootsie Roll

1. (i) Percentage increase

$6,080,788 – $5,671,009

(b) Hershey’s increases in net sales, net income, and total assets were all

significantly larger than Tootsie Roll’s. Both Companies had a decrease

BYP 13-3 RESEARCH CASE

(a) The article explains that unrealized losses on certain types of

investment securities, known as available-for-sale securities, do not

(b) Companies are required to report these losses in net income when

the company determines that the loss is permanent. This would occur

(c) At the time of the article companies in the Standard and Poor’s 500

(d) The article emphasizes that these companies actually are following

accepted accounting standards.

(e) The implications for investors are that investors need to look for

BYP 13-4 RESEARCH CASE

(a) As discussed in Chapter 11, when a company does a stock split, its

share price drops accordingly. If Amazon had not engaged in past stock

splits its stock price at the time of the article would have been $1,166.

(b) Amazon dramatically increased its capacity to handle customer orders

through its spending on fulfillment centers. However, until its sales

(d) The article notes that Amazon’s 2012 operating margin was about half

what it had been in the typical previous year. In the past, many of

Amazon’s customers did not pay sales taxes on their purchases, which

BYP 13-5 INTERPRETING FINANCIAL STATEMENTS

(a) Liquidity Ratios Coca-Cola PepsiCo

(1) Current ratio 1.28:1

($17,551 ÷ $13,721)

1.44:1

($12,571 ÷ $8,756)

(5) Days in inventory 74.5

(365 ÷ 4.9)

46.8

(365 ÷ 7.8)

(

b

)

Solvency Ratios Coca-Cola PepsiCo

(1) Debt to assets ratio

$23,872

$48,671 = 49%

$23,044

$39,848 = 58%

BYP 13-5 (Continued)

(c) Profitability Ratios Coca-Cola PepsiCo

(1) Profit margin 22.0%

($6,824 ÷ $30,990)

13.8%

($5,946 ÷ $43,232)

BYP 13-6 REAL-WORLD FOCUS

BYP 13-7 DECISION MAKING ACROSS THE ORGANIZATION

(a) Lenders prefer that financial statements are audited because an audit

gives independent assurance that the financial statements give a

(b) The current ratio increase is a favorable indication as to liquidity, but

alone tells little about the going-concern prospects of the client. From

this ratio change alone, it is impossible to know the amount and direction

The 50 percent [(.1 – .2) ÷ .2] decrease in cash debt coverage may indicate

that the company is having difficulties generating enough cash from

The increase in net income is a favorable indicator for both solvency

and going-concern prospects although much depends on the quality

of receivables generated from sales and how quickly they can be

BYP 13-7 (Continued)

The 32 percent [($3.30 – $2.50) ÷ $2.50] increase in earnings per share,

which is identical to the percentage increase in net income, is an

indication there has probably been no change in the number of shares of

A limitation on comparisons with industry statistics or other companies

within the industry exists because material differences can be created

through the use of alternative (but acceptable) accounting methods.

(c) 1. Current cash debt coverage—indicates liquidity.

BYP 13-8 COMMUNICATION ACTIVITY

To: David Lemay

From: Accounting Student

Re: Financial Statement Analysis

There are two fundamental considerations in financial statement analysis:

(1) the bases of comparison and (2) the limitations of financial statement

analysis. Each of these considerations is explained below.

1. Bases of comparison. The bases of comparison are:

a. Intracompany—This basis compares an item or financial relationship

within a company in the current year with the same item or rela-

2. Three factors that affect quality of earnings are:

a. Alternative accounting methods—Variations among companies in

the application of generally accepted accounting principles (GAAP)

BYP 13-9 ETHICS CASE

(a) The stakeholders in this case are:

Kelli Rice, president of LR Industries.

Laurie Ellis, public relations director.

(b) The president’s press release is deceptive and incomplete and to that

extent her actions are unethical.

(c) As controller you should at least inform Laurie, the public relations

director, about the biased content of the release. She should be aware

BYP 13-10 ALL ABOUT YOU

Student responses will vary. We suggest that in class you ask for a few

students to share their responses in order to increase students under-

BYP 13-11 FASB CODIFICATION ACTIVITY

(a) Discontinued Operations

205-20-45-1 The results of operations of a component of an entity that

either has been disposed of or is classified as held for sale under the

requirements of paragraph 360-10-45-9, shall be reported in

discontinued operations in accordance with paragraph 205-20-45-3 if

both of the following conditions are met:

(b) Extraordinary items are events and transactions that are distinguished

by their unusual nature and by the infrequency of their occurrence.

Thus, both of the following criteria should be met to classify an event

or transaction as an extraordinary item:

(c) Comprehensive Income

IFRS CONCEPTS AND APPLICATION

IFRS 13-1

LING COMPANY

Statement of Comprehensive Income

For the Year Ended December 31, 2014

Sales revenue ………………………………………………………. $1,000,000

Cost of goods sold ………………………………………………. 700,000

IFRS 13-2

LING COMPANY

Income Statement

For the Year Ended December 31, 2014

Sales revenue ………………………………………………………. $1,000,000

Cost of goods sold ………………………………………………. 700,000

LING COMPANY

Statement of Comprehensive Income

For the Year Ended December 31, 2014

Net income ………………………………………………………….. $100,000

Other comprehensive income

Unrealized gain on non-trading

IFRS 13-3 INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a) The company decided to sell its Baked Snacks business. It said it was

doing this in order to enhance earnings and focus its resources on its

core profitable divisions.