Accounting Chapter 13 Homework The ceos Motivation Might Make Her Performance The Company s or Both Appear Better Than

Problem 13-4B (50 minutes)

1. Current ratio

= 2.5 to 1

= 1.6 to 1

3. Days’ sales uncollected

x 365 = 17.5 days

= 15.3 times

5. Days’ sales in inventory

7. Times interest earned

$30,200 / $2,200 = 13.7 times

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

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

$15,100

$315,500

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

Problem 13–4B (Concluded)

8. Profit margin ratio

= 7.5%

10. Return on total assets

= 22.4%

$23,800

$315,500

$23,800

($117,500 + $94,900)/2

Problem 13-5B (60 minutes)

Part 1

Fargo Company

Ball Company

a. Current ratio

= 2.3 to 1

= 2.1 to 1

b. Acid-test ratio

= 1.2 to 1

e. Days’ sales in inventory

x 365 = 109.0 days x 365 = 62.4 days

f. Days’ sales uncollected

x 365 = 82.3 days x 365 = 43.5 days

$86,800

$290,600

$88,700

$393,600

$205,200

$90,500

$108,700

$90,500

$208,100

$97,000

$116,000

$97,000

$82,000

$480,000

$79,500

$667,500

Problem 13-5B (Concluded)

Part 2

Fargo Company

Ball Company

a. Profit margin ratio

= 8.6% = 9.2%

d. Return on common stockholders’ equity

= 17.8% = 23.7%

e. Price-earnings ratio

= 19.7 = 11.4

f. Dividend yield

= 6.0% = 6.0%

$33,850

$393,600

$33,850

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

$25

$1.27

$1.50

$25

$61,700

$667,500

$61,700

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

$25

$2.19

$1.50

$25

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)

n. Correction of overstatement of prior year’s expense ………….

48,000

12,000

36,000

p. Loss on sale of discontinued segment’s assets …………………

(180,000)

(45,000)

(135,000)

Part 2 Income from continuing operations (and its components)

c.

Net sales ……………………………………………………….

$2,640,000

b.

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

20,000

j.

Gain from settling lawsuit ………………………………………

68,000

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

2,728,000

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

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

Other operating expenses ……………………………………..

k.

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

e.

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

48,000

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 ……………

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 …………………………..

(225,000)

Net income ……………………………………………………………………………………

$522,000

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

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

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

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

Cost of sales …………………………………………………

100.7%

93.8%

100.0%

$141,048

$131,376

$140,089

Operating income …………………………………………

86.1%

84.3%

100.0%

Other income/(expense) ………………………………..

213.6%

104.9%

100.0%

Income taxes (provision for income taxes) …….

82.3%

82.0%

100.0%

Net income ……………………………………………………

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

Property, plant and equipment, net ……………….

9.0%

8.4%

$33,783

$27,010

Goodwill and other intangible assets …………….

2.1%

2.7%

$8,015

$8,620

Total assets as of September 30, 2017 and September 24, 2016 are $375,319 and $321,686, respectively.

3. More liquid

Comparative Analysis — AA 13-2 (25 minutes)

1.

$ millions

Apple

Google

Cash and equivalents ………….

5.4%

$20,289

5.4%

$10,715

Accounts receivable, net …….

4.8%

17,874

9.3%

18,336

Inventories …………………………

1.3%

4,855

0.4%

749

Retained earnings ………………

26.2%

98,330

57.4%

113,247

141,048

Revenues …………………………..

229,234

110,855

2. Decrease

3. Google

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

to Google’s at 41.1%. This implies that Apple has a lower gross margin

ratio on sales of 38.5% (computed from 100% less 61.5%), while Google

has the higher gross margin ratio at 58.9% (computed from 100% less

41.1%).

Global Analysis — AA 13-3 (20 minutes)

1.

KRW in millions

Samsung

Cash and equivalents ………………………………….

10.1%

₩30,545,130

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

9.2%

27,695,995

Inventories ………………………………………………….

8.3%

24,983,355

Retained earnings ……………………………………….

71.5%

54.0%

Revenues ……………………………………………………

2. 46.0%

3. Outperform

Explanation: Samsung’s gross margin ratio exceeds the industry

average of 25%.

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

the company. (However, some analysts may not interpret a decline in

selling expenses as a percent of revenue as positive since it might

imply a scaling back on advertising or promotion campaigns.) The

CEO’s motivation might be to make her performance, or the company’s,

or both, appear better than it is in the eyes of the analysts.

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.

If discovered, such a disclosure ploy by the CEO will not reflect

favorably on the company. Both the CEO and the company are likely to

suffer losses in reputation and credibility.

Communicating in Practice — BTN 13-2

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

vary based on the industry and companies chosen for analysis.

(Instructor: Consider having each team do a brief presentation discussing

the findings in their memorandum to engage in a classroom discussion of

the findings.)

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

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%

Analysis and Interpretation: Hershey’s performance generally improved in

all areas evaluated for the profitability metrics reported in the table above

with the exception of gross profit.

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

horizontally aligned; that is, we compare the same items from one period to

another period. The change disclosed by the comparison is generally

expressed as a dollar amount and/or as a percent. For instance, we

compare sales of one period to sales of another and determine the dollar

amount of the increase or decrease.

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

a base amount. Usually this base amount is a total or aggregate amount.

An income statement’s base is usually total revenue and a balance sheet’s

base is usually total assets. We analyze what percent of the total (or base)

the individual statement items represent.

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.

b. Solvency analysis measures a company’s long-run financial viability and

its ability to cover long-term obligations.

Part 3

Each team member presents results to the entire team.

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.

2. No. The decreasing turnover of accounts receivable indicates the

company is collecting its receivables more slowly.

3. No. Sales are increasing and accounts receivable are turning more

slowly. Either or both of these trends would produce an increase in

accounts receivable, even if the other remained unchanged.

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.

Also, assume that the level of investment will be at 8% of your salary (or

$3,000 annually) starting at age 25. By starting at age 25 there will be 40

annual compounding periods until age 65.