Accounting Chapter 13 Wild And Shaw Financial And Managerial Accounting

Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 13

874

Problem 13–4B (Concluded)

8. Profit margin ratio

= 7.5%

11. Return on equity

= 38.3%

$23,800

$315,500

$23,800

($70,100 + $54,300)/2

Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 13

875

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

e. Days’ sales in inventory

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

Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 13

876

Problem 13-5B (Concluded)

Part 2

Fargo Company

Ball Company

a. Profit margin ratio

= 8.6% = 9.2%

b. Total asset turnover

$33,850

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

d. Return on equity

= 17.8% = 23.7%

e. Price-earnings ratio

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

assets, and return on equity are all higher than Fargo‘s. Also, Ball has a lower

$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 and Managerial Accounting 9e Solutions Manual: Chapter 13

877

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.

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

68,000

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

2,728,000

o.

Cost of goods sold …………………………..……………………

$1,040,000

h.

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

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

g.

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

k.

i.

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

d.

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

Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 13

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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 and Managerial Accounting 9e Solutions Manual: Chapter 13

SERIAL PROBLEM — SP 13

Serial Problem — Business Solutions (45 minutes)

1. Gross margin with services revenue

Gross margin = Total revenue – Cost of goods sold

Gross margin without services revenue

Gross margin = Net (goods) sales – Cost of goods sold

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

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

4. Current assets are 79.4% of total assets ($95,568/$120,268)

Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 13

Company Analysis — AA 13-1 (30 minutes)

1. Trend percents for selected income statement accounts

$ millions

Fiscal

2019

Fiscal

2018

Fiscal

2017

Net Sales ………………………………………………………

113.5%

115.9%

100.0%

$260,174

$265,595

$229,234

114.7%

116.1%

100.0%

$161,782

$163,756

$141,048

104.2%

115.6%

100.0%

65.8%

100.0%

66.6%

100.0%

114.3%

123.1%

100.0%

2. Common-size percents for asset categories and accounts

$ millions

2019

2018

Total current assets ………………………………………

48.1%

35.9%

$162,819

$131,339

Accounts receivable, net …………………………..

3. More liquid

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

881

1.

$ millions

Apple

Google

Cash and equivalents ………….

14.4%

$48,844

6.7%

$18,498

Accounts receivable, net …….

6.8%

22,926

9.2%

25,326

Retained earnings ………………

13.6%

152,122

2. Decrease

Explanation: If Google paid a dividend, it would reduce its retained

3. Google

Explanation: Apple’s cost of sales percent is higher at 62.2% compared

Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 13

Extended Analysis — AA 13-3 (20 minutes)

1.

$ millions

Samsung

Cash and equivalents ………………………………….

7.6%

$ 23,069

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

7.6%

Retained earnings ……………………………………….

Revenues ……………………………………………………

2. 36.1%

Explanation: Samsung’s cost of sales percent is 63.9%. This implies that

3. Outperform

Explanation: Samsung’s gross margin ratio exceeds the industry

Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 13

DISCUSSION QUESTIONS

1. Financial reporting includes the entire process of preparing and issuing financial

2. With comparative statements, financial statement items for two or more successive

accounting periods are placed side by side on a single statement, with the change in

3. Total assets (or equivalently, the total of liabilities plus equity) are assigned a value of

4. The nature of a company’s business, the composition of its current assets, and the

turnover of its current assets are three important factors that should be considered in

deciding whether a current ratio is good or bad.

5. A 2-to-1 current ratio may not be adequate if the company’s current assets consist of

6. Adequate working capital enables a company to carry sufficient inventories, meet

7. When evaluated in light of a company’s credit terms, the number of days‘ sales

8. A high accounts receivable turnover implies that accounts are collected quickly,

thereby providing cash that can be used to meet obligations. A high turnover also

9. Users are interested in the capital structure of a company, as measured by debt and

equity ratios, for at least two reasons. First, as a company includes more debt in its

10. Inventory turnover reflects on the efficiency of inventory management. That is, a high

inventory turnover means that a given sales volume can be supported with a smaller

Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 13

11. Since management is responsible for a company‘s performance, all ratios that are

useful in evaluating a company are of some usefulness in assessing management

12. Almost all companies have some liabilities. Since total assets equals total liabilities

plus equity, total assets are almost always higher than total equity. Thus, the

13. This gain is considered to be unusual but not infrequent. It would be included in the

calculation of income from continuing operations, with other unusual or infrequent

Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 13

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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

vary based on the industry and companies chosen for analysis.

Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 13

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Taking It to the Net — BTN 13-3

($ thousands)

As of 12/31/2018

As of 12/31/2017

1. Profit margin ratio ……………..

$1,177,562/$7,791,069= 15.1%

$782,981/$7,515,426 = 10.4%

2. Gross profit ratio ………………

$3,575,325/$7,791,069 = 45.9%

$3,455,376/$7,515,426 = 46.0%

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

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 and Managerial Accounting 9e Solutions Manual: Chapter 13

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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.

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 and Managerial Accounting 9e Solutions Manual: Chapter 13

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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

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.

6. The dollar amount of selling expenses increased in 2020 and decreased

sharply in 2021. Again assuming sales figures of $100 in 2019, $125 in