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7-34 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 2 PROBLEM 7-3A MAKING BUSINESS DECISIONS: ANALYZING THE HERSHEY
COMPANY’S ACCOUNTS RECEIVABLE TURNOVER
Part A. Ratio Analysis Model
1. Formulate the Question:
How many times a year does The Hershey Company turn over its accounts receivable?
2. Gather the Information from the Financial Statements:
3. Calculate the Ratio:
Accounts Receivable Turnover Ratio = Net Credit Sales*
4. Compare the Ratio with Other Ratios:
Accounts Receivable Turnover Ratio
Hershey Tootsie Roll
Year Ended Year Ended Year Ended Year Ended
December 31, 2013 December 31, 2012 December 31, 2013 December 31, 2012
15.2 times 15.4 times 13.0 times 13.0 times
Calculations:
Hershey:
5. Interpret the Ratios:
Hershey turned over its accounts receivable 15.2 times during 2013, very similar to
CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-35
PROBLEM 7-3A (Concluded)
Part B. Business Decision Model
1. Formulate the Question:
After considering all relevant information, should I loan money to The Hershey
Company?
2. Gather Information from the Financial Statements and Other Sources:
The information will come from a variety of sources, not limited to but including:
a. The balance sheet provides information about liquidity.
3. Analyze the Information Gathered:
The information gathered in (2) above must be analyzed. Among the relevant ques-
tions that must be answered are the following:
a. Refer to part (5) of the Ratio Analysis Model for a comparison of the turnover
ratios for Hershey and its competitor, Tootsie Roll, over the last two years. Which
company turns over its receivables more often?
b. What has been the trend in profits over recent years? Has the company been
4. Make the Decision:
Taking into account all of the various sources of information, decide either to loan
money to The Hershey Company or find an alternative use for the money.
5. Monitor Your Decision:
7-36 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 4 PROBLEM 7-4A CREDIT CARD SALES
1. Cost of credit card operation per outlet:
Equipment/phone line ....................................................... $ 800
2. The company should also consider competition in its decision on the use of credit
cards. It may in fact suffer a loss of sales if its competitors start offering credit to cus-
tomers and it does not. The company may find that customer goodwill is increased
by the offer to use a credit card.
LO 5 PROBLEM 7-5A INVESTMENTS IN BONDS AND STOCK
Journal 2016
Entry July 1 Investment in Maine Bonds .................... 10,000
Analysis Cash ................................................. 10,000
To record purchase of 8% Maine bonds.
Journal 2016
Entry Oct. 23 Investment in Virginia Stock ......................... 15,000
Analysis Cash ....................................................... 15,000
To record purchase of 1,000 shares
of common stock at $15 per share.
Balance Sheet Income Statement
CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-37
PROBLEM 7-5A (Continued)
Journal 2016
Entry Nov. 21 Investment in Carolina Stock ....................... 4,800
Analysis Cash ....................................................... 4,800
To record purchase of 600 shares of
preferred stock at $8 per share.
Balance Sheet Income Statement
Journal 2016
Entry Dec. 10 Cash ....................................................... 1,100
Analysis Dividend Income ............................... 1,100
To record receipt of dividends:
Virginia—1,000 × $0.50 = $ 500
Carolina—600 × $1.00 = 600
$1,100
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash 1,100
1,100
Dividend In-
come 1,100
1,100
7-38 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 7-5A (Concluded)
Journal 2016
Entry Dec. 31 Cash ............................................................. 400
Analysis Interest Revenue .................................... 400
To record receipt of interest on bonds:
$10,000 × 8% × 1/2 year.
LO 5 PROBLEM 7-6A INVESTMENTS IN STOCK
Journal 2016
Entry Jan. 15 Investment in BMI Stock ........................ 13,250
Analysis Cash ................................................. 13,250
To record purchase of 100 shares of
stock at $130 per share, plus $250
in commissions.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Investment in
BMI Stock
13,250
Cash
(13,250)
CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-39
PROBLEM 7-6A (Concluded)
(12,300)
Journal 2016
Entry Oct. 20 Cash ................................................................ 13,600
Analysis Investment in BMI Stock ......................... 13,250
Gain on Sale of Stock ............................. 350
To record sale of BMI stock:
(100 shares × $140) – $400.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash 13,600
Investment in
BMI Stock
(13,250)
350
Gain on Sale
of Stock 350
350
7-40 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 6 PROBLEM 7-7A EFFECTS OF CHANGES IN RECEIVABLE BALANCES ON
STATEMENT OF CASH FLOWS
1. Statement of cash flows:
ST. CHARLES ANTIQUE MARKET
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2016
2. Memorandum to the president:
TO: Owner of St. Charles Antique Market
FROM: Student’s name
DATE: January XX, 2017
SUBJECT: Cash Flows
You recently questioned the increase in the company’s cash balance in light of this
year’s net loss. My thoughts and a copy of the company’s 2016 statement of cash
CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-41
ALTERNATE MULTI-CONCEPT PROBLEM
LO 1,3 PROBLEM 7-8A ACCOUNTS AND NOTES RECEIVABLE
1. Journal entries:
Journal 2016
Entry July 31 Accounts Receivable—P. Paxton ........... 6,000
Analysis Sales Revenue ................................. 6,000
To record sale on credit; terms n/30.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Accounts Re-
ceivable—
P. Paxton
6,000
6,000
Sales Rev-
enue 6,000
6,000
7-42 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 7-8A (Continued)
Journal 2017
Entry Jan. 15 Accounts Receivable—P. Paxton ........... 6,000
Analysis Allowance for Doubtful Accounts ...... 6,000
To restore account previously written off.
Balance Sheet Income Statement
Journal 2017
Entry Jan. 15 Cash ............................................................. 1,500
Analysis Notes Receivable ......................................... 4,500
Accounts Receivable—P. Paxton ........... 6,000
To record partial collection on open
account and receipt of two-month, 8%
note for the balance.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash 1,500
CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-43
PROBLEM 7-8A (Concluded)
Journal 2017
Entry Mar. 15 Cash ....................................................... 4,560
Analysis Interest Revenue .............................. 60
Notes Receivable .............................. 4,500
2. Paxton is interested in reestablishing a good credit standing with its supplier,
Tuscon, and for this reason has sent the check and signed a note for the balance.
DECISION CASES
READING AND INTERPRETING FINANCIAL STATEMENTS
LO 1 DECISION CASE 7-1 READING 3M COMPANY’S BALANCE SHEET:
ACCOUNTS RECEIVABLE
1. The balance in Allowance for Doubtful Accounts is $104 million at the end of 2013
and $105 million at the end of 2012.
3. Increases in the allowance account result from the adjustment to estimate bad debts
for the period. Decreases in the allowance account result from the write-off of uncol-
7-44 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 1,6 DECISION CASE 7-2 READING APPLE INC.’S STATEMENT OF CASH FLOWS
1. Apple spent $217,128 million to purchase marketable securities in 2014. This was
$68,639 million more than Apple spent on marketable securities in 2013 and
$65,896 million more than it spent on marketable securities in 2012.
LO 2 DECISION CASE 7-3 COMPARING TWO COMPANIES IN THE SAME INDUSTRY:
UNDER ARMOUR AND COLUMBIA SPORTSWEAR
1. Accounts receivable turnover ratios:
Under Armour:
2. Average collection period:
Under Armour:
3. Under Armour’s accounts receivable turnover ratio is higher than Columbia
Sportswear’s: 12.10 versus 5.26. The average collection period for Under Armour is
about one month and for Columbia Sportswear is just over two months. It would be
CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-45
MAKING FINANCIAL DECISIONS
LO 1,5 DECISION CASE 7-4 LIQUIDITY
TO: The President of FNB of Verona Heights
FROM: Joe Smith, Loan Officer
DATE: X/X/XX
SUBJECT: Loan proposals
I have reviewed the loan proposals recently submitted by Oak and Maple and would
like to summarize for you my findings. Because of limited resources available for
short-term loans, my recommendation is that we make a six-month, $10 million loan to
Maple only.
7-46 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
ETHICAL DECISION MAKING
LO 4 DECISION CASE 7-5 NOTES RECEIVABLE
1. Recognize an ethical dilemma:
The entry to record the sale of the property violates two principles: the revenue
2. Analyze the key elements in the situation:
a. The vice president may benefit and the users of the statements may be harmed.
b. The vice president would benefit if his performance is partially based on the
3. List alternatives and evaluate the impact of each on those affected:
Your options are to go along with the vice president and record a sale for $10 million
4. Select the best alternative:
The best alternative is to insist that the sale be recorded at $7.5 million. Even though
you are interested in maximizing profits to shareholders whenever possible, the sug-
