ch13-Solutions
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ch13-Solutions

Course Number: BUS 210, Spring 2010

College/University: SUNY Stony Brook

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CHAPTER 13 Financial Analysis: The Big Picture Study Objectives 1. 2. 3. 4. 5. 6. 7. Understand the concept of sustainable income. Indicate how irregular items are presented. Explain the concept of comprehensive income. Describe and apply horizontal analysis. Describe and apply vertical analysis. Identify and compute ratios used in analyzing a companys liquidity, solvency, and profitability. Understand the concept...

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13 Financial CHAPTER Analysis: The Big Picture Study Objectives 1. 2. 3. 4. 5. 6. 7. Understand the concept of sustainable income. Indicate how irregular items are presented. Explain the concept of comprehensive income. Describe and apply horizontal analysis. Describe and apply vertical analysis. Identify and compute ratios used in analyzing a companys liquidity, solvency, and profitability. Understand the concept of quality of earnings. Summary of Questions by Study Objectives and Blooms Taxonomy Item 1. 2. 3. 4. 5. 1. 2. 3. 1. 1. 2. SO BT Item 6. 7. 8. 9. 10. 4. 5. 6. 2. 3. 4. C 5. 2. 2. SO BT Item SO BT Item SO BT Item SO BT Questions 1 2 1 2 3 2 2 2 2 2 1, 2, 6 C C C C AP AP AP C AP AP 6 4, 5 4, 5 4, 5 6 4 5 4 3 4 5 4, 5 6 6 C C C AP K AP AP AP AP AP AP AP AP AP 11. 12. 13. 14. 15. 7. 8. 9. 3. 6. 7. 8. 3. 3. 6 6 6 6 6 4 5 4 5 Exercises 4, 5 6 6 6 6 AP AP AP AN AN 4. 4. 6 6 AN AN 5. 5. 6 6 E E 9. 10. 6 6 AP AP 11. 12. 6 6 AP AP C K C C C AP AP AP AP 10. 11. 12. 4. 6 6 6 37 AP AN AN K 13. 14. 15. 6 6 6 AN AN AN 16. 17. 18. 19. 6 6 6 6 C C C C 20. 21. 22. 23. 6 6 7 7 C AP C AN Brief Exercises Do It! Review Exercises Problems: Set A 1. 1. 5, 6 5, 6 AN AN Problems: Set B Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-1 ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A 2A Description Prepare vertical analysis and comment on profitability. Compute ratios from balance sheet and income statement. Perform ratio analysis, and discuss change in financial position and operating results. Compute ratios; comment on overall liquidity and profitability. Compute selected ratios, and compare liquidity, profitability, and solvency for two companies. Prepare vertical analysis and comment on profitability. Compute ratios from balance sheet and income statement. Perform ratio analysis, and discuss change in financial position and operating results. Compute ratios; comment on overall liquidity and profitability. Compute selected ratios, and compare liquidity, profitability, and solvency for two companies. Difficulty Level Simple Simple Time Allotted (min.) 2030 2030 3A Simple 2030 4A Moderate 3040 5A Moderate 5060 1B 2B Simple Simple 2030 2030 3B Simple 2030 4B Moderate 3040 5B Moderate 5060 13-2 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) ANSWERS TO QUESTIONS 1. Sustainable income is defined as the most likely level of income to be obtained in the future. It is the amount of regular income that a company can expect to earn from its normal operations. In order to distinguish a companys net income from its sustainable income, irregular items, such as a once-in-a lifetime gain or discontinued operations, are reported separately on the income statement. Items (a), (d), and (g) are extraordinary items; item (h) is debatable. This would not be considered a favorable trend for McDonell Inc. The relevant earnings per share figures are the $3.26 in 2009 and the $2.99 in 2010. These figures indicate that, unless there was a sale of common stock, the earnings from the continuing operations of the company decreased during 2010. This should give the companys management some concern because they will not always be able to count on revenue or gains from irregular items. Companies report a change from FIFO to average cost pricing for inventory retroactively. That is, they report both the current period and any previous periods reported on the face of the statement using the new principle. As a result, the same principle applies in all periods. This treatment improves the ability to compare results across years. Tootsie Roll reported Other comprehensive earnings of $810,000 in 2007. Comprehensive earnings exceeded Net earnings by 1.6% [($52,435 $51,625) $51,625] (a) Andrea is not correct. There are three characteristics: liquidity, profitability, and solvency. (b) The three parties are not primarily interested in the same characteristics of a company. Shortterm creditors are primarily interested in the liquidity of the enterprise. In contrast, long-term creditors and stockholders are primarily interested in the profitability and solvency of the company. 7. (a) Comparison of financial information can be made on an intracompany basis, an inter company basis, and an industry average basis. 1. An intracompany basis compares the same item with prior periods, or with other financial items in the same period. 2. An intercompany basis compares the same item with other companies published reports. 3. The industry average compares the item with the industry average as compiled by Dun & Bradstreet or by trade associations. (b) The intracompany basis of comparison is useful in detecting changes in financial relationships and significant trends within a company. The intercompany basis of comparison provides insight into a companys competitive position. The industry average basis provides information about a companys relative performance within the industry. 8. Horizontal analysis (also called trend analysis) measures the dollar and percentage increase or decrease of an item over a period of time. In this approach, the amount of the item on one statement is compared with the amount of that same item on one or more earlier statements. Vertical analysis, also called common-size analysis, expresses each item within a financial statement as a percent of a relevant base amount. 2. 3. 4. 5. 6. Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-3 Questions Chapter 13 (Continued) 9. 10. (a) $300,000 X 1.245 = $373,500, 2010 net income. (b) $300,000 .06 = $5,000,000, 2009 revenue. (a) Liquidity ratios:Working capital, current ratio, current cash debt coverage ratio, inventory turnover ratio, days in inventory, receivables turnover ratio, and average collection period. (b) Solvency ratios:Debt to total assets, cash debt coverage ratio, times interest earned, and free cash flow. 11. Joan is correct. A single ratio by itself may not be very meaningful and is best interpreted by comparison with (1) past ratios of the same enterprise, (2) ratios of other enterprises, or (3) industry norms or predetermined standards. In addition, other ratios of the enterprise are necessary to determine overall financial well-being. (a) Liquidity ratios measure the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash. (b) Solvency ratios measure the companys ability to survive over a long period of time. (c) 13. Profitability ratios measure the income or operating success of an enterprise for a given period of time. 12. Working capital and the current ratio both relate current assets to current liabilities. Working capital produces a dollar amount that indicates the difference between current assets and current liabilities. The current ratio produces a ratio which indicates the proportional relationship between current assets and current liabilities. Kwik Mart does not necessarily have a problem. The receivables turnover ratio can be misleading in that some companies encourage credit and revolving charge sales and slow collections in order to earn a healthy return on the outstanding receivables in the form of high rates of interest. (a) (b) (c) (d) Asset turnover. Inventory turnover. Return on common stockholders equity. Times interest earned. 14. 15. 16. The price earnings (P-E) ratio is a reflection of investors assessments of a companys future earnings. The P-E ratio takes into account such factors as relative risk, stability of earnings, trends in earnings, and the markets perception of the companys growth potential. In this question, investors favor Microsoft because it has the higher P-E ratio. The investors feel that Microsoft will be able to generate even higher future earnings and thus investors are willing to pay more for the stock. The payout ratio is cash dividends declared on common stock divided by net income. In a growth company, the payout ratio is often low because the company is reinvesting earnings in the business. (a) The increase in the profit margin ratio is good news because it means that a greater percentage of net sales is going towards income. (b) The decrease in inventory turnover signals bad news because it is taking the company longer to sell the inventory and consequently there is a greater chance of inventory obsolescence. 17. 18. 13-4 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) Questions Chapter 13 (Continued) (c) An increase in the current ratio signals good news because the company improved its ability to meet maturing short-term obligations. (d) The earnings per share ratio is a deceptive ratio. The decrease might be bad news to the company because it could mean a decrease in net income. Or the decrease might be good news to the company because of an increase in stockholders investment. (e) The increase in the price-earnings ratio is generally good news because it means that the market price per share of stock has increased and investors are willing to pay that higher price for the stock. (f) The increase in the debt to total assets ratio is bad news because it means that the company has increased its obligations to creditors and has lowered its equity buffer. (g) The decrease in the times interest earned ratio is bad news because it means that the companys ability to meet interest payments as they come due has weakened. 19. Net Income Return on assets = Average Total Assets (7.6%) Net Income Preferredstockdividends Return on common stockholders equity = Averagecommonstockholders' equity (12.8%) The difference between the two rates can be explained by looking at the denominator value and by remembering the basic accounting equation, A = L + SE. The asset value will clearly be the larger of the two denominator values; therefore, it will also give the smaller rate of return. 20. (a) The times interest earned ratio, which is an indication of the companys ability to meet interest charges, and the debt to total assets ratio, which indicates the companys ability to withstand losses without impairing the interests of creditors. (b) The current ratio and the current cash debt coverage ratio, which indicate a companys liquidity and short-term debt-paying ability. (c) The earnings per share of common stock and the return on common stockholders equity, both of which indicate the earning power of the investment. = Earnings per share. Net income Preferred dividends 21. Average common shares outstanding $200, 000 $20, 000 50, 000 = $3.60 EPS of $3.60 is high relative to what? Is it high relative to last years EPS? The president may be comparing the EPS of $3.60 to the market price of the companys stock, which is inappropriate. Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-5 Questions Chapter 13 (Continued) 22. (1) Use of alternative accounting methods. Variations among companies in the application of generally accepted accounting principles may hamper comparability. (2) Use of pro forma income measures that do not follow GAAP. Pro forma income is calculated by excluding items that the company believes are unusual or nonrecurring. It is often difficult to determine what was included and excluded. (3) Improper revenue and expense recognition. Many high-profile cases of inapprop riate accounting involve recording items in the wrong period. 23. (a) During a period of inflation, net income will be less under the LIFO inventory costing method than it will be using the FIFO method because LIFO results in the larger cost of goods sold amount. (b) Inflation does not affect the amount of depreciation taken (except through its effect on salvage) since the depreciable amount is based on the acquisition cost. A six-year life produces greater depreciation for the first six years (thus, less net income) and less depreciation in years 7, 8, 9 (thus, more net income in those years) than a nine-year life. (c) Inflation does not affect the amount of depreciation taken. Use of the straight-line method results in less depreciation in the earlier years (thus, more net income) than the accelerated decliningbalance method but more depreciation in the later years. 13-6 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 13-1 GOMEZ CORPORATION Partial Income Statement Discontinued operations Loss on disposal of Mexico facility, net of $170,000 ($680,000 X 25%) tax savings................................................................................ ($510,000) BRIEF EXERCISE 13-2 OSBORN CORPORATION Partial Income Statement Income before income taxes......................................................... Income tax expense ($300,000 X 30%)......................................... Income before extraordinary item................................................ Extraordinary loss from flood, net of $18,000 ($60,000 X 30%) tax savings...................................................... Net income...................................................................................... $300,000 90,000 210,000 (42,000) $168,000 BRIEF EXERCISE 13-3 The change in inventory pricing for Robins should be reported retroactively. That is, it should report both the current period and previous periods included on the face of the statement using the new principle. As a result, the same principle applies in all periods. The treatment improves the ability to compare results across years. Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-7 BRIEF EXERCISE 13-4 Horizontal analysis: Increase or (Decrease) Dec. 31, 2010 Dec. 31, 2009 Amount Percentage* Accounts receivable $ 560,000 $ 400,000 $160,000 40% Inventory $ 780,000 $ 650,000 $130,000 20% Total assets $3,220,000 $2,800,000 $420,000 15% *$160, 000 $420,000 $130, 000 = .40 = .20 = .15 $2, 800,000 $400, 000 $650, 000 BRIEF EXERCISE 13-5 Vertical analysis: Dec. 31, 2010 Dec. 31, 2009 Amount Percentage* Amount Percentage** $ 560,000 17.4% $ 400,000 14.3% $ 780,000 24.2% $ 650,000 23.2% $3,220,000 100% $2,800,000 100% Accounts receivable Inventory Total assets *$560, 000 * * $400, 000 = .174 = .143 $3, 220, 000 $2, 800, 000 * $780,000 $650, 000 = .242** = .232 $3, 220,000 $2, 800, 000 13-8 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) BRIEF EXERCISE 13-6 2010 $518,400 2009 $480,000 2008 $500,000 Net income (a) 20082009 (b) 20092010 Increase or (Decrease) Amount Percentage* ($20,000) (4%) $38,400) 8%) *($20, 000) $38, 400 = (.04) = .08 $500, 000 $480, 000 BRIEF EXERCISE 13-7 2010 $561,600 2009 X Increase 17% Net income .17 = $561, 600 X X .17X = $561,600 X 1.17X = $561,600 X = $480,000 2009 Net Income = $480,000 BRIEF EXERCISE 13-8 2010 100.0 60.5 26.0 13.5 2009 100.0 62.4 26.6 11.0 2008 100.0 64.5 28.5 7.0 Sales Cost of goods sold Expenses Net income Net income as a percent of sales for Waubons increased over the three-year period because cost of goods sold and expenses both decreased as a percent of sales every year. Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-9 BRIEF EXERCISE 13-9 Comparing the percentages presented results in the following conclusions: The net income for Olympic increased in 2009 because of the combination of an increase in sales and a decrease in both cost of goods sold and expenses. However, the reverse was true in 2010 as sales decreased, while both cost of goods sold and expenses increased. This resulted in a decrease in net income. BRIEF EXERCISE 13-10 (a) Current ratio: 2007 $102, 464 Current assets = = .51:1 Current liabilities $201, 183 2006 $82, 402 = .52:1 $159, 485 The current ratio decreased slightly indicating that Bob Evans Farms is somewhat less liquid in 2007. BRIEF EXERCISE 13-11 Receivables turnover ratio = 2010 (a) $4, 400, 000 = 8.0 times $550, 000* *($540,000 + $560,000) 2 (b) Average collection period 365 = 45.6 days 8.0 365 = 47.4 days 7.7 Net credit sales Average net receivables 2009 $4, 000,000 = 7.7 times $520,000** **($500,000 + $540,000) 2 Fleetwood Company can be somewhat pleased with the effectiveness of its credit and collection policies. The company has decreased the average collection period by almost two days and the collection period of approximately 46 days almost equals the 45 days allowed in the credit terms. 13-10 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) BRIEF EXERCISE 13-12 (a) Inventory turnover ratio = 2010 $4,790, 000* Cost of goods sold Average inventory 2009 $4, 528, 000** $837,000 + $970, 000 = 5.0 times 2 $970,000 + $1,020,000 = 4.8 times 2 Beginning inventory Purchases Goods available for sale Ending inventory Cost of goods sold $ 970,000 4,840,000 5,810,000 1,020,000 $4,790,000* $ 837,000 4,661,000 5,498,000 970,000 $4,528,000** (b) Days in inventory 365 365 = 76 days = 73 days 5.0 4.8 Management should be concerned with the fact that inventory moved slower in 2010 than it did in 2009. The decrease in the inventory turnover ratio could be because of poor pricing decisions or because the company is stuck with obsolete inventory. BRIEF EXERCISE 13-13 (a) Asset turnover ratio = Net sales Average total assets $19, 372.7 = $8, 397.3 + $9, 036.3 2 = 2.22 times Staples generated $2.22 of sales for each dollar it had invested in assets. Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-11 BRIEF EXERCISE 13-13 (Continued) (b) Profit margin ratio = Net income Net sales $995.7 $19, 372.7 = = 5.1% Each dollar of sales resulted in about 5 cents of net income. BRIEF EXERCISE 13-14 Payout ratio = Cash dividends Net income X $72, 000 .25 = X = $72,000 (.25) = $18,000 Cash dividends = $18,000 Net income Average total assets $72, 000 X Return on assets ratio = .16 = .16X = $72,000 X= $72, 000 .1 6 X = $450,000 Average total assets = $450,000 13-12 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) BRIEF EXERCISE 13-15 (a) Current cash debt Net cash provided by operating activities = coverage ratio Average current liabilities $10.4 $41.1 + $62.4 = .20 times 2 Topps Company could cover (or pay) approximately 20% of its current liabilities with cash generated by operating activities. Net cash provided by operating activities (b) Cash debt = coverage ratio Average total liabilities $10.4 $65.2 + $73.2 = .15 times 2 Topps Company could cover (or pay) about 15% of its total liabilities with cash generated by operating activities. (c) Free Cash Flow = Cash provided by operations Capital expenditures Cash dividends 2006: $10.4 $3.7 $6.2 = $.5 Topps Company generated enough cash from operating activities to maintain its current productive capacity and pay dividends. The free cash flow that remained could have been used to expand operations, pay additional dividends, or reduce debt. Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-13 SOLUTIONS TO DO IT! REVIEW EXERCISES DO IT! 13-1 SUPPLY CORPORATION Income Statement (partial) Income before income taxes........................................... Income tax expense.......................................................... Income before irregular item........................................... Discontinued operations Loss from disposal of discontinued music division, net of $8,000 income tax savings............ Income before extraordinary item................................... Extraordinary earthquake loss, net of $60,000 tax saving......................................................... Net income......................................................................... DO IT! 13-2 Increase in 2011 Amount Current assets Plant assets Total assets DO IT! 13-3 2010 (a) Current ratio: $1,380 $900 = $1,310 $790 = (b) Inventory turnover: $970/[($460 + $390) 2)] = $890/[($390 + $340) 2)] = 1.53:1 1.66:1 2.28 2.44 2009 $(21,000) 41,000 $ 20,000 Percent (9.5)% [($199,000 $220,000) $220,000] 5.3% [($821,000 $780,000) $780,000] 2.0% [($1,020,000 $1,000,000) $1,000,000] $500,000 200,000 300,000 12,000 288,000 90,000 $198,000 13-14 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) DO IT! 13-3 (Continued) (c) Profit margin ratio: $252 $3,800 = $88 $3,460 = (d) Return on assets: $252/[($2,340 + $2,210) 2)] = $88/[($2,210 + $1,900) 2)] = (e) Return on common stockholders equity: $252/[($1,030 + $1,040) 2)] = $88/[($1,040 + $900) 2)] = (f) Debt to total assets ratio: $1,310 $2,340 = $1,170 $2,210 = (g) Times interest earned: ($252 + $168 + $10) $10 = ($88 + $132 + $20) $20 = 6.6% 2.5% 11.1% 4.3% 24.3% 9.1% 56.0% 52.9% 43 times 12 times DO IT! 13-4 1. 2. 3. 4. 5. 6. Current ratio: A measure used to evaluate a companys liquidity. Pro forma income: Usually excludes items that a company thinks are unusual or nonrecurring. Quality of earnings: Indicates the level of full and transparent information provided to users of the financial statements. Discontinued operations: The disposal of a significant segment of a business. Horizontal analysis: Determines increases or decreases in a series of financial statement data. Comprehensive income: Includes all changes in stockholders equity during a period except those resulting from investments by stockholders and distributions to stockholders. Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-15 SOLUTIONS TO EXERCISES EXERCISE 13-1 OKLAHOMA COMPANY Partial Income Statement For the Year Ended December 31, 2010 Income before irregular items...................................................... Discontinued operations: Gain from disposal of division, net of $9,000 income taxes.................................... Extraordinary item: Fire loss, net of $15,000 tax savings......... Net income...................................................................................... $290,000 21,000 (35,000) $276,000 EXERCISE 13-2 (a) The loss on the sale of electrical equipment was reported as a part of continuing operations. The loss was reported in the third quarter of 2009 because the cross-reference to the item appears next to the quarterly results for net income. (b) The extraordinary items are listed separately so that the reader can evaluate the companys results on the basis of normal operations and also see the impact of irregular items. If only the net income figure was disclosed, the reader would not be able to evaluate what portion of the earnings came from operations and what portion came from irregular items. (c) The extraordinary gain is the expropriation (takeover) of company property in the Middle East. It was not included in income for the third quarter because it is only cross-referenced in the year-to-date totals and not in the quarterly report. 13-16 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) EXERCISE 13-2 (Continued) (d) The company had net income of over $68 million during the third quarter of 2009 but the year-to-date total shows net income of only $33.25 million. Therefore, Energy Enterprises had an operating loss at the end of the first half of 2009. A reader can thus conclude that either one or both of the first two quarters were operating at a loss. However, 2010 is not quite as clear. Since the company earned such a high percentage of its year-todate net income ($102.7 million) in the third quarter ($97 million), it appears likely that one of the first two quarters of 2010 was operating at a loss. (e) Energy Enterprises had 73,884,892 shares of stock outstanding (Net Income EPS = $102,700,000 $1.39) at July 31, 2010. The number of shares of stock outstanding increased from the July 31, 2009 total of 69,270,833 ($33,250,000 $.48). (f) The profit margin should be based on the companys net income from its normal and continuing operations. The net income figure should be a more conservative amount and should not include any irregular items. The profit margin for the nine months ended July 31, 2009 is 0.7%; for the nine months ended July 31, 2010 it is 1.8%. The 2009 percentage was based on the $33,250,000 net income while the 2010 percentage was based on operating income of $100,800,000 ($102,700,000 $1,900,000). These two figures are comparable because they are the end result of the companys operations and do not include any irregular items which only affect the year of their occurrence. Some analysts might adjust net income in 2009 for the $26 million loss on sale of electrical equipment. Much depends on whether this type of transaction is recurring or not. Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-17 EXERCISE 13-3 GALENTI INC. Condensed Balance Sheet December 31 Increase or (Decrease) Amount Percentage ($26,000 40,000 ($66,000 (32.5%) (11.1%) (15.0%) 2010 Assets Current assets Plant assets (net) Total assets Liabilities Current liabilities Long-term liabilities Total liabilities Stockholders Equity Common stock, $1 par Retained earnings Total stockholders equity Total liabilities and stockholders equity $106,000 400,000 $506,000 2009 $ 80,000 360,000 $440,000 $ 91,000 122,000 $213,000 $ 65,000 90,000 $155,000 ($26,000 32,000 $58,000 (40.0%) (35.6%) (37.4%) 138,000 155,000 293,000 115,000 170,000 285,000 23,000 (15,000) 8,000 (20.0%) (8.8%) (2.8%) (15.0%) $506,000 $440,000 ($66,000 13-18 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) EXERCISE 13-4 ROBINSON CORPORATION Condensed Income Statement For the Years Ended December 31 2010 Amount Percent $800,000 100.0% 520,000 65.0% 280,000 35.0% 120,000 15.0% 72,000 9.0% 192,000 24.0% 88,000 11.0% 32,000 4.0% $ 56,000 7.0% 2009 Amount Percent $600,000 100.0% 408,000 68.0% 192,000 32.0% 72,000 12.0% 48,000 8.0% 120,000 20.0% 72,000 12.0% 21,600 3.6% $ 50,400 8.4% Sales Cost of goods sold Gross profit Selling expenses Administrative expenses Total operating expenses Income before income taxes Income tax expense Net income EXERCISE 13-5 (a) NIKE, INC. Condensed Balance Sheet May 31 ($ in millions) Percentage Increase Change (Decrease) from 2006 $730 20 68 $818 9.9% 1.2% 7.9% 8.3% 2007 Assets Current assets Property, plant, and equipment (net) Other assets Total assets $ 8,076 1,678 934 $10,688 2006 $7,346 1,658 866 $9,870 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-19 EXERCISE 13-5 (Continued) NIKE, INC. Condensed Balance Sheet (Continued) December 31 Percentage Increase Change (Decrease) from 2006 2007 Liabilities and stockholders equity Current liabilities Long-term liabilities Stockholders equity Total liabilities and stockholders equity 2006 $ 2,584 1,079 7,025 $2,612 973 6,285 $ (28) 106 740 (1.1%) 10.9% 11.8% $10,688 $9,870 $818 8.3% (b) NIKE, INC. Condensed Balance Sheet May 31, 2007 $ (in millions) Assets Current assets Property, plant, and equipment (net) Other assets Total assets Liabilities and stockholders equity Current liabilities Long-term liabilities Stockholders Total equity liabilities and stockholders equity $ 8,076 1,678 934 $10,688 Percent 75.6% 15.7% 8.7% 100.0% 24.2% 10.1% 65.7% 100.0% $ 2,584 1,079 7,025 $10,688 13-20 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) EXERCISE 13-6 (a) WINFREY CORPORATION Condensed Income Statement For the Years Ended December 31 Increase or (Decrease) During 2010 Amount Percentage $78,000 15.0% 27,000 6.0% (51,000) (72.9% 35,000) 77.8% $ 16,000) (64.0% Net sales Cost of goods sold Gross profit Operating expenses Net income (b) 2010 $598,000 477,000 121,000 80,000 $41,000 2009 $520,000 450,000 70,000 45,000 $ 25,000 WINFREY CORPORATION Condensed Income Statements For the Years Ended December 31 2010 $ Percent $598,000 100.0% 477,000 79.8% 121,000 20.2% 80,000 13.4% $ 41,000 6.8% 2009 $ Percent $520,000 100.0% 450,000 86.5% 70,000 13.5% 45,000 8.7% $ 25,000 4.8% Net sales Cost of goods sold Gross profit Operating expenses Net income EXERCISE 13-7 Current ratio = 2.06:1 ($3,361 $1,635) Current cash debt coverage ratio = .10 ($161 $1,534a) Receivables turnover ratio = 7.1 times ($8,828 $1,236b) Average collection period = 51.4 days (365 days 7.1) Inventory turnover ratio = 5.7 times ($5,526 $977c) Days in inventory = 64.0 days (365 days 5.7) a b ($1,635 + $1,433) 2 ($1,788 + $684) 2 13-21 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) c ($956 + $997) 2 13-22 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) EXERCISE 13-8 Current ratio as of February 1, 2010 = 2.75:1 ($110,000 $40,000). Feb. 3 7 11 14 18 2.75 2.25 2.25 2.79 2.29 No change in total current assets or liabilities. ($90,000 $40,000). No change in total current assets or liabilities. ($78,000 $28,000). ($78,000 $34,000). EXERCISE 13-9 (a) Current ratio = $150, 000 = 3.00:1 $50, 000 $350, 000 = 5.6 times $62, 500 (1) (b) Receivables turnover = (1) ($65,000 + $60, 000) 2 (c) Average collection period = 365 days 5.6 = 65.2 days (d) Inventory turnover = (2) $198,000 = 3.6 times $55, 000 (2) $60, 000 + $50,000 2 (e) Days in inventory = 365 days 3.6 = 101.4 days $48, 000 Cash debt coverage ratio = $160, 000 + $150, 000 = .31 times 2 (f) $48, 000 (g) Current cash debt coverage ratio = $60, 000 + $50, 000 = .87 times 2 (h) Free cash flow = $48,000 $25,000 $18,000 = $5,000 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-23 EXERCISE 13-10 (a) Profit margin $150.5 = 2.9% $5, 261.3 $5,261.3 $3,156.3 + $3,196.8 = 1.66 times 2 $150.5 $3,156.3 + $3,196.8 = 4.7% 2 $150.5 $1,115.8 + $1,164.9 = 13.2% 2 $5, 261.3 $3, 623.0 = 31.1% $5, 261.3 (b) Asset turnover (c) Return on assets (d) Return on common stockholders equity (e) Gross profit rate EXERCISE 13-11 $80,000 $10,000 $70, 000 30,000 + 40,000 = = $2.00 35, 000 2 $17.60 = 8.8 times $2.00 $21, 000 $10, 000 = 13.8% $80, 000 $80, 000 + $16, 000 + $24, 000 $120, 000 = = 7.5 times $16, 000 $16, 000 (a) Earnings per share (b) Price-earnings ratio (c) Payout ratio (d) Times interest earned ratio 13-24 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) EXERCISE 13-12 Cost of goods sold (a) Inventory turnover = 4.4 = $200,000 + $180,000 2 4.4 X $190,000 = Cost of goods sold Cost of goods sold = $836,000. Net sales (credit) (b) Receivables turnover = 11.2 = $126,000 + $72,500 2 11.2 X $99,250 = Net sales (credit) = $1,111,600. (c) Return on common stockholders equity = 18% = Net income $400,000 + $113,500 + $400,000 + $101,000 2 .18 X $507,250 = Net income = $91,305. (d) Return on assets = 16% = Net income $91,305 [see (c) ab o ve] = Average assets Averag e assets Average assets = $91,305 = $570,656 .16 T otal assets (Dec. 31, 2010) + $605, 000 = $570,656 2 Total assets (Dec. 31, 2010) = ($570,656 X 2) $605,000 = $536,312. Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-25 SOLUTIONS TO PROBLEMS PROBLEM 13-1A (a) Condensed Income Statement For the Year Ended December 31, 2010 Blue Company Gray Company Dollars Percent Dollars Percent $1,849,035 100.0% $546,000 100.0% 1,080,490 58.5% 278,000 50.9% 768,545 41.5% 268,000 49.1% 250,000 13.5% 82,000 15.0% 518,545 28.0% 186,000 34.1% .3% 1,600 27.7% 184,400 3.4% 31,000 24.3% $153,400 .3% 33.8% 5.7% 28.1% Net sales Cost of goods sold Gross profit Operating expenses Income from operations Other expenses and losses Interest expense 6,800 Income before income taxes 511,745 Income tax expense 62,030 Net income $ 449,715 (b) Gray Company appears to be more profitable. It has higher relative gross profit, income from operations, income before taxes, and net in $4 49 ,71 5 come. Also, Blues return on assets of 54.0% $8 32 ,59 3 a is lower than $ 15 3,40 0 b Grays return on assets of 71.6% , and Blues return on common $ 21 4,17 2 $ 44 9,71 5 c stockholders equity of 68.2% is lower than Grays return on $ 65 9,52 8 $ 15 3,40 0 d common stockholders equity of 99.6% . $ 15 4,04 7 13-26 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) PROBLEM 13-1A (Continued) a a $449,715 is Blues 2010 net income. $832,593 is Blues 2010 average assets: Current assets Plant assets Total assets 2010 2009 $325,975 $312,410 526,800 500,000 $852,775 + $812,410 = $1, 665,185 2 b a $153,400 is Grays 2010 net income. $214,172 is Grays 2010 average assets: Current assets Plant assets Total assets 2010 2009 $ 83,336 $ 79,467 139,728 125,812 $223,064 + $205,279 = $428,343 2 c s $449,715 is Blues 2010 net income. $659,528 is Blues 2010 average stockholders equity: 2010 2009 Common stock $500,000 $500,000 Retained earnings 172,460 146,595 Stockholders equity $672,460 + $646,595 = $1, 319, 055 2 d d $153,400 is Grays 2010 net income. $154,047 is Grays 2010 average stockholders equity: 2010 2009 Common stock $120,000 $120,000 Retained earnings 38,096 29,998 Stockholders equity $158,096 + $149,998 = $308,094 2 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-27 PROBLEM 13-2A (a) Earnings per share = $211, 000 = $3.58 59, 000 (1) 60,000 + 58,000 (1) 2 $211,000 (b) Return on common stockholders equity = $465,400 + $576,700 2 = $211, 000 $521, 050 = 40.5% $211,000 $211, 000 (c) Return on assets = $852,800 + $990,200 = = 22.9% $921, 500 2 $374,900 = 1.84:1 $203,500 (d) Current ratio = $1,890,540 (e) Receivables turnover = ($102,800 + $117,800) 2 = $1, 890, 540 = 17.1 times $110, 300 (f) Average collection period = 365 days 17.1 = 21.3 days 13-28 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) PROBLEM 13-2A (Continued) $1,058,540 $1, 058, 540 (g) Inventory turnover = $115,500 + $123,000 = = 8.9 times $119, 250 2 (h) Days in inventory = 365 days 8.9 = 41.0 days $326,000 = 13.0 times $25, 000 (i) Times interest earned = (j) $1,890,540 Asset turnover = $990,200 + $852,800 = 2.05 times 2 (k) Debt to total assets = $413,500 = 42% $990,200 (l) $220,000 Current cash debt coverage = $187,400 + $203,500 = 1.13 times 2 $220,000 (m) Cash debt coverage = $387,400 + $413,500 = .55 times 2 (n) Free cash flow = $220,000 $120,000 $80,000 = $20,000 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-29 PROBLEM 13-3A (a) (1) Profit margin. 2010 2009 $65,000 = 10.8% $600,000 (2) Gross profit. $175, 000 = 29% $600, 000 (3) Asset turnover. $600,000 $71,000 = 15.1% $470,000 $170, 000 = 36% $470, 000 $470,000 $590,000 + $725,000 = .91 times 2 (4) Earnings per share. $65, 000 $433,000 + $590,000 = .92 times 2 30,000 + 32,000 = $2.10 2 (5) Price-earnings ratio. $7.00 = 3.3 times $2.10 (6) Payout ratio. $55,000 ** = 85% $65,000 **($125,000 + $65,000 $135,000) (7) Debt to total assets. $270, 000 = 37% $725, 000 $71,000 = $2.37 30,000 $9.00 = 3.8 times $2.37 $29,000 * = 41% $71,000 *($83,000 + $71,000 $125,000) $165, 000 = 28% $590, 000 13-30 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) PROBLEM 13-3A (Continued) (b) The underlying profitability of the corporation appears to have declined. For example, profit margin and earnings per share have both decreased. Also, the corporations debt to total assets ratio has increased. Similarly, its payout ratio has increased, which hurts its overall solvency. Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-31 PROBLEM 13-4A (a) LIQUIDITY 2009 Current Receivables turnover Inventory turnover $343,000 = 1.88:1 $182,000 $790,000 = 9.4 times $84,000 $575,000 = 4.6 times $125,000 2010 $484,000 = 1.76:1 $275,000 $880,000 = 9.6 times $92,000 $640,000 = 3.5 times $182,500 % Change (6%) 2% (24%) An overall decrease in short-term liquidity has occurred. PROFITABILITY Profit margin Asset turnover Return on assets Earnings per share $48,000 = 6.1% $790,000 $50,000 = 5.7% $880,000 (7%) $790,000 $880,000 = 1.24 times = 1.16 times $639,000 $761,000 $48,000 = 7.5% $639,000 $48,000 = $2.40 20,000 $50,000 = 6.6% $761,000 $50,000 = $2.50 20,000 (6%) (12%) 4% Profitability has decreased slightly. 13-32 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) PROBLEM 13-4A (Continued) (b) 1. 2010 Return on $50,000 common = 15.0% stockhold- $332,500 (a) ers equity Debt to total assets Priceearnings ratio $525,000 = 60% $874,000 $9.00 = 3.6 times $2.50 2011 $40,000 = 8.7% $459,000 (b) %Change (42%) 2. $355,000 = 39% $900,000 $12.00 = 6.0 times $2.00 (c) (35%) 3. 67% (a) ($200,000 + $149,000 + $200,000 + $116,000) 2. (b) ($380,000* + $189,000** + $200,000 + $149,000) 2. (c) $40,000 20,000. **$200,000 + (18,000 X $10/share) **$149,000 + $40,000 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-33 PROBLEM 13-5A (a) Ratio Target (All Dollars Are in Millions) Wal-Mart (1) Current (2) Receivables turnover (3) Average collection period (in days) (4) Inventory turnover (5) Days in inventory (6) Profit margin (7) Asset turnover (8) Return on assets (9) Return on common stockholders equity (10) Debt to total assets (11) Times interest earned (12) Current cash debt coverage (13) Cash debt coverage (14) Free cash flow 1.32:1 ($14,706 $11,117) 9.8 ($57,878 $5,930) 37.2 6.5 56.2 4.8% 1.6 7.7% (365 9.8) ($39,399 $6,046) (365 6.5) ($2,787 $57,878) ($57,878 $36,172a) ($2,787 $36,172a) .90:1 ($46,588 $51,754) 128.8 ($348,650 $2,707) 2.8 (365 128.8) 8.1 ($264,152 $32,797) 45.1 (365 8.1) 3.2% ($11,284 $348,650) 2.4 ($348,650 $144,690f) 7.8% ($11,284 $144,690f) 19.7% ($11,284 $57,372g) 59% ($89,620 $151,193) 10.8 ($19,458h $1,809) .40 $50,289.5i) .23 $1,741 $2,802) 18.7% ($2,787 $14,919b) 58% ($21,716 $37,349) 8.9 ($5,069c $572) .47 .23 $554 ($4,862 $10,352.5d) ($4,862 $21,253e) ($4,862 $3,928 $380) ($20,209 ($20,209 $87,318j) ($20,209 $15,666 a ($37,349 + $34,995) 2 b ($15,633 + $14,205) 2 c ($2,787 + $1,710 + $572) d ($11,117 + $9,588) 2 e (($11,117 + $10,599) + $20,790) 2 ($151,193 + $138,187) 2 ($61,573 + $53,171) 2 h ($11,284 + $6,365 + $1,809) i ($51,754 + $48,825) 2 j (($51,754 + $37,866) + $85,016) 2 g f (b) The comparison of the two companies shows the following: LiquidityTargets current ratio of 1.32:1 is better than Wal-Marts .90:1. However, Wal-Mart has a better inventory turnover ratio than Target and its receivables turnover is significantly better than Targets. SolvencyWal-Mart betters Target in all of the solvency ratios except debt to total assets. Thus, it is more solvent than Target. 13-34 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) ProfitabilityWith the exception of profit margin, Wal-Mart betters Target in all of the profitability ratios. Thus, it is more profitable than Target. Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-35 BYP 13-1 FINANCIAL REPORTING PROBLEM (a) TOOTSIE ROLL INDUSTRIES, INC. Trend Analysis of Net Sales and Net Earnings For the Five Years Ended 2007 Base Period 2003($ in thousands) 2007 (1) Net sales Trend (2) Net earnings Trend 2006 2005 2004 2003 $492,742 $495,990 $487,739 $420,110 $392,656 125% 126% 124% 107% 100% $ 51,625 65,919 77,227 64,174 65,014 79% 101% 119% 99% 100% Net sales increased 26% from 2003 to 2006. The net earnings increased 19% from 2003 to 2005. 2007 shows a slight decrease in net sales but a significant decline in net earnings. The reasons for such a large decrease in profitability since 2005 would require further investigation. (b) (000s omitted) 1. Debt to Total Assets 2007:($812,725 $638,230) $812,725 = 21% 2006:($791,639 $630,681) $791,639 = 20% 2. Times Interest Earned 2007:($77,167 + $535) $535 = 145.2 times 2006:($94,715 + $726) $726 = 131.5 times Tootsie Rolls long-term solvency is not in jeopardy. The debt to total assets ratio indicates that creditors are providing approximately 21% of Tootsie Rolls total assets. Also, Tootsie Roll easily has the ability to pay interest payments when they come due as indicated by the times interest earned ratio of over 140 times. 13-36 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) BYP 13-1 (Continued) (c) (000s omitted) 1. Profit Margin 2007:$51,625 $492,742 = 10% 2006:$65,919 $495,990 = 13% 2. Asset Turnover 2007:$492,742 [($812,725 + $791,639) 2] = .61 times 2006:$495,990 [($791,639 + $813,696) 2] = .62 times 3. Return on Assets 2007:$51,625 [($812,725 + $791,639) 2] = 6.4% 2006:$65,919 [($791,639 + $813,696) 2] = 8.2% 4. Return on Common Stockholders Equity 2007:$51,625 [($638,230 + $630,681) 2] = 8.1% 2006:$65,919 [($630,681 + $617,405) 2] = 10.6% All of the profitability ratios decreased in 2007; yet Tootsie Roll is a profitable corporation. Stockholders are earning an acceptable 8.1% on their investment. Considering that Tootsie Roll is primarily in a highvolume business where the margin above costs is historically low, the profit margins for both 2007 and 2006 are good. (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 developments, governmental actions, and union activities are often critical to the successful operation of a company. Financial reports in the media and publications of financial service firms (Standard & Poors, Dun & Bradstreet) will provide additional relevant information not usually found in the annual report. Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-37 BYP 13-2 COMPARATIVE ANALYSIS PROBLEM (a) Hershey 1. (i) Percentage increase $ 4,94 6,7 16 $4 ,94 4,2 30 (decrease) in net = 0.0% $4 ,94 4,2 30 sales (ii) Percentage increase $ 21 4,15 4 $ 55 9,0 61 = (61.7%) (decrease) in net $5 59 ,06 1 income 2. (i) Percentage increase $ 4,24 7,11 3 $ 4,15 7,5 65 = 2.2% (decrease) in total $4 ,1 57 ,56 5 assets (ii) Percentage increase $ 59 2,92 2 $ 68 3,4 23 = (13.2%) (decrease) in total $6 83 ,4 23 stockholders equity 3. Earnings per share .96* Tootsie Roll $ 49 2,74 2 $ 49 5,9 90 $4 95 ,99 0 $ 51 ,6 25 $6 5,9 19 $ 65 ,9 19 = (0.7%) = (21.7%) $ 81 2,72 5 $ 79 1,6 39 $7 91 ,63 9 $ 63 8,23 0 $ 63 0,6 81 $6 30 ,68 1 = 2.7% = 1.2% .94* *Given on income statement (b) Hersheys net sales remained constant while Tootsie Rolls decreased .7%. Hersheys net income decreased more than 61% in 2007 due to a very large charge for business realignment ($276,868) while Tootsie Rolls decreased 21.7%. Tootsie Rolls slight decrease in net sales accompanied by a 22% decrease in net income would require further investigation. Hersheys operations resulted in a much more significant decrease in net income. Both companies total assets increased in 2007 but Hersheys stockholders equity decreased 13%. 13-38 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) BYP 13-3 RESEARCH CASE (a) At the time the article was written, the average P-E ratio was 16.5. That was actually quite close to the long-term average calculated since World War II of 16.1. Graham and Dodd criticized the way that the P-E ratio is usually calculated because they said that since it uses last years net income as the denominator, it puts too much emphasis on the recent past. They said that it would be better to calculate the average income over a period of 5 to 7 years and use that as the denominator. Using Graham and Dodds approach, at the time of the article the P-E ratio was 27. That is actually the highest it has ever been during the past 130 years, with two exceptions. The only two times it was higher was during the stock market bubbles of the 1920s and the 1990s. The author says that the reason the basic P-E is so low, while the Graham and Dodd P-E is so high, is that companies have enjoyed very high earnings over the last several years. If they continue to enjoy record profits, then the Graham and Dodd P-E will eventually begin to decline and will approach the traditional P-E. On the other hand, if profits are likely to fall, then the Graham and Dodd P-E suggests that stock prices are way too high. (b) (c) (d) Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-39 BYP 13-4 (a) INTERPRETING FINANCIAL STATEMENTS Coca-Cola .92:1 ($12,105 $13,225) 9.8 times ($28,857 $2,952) 37.2 days (365 9.8) 5.4 times ($10,406 $1,931) 67.6 (365 5.4) .65 ($7,150 $11,058) PepsiCo 1.31:1 ($10,151 $7,753) 9.7 times ($39,474 $4,057) 37.6 days (365 9.7) 8.6 times ($18,038 $2,108) 42.4 (365 8.6) .95 ($6,934 $7,307) Liquidity Ratios (1) Current ratio (2) Receivables turnover (3) Average collection period (4) Inventory turnover (5) Days in inventory (6) Current cash debt coverage ratio PepsiCo is more liquid than Coca-Cola. PepsiCo betters Coca-Cola in all of the ratios except receivables turnover. (b) Solvency Ratios (1) Debt to total assets $21,525 $43,269 $5,981 + $1,892 + $456 (2) Times interest earned $456 = 18.3 times $7,150 $17,284 (4) Free cash flow $7,150 $1,648 $3,149 = $2,353 = .41 times Coca-Cola = 50% $17,394 $32,279 $5,658 + $1,973 + $224 $224 = 35.1 times $6,934 $15,978 $6,934 $2,430 $2,204 = $2,300 = .43 times PepsiCo = 54% (3) Cash debt coverage Coca-Cola is slightly more solvent than PepsiCo. Both companies have similar debt to total assets and cash debt coverage ratios. Coca-Cola has more free cash flow but a much lower times interest earned ratio. 13-40 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) BYP 13-4 (Continued) (c) Profitability Ratios (1) Profit margin (2) Asset turnover (3) Return on assets (4) Return on common stockholders equity Coca-Cola 20.7% ($5,981 $28,857) .79 times ($28,857 $36,616) 16.3% ($5,981 $36,616) 30.9% ($5,981 $19,332) PepsiCo 14.3% ($5,658 $39,474) 1.22 times ($39,474 $32,279) 17.5% ($5,658 $32,279) 34.5% ($5,658 $16,386) PepsiCo, Inc. is more profitable than the Coca-Cola Company. PepsiCo, Inc. has a higher asset turnover, return on assets, and return on common stockholders equity. Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-41 BYP 13-5 FINANCIAL ANALYSIS ON THE WEB (a) and (b) Answers will vary depending on the year chosen by the student. 13-42 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) BYP 13-6 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 reasonable representation of the companys financial position and results of operations. With this independent assurance they feel more comfortable making a decision. (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 of the changes in individual accounts, total current assets, and total current liabilities. Also unknown are the reasons for the changes. The change in asset turnover cannot alone tell anything about either solvency or going-concern prospects. There is no way to know the amount and the direction of the changes in the two items. An increase in sales would be favorable for going-concern prospects, while a decrease in assets could represent a number of possible scenarios and would need to be investigated further. The 50 percent [(.1 .2) .2] decrease in cash debt coverage may indicate that the company is having difficulties generating enough cash from operations to meet debt obligations and even operating needs. The increase in net income may not have brought a corresponding increase in cash collections from accounts receivable. Since the cash debt coverage ratio was low in 2009 and even lower in 2010, it appears that the company may have a solvency problem. 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 converted into cash. A significant factor here may be that despite a decline in sales the clients management has been able to reduce costs to produce this increase. Indirectly, the improved income picture may have a favorable impact on solvency and going-concern potential by enabling the client to borrow currently to meet cash requirements. Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-43 BYP 13-6 (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 common stock out standing. This in turn indicates that financing was not obtained through the issuance of common stock. It is not possible to reach conclusions about solvency and going-concern prospects without additional information about the nature and extent of financing. The collective implications of these data alone are that the client entity is about as solvent and viable as a going concern at the end of the current year as it was at the beginning although there may be a need for shortterm operating cash. Although a quick evaluation of a reporting entity can be made using only a few ratios and comparing these with past ratios and industry statistics , the creditors should realize the limitations of such analysis even from the best prepared statements carrying a CPAs unqualified opinion. 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. Further, when evaluating changes in ratios or percentages, the evaluation should be directed to the nature of the item being evaluated because very small differences in ratios or percentages can represent significant changes in dollar amounts or trends. The creditors should evaluate conclusions drawn from ratio analysis in light of the current status of, and expected changes in, such things as general economic conditions, the clients competitive position, the publics demand (for the product itself, increased quality of the product, control of noise and pollution, etc.), and the clients specific plans. (c) 1. 2. 3. Current cash debt coverage ratioindicates liquidity. Debt to total assets ratioindicates solvency. Times interest earned ratioindicates ability to repay interest when due. Other answers are possible. 13-44 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) BYP 13-7 COMMUNICATION ACTIVITY To: From: Re: Sam Mead Accounting Major 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. IntracompanyThis basis compares an item or financial relationship within a company in the current year with the same item or relationship in one or more prior years. IntercompanyThis basis compares an item or financial relationship of one company with the same item or relationship in one or more competing companies. Industry averagesThis basis compares an item or financial relationship of a company with industry averages (or norms). b. c. 2. Three factors that affect quality of earnings are: a. Alternative accounting methodsVariations among companies in the application of generally accepted accounting principles (GAAP) can cause variation in earnings quality across companies. Pro forma incomeMany companies now report non-GAAP income measures in addition to GAAP income. There is little guidance regarding these measures, thus the earnings quality of these measures is difficult to determine. b. Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-45 BYP 13-7 (Continued) c. Improper recognitionIn order to meet earnings targets, some companies record revenues and expenses in the wrong period. This directly reduces earnings quality. 13-46 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) BYP 13-8 ETHICS CASE (a) The stakeholders in this case are: Glenda Shumway, president of RF Industries. Regina Tarow, public relations director. You, as controller of RF Industries. Stockholders of RF Industries. Potential investors in RF Industries. Any readers of the press release. (b) The presidents press release is deceptive and incomplete and to that extent her actions are unethical. (c) As controller you should at least inform Regina, the public relations director, about the biased content of the release. She should be aware that the information she is about to release, while factually accurate, is deceptive and incomplete. Both the controller and the public relations director (if she agrees) have the responsibility to inform the president of the bias of the about-to-be-released information. Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only) 13-47 BYP 13-9 ALL ABOUT ACTIVITY Student responses will vary. We suggest that in class you ask for a few students to share their responses in order to increase students understanding of the reasons why different people will choose different investment vehicles. 13-48 Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual(For Instructor Use Only)

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SUNY Stony Brook - BUS - 210
CHAPTER 12Statement of Cash FlowsStudy Objectives1. 2. 3. 4. 5. *6. Indicate the usefulness of the statement of cash flows. Distinguish among operating, investing, and financing activities. Explain the impact of the product life cycle on a companys cas
SUNY Stony Brook - BUS - 210
CHAPTER 11Reporting and Analyzing Stockholders EquityStudy Objectives1. 2. 3. 4. 5. 6. 7. 8. *9. Identify and discuss the major characteristics of a corporation. Record the issuance of common stock. Explain the accounting for the purchase of treasury s
SUNY Stony Brook - BUS - 210
CHAPTER 9Reporting and Analyzing Long-Lived AssetsStudy Objectives1. Describe how the cost principle applies to plant assets. 2. Explain the concept of depreciation. 3. Compute periodic depreciation using the straight-line method, and contrast its expe
SUNY Stony Brook - BUS - 210
Chapter 9 -1Reporting and Analyzing Long-Lived Assets Long-LivedChapter 9 -2Financial Accounting, Fifth EditionStudy Objectives1. 2. 3. 4. 5. 6. 7. 8. 9. De scribehow thecost principleapplie to plant asse s ts. Explain theconce of de ciation. pt pre
SUNY Stony Brook - BUS - 210
CHAPTER 8Reporting and Analyzing ReceivablesStudy Objectives1. 2. 3. 4. 5. 6. 7. 8. 9. Identify the different types of receivables. Explain how accounts receivable are recognized in the accounts. Describe the methods used to account for bad debts. Comp
SUNY Stony Brook - BUS - 210
Chapter 8 -1Reporting and Reporting Analyzing Receivables AnalyzingChapter 8 -2Financial Accounting, Fifth EditionStudy Objectives1. 2. 3. 4. 5. 6. 7. 8. 9. I de ntify thediffe nt type of re ivable re s ce s. Explain how accounts re ivablearere ce co
ASU - BME - BME 100
Name: Mark McDanielDate: 9-15-2009BME100 Modeling Assignment (Fall 2009) Instructor Fills Out This FormExpected Requirements Yes No Checklist Item 1. Are the grammar, punctuation, and spelling reasonable (no more than 3 mistakes)? 2. Does the problem s
École Normale Supérieure - ENGINEERIN - mech
pressure distribution Inlet Pressure (bar) nozzle pos 1 nozzle pos 2 nozzle pos 3 nozzle pos 4 nozzle pos 5 nozzle pos 6 nozzle pos 7 nozzle pos 8 Exit Pressure (bar) Inlet Temp Exit Temp Inlet P vs. Mass Flow Inlet Pressure (bar) Mass Flow Rate (g/s) Exi
UC Davis - CHE - CHE 2C
NameExam 2 (Page 1 of 11) Last Name _ First Name _ Lab Sec. # _; TA: _; Lab day/time: _Andreas Toupadakis, Ph.D. Fall 2006CHEMISTRY 2CSection AEXAM 2Instructions:CLOSED BOOK EXAM! No books, notes, or additional scrap paper are permitted. All inform
UC Riverside - ECON129 - soc150
HW #2 2010 15 ptsDue Weds Jan 20th1. Suppose the Surgeon General issues a report saying each cup of coffee consumed takes1 day off your life. The problem is you enjoy drinking coffee. Suppose you value eachday of life at 20 utils (units of utility). C
Berkeley - PHYSICS - 7b
Berkeley - PHYSICS - 7b
Berkeley - PHYSICS - 7b
UNIVERSITY OF CALIFORNIA, BERKELEY Physics Department 7b, Liphardt Exam #1 Spring Term 2005Name _ Disc. Section _ SID _ #1_ #2_ #3_ #4_ Total_ The relative weight of each problem is indicated next to the problem number. Most credit will be given for alge
Berkeley - PHYSICS - 7b
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String MatchingSung Yong ShinTC Lab.CS Dept., KAISTContents1.2.3.4.5.Problem DefinitionStraightforward AlgorithmString Matching with Finite AutomatonKnuth-Morris-Pratt AlgorithmBoyer-Moore Algorithm1. Problem DefinitionTPSM : Given a tex
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15.4) pN= 45 0 0.01 0.01 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 0.11 0.12 0.13 0.14 0.15 0.16 0.17 0.18 0.19 0.2 Pac= 10.99 =BINOMDIST($B$3,$A$3,A7,TRUE) 0.98 0.95 1.2 0.93 0.77 0.61 1 0.46 0.33 0.8 0.24 0.17 0.12 0.6 0.08 0.05 0.4 0.03 0.02
Florida State College - PSYCHOLOGY - PCO 4930
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Florida State College - PSYCHOLOGY - PCO 4930
Maslows Hierarchy of Needs is displayed throughout the film The Odd Couple. Though the main characters, Felix and Oscar, share some needs they differ greatly on the basis of their personality. Felix and Oscar are long time friends, but when Felix finds ou
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Biol 3301 Exam #11) Which of the following is not a trait of a Good Genetic Model Systema. b. c. d. e. 2) fast generation time has many redundant gene families inexpensive to culture Facile manipulation of genome has a large collection of mutantsA phen
Texas Tech - MUHL - 3310
Blues: an African American folk music genre that developed in the rural American South. The musical roots of blues begin in Africa: -Work songs, rhythm of music reflects the rhythm of work -Dance music -Folk music, commentary on community members The char
Texas Tech - MUHL - 3310
Roots of Country Early 1900s Appalachian roots; the south and the Midwest was the center of this musical activity Predominated by string bands Influenced by black styles of fiddle and guitar (and banjo, which is African in origin) Strong influence of chur
Texas Tech - MUHL - 3310
Rhythm and Blues Shares the following characteristic with Blues: Differs from Blues:Melodic language- basic blues scales, blue notes Harmonic language- chord structures Musical structures and forms (such as 12 bar blues)Rhythm- R&B features dance rhythm
Texas Tech - MUHL - 3310
R&B and the Influence of Gospel Gospel: a musical root, that runs from country, blues, and rhythm and blues vocals Because rock and roll came directly out of rhythm and blues, this gospel influence will continue throughout the history of Rock and RollRhy
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Chemistry 3301 - Descriptive Inorganic Chemistry Spring Semester 2009 Homework 1 Key (1) Leaving out the Noble Gases, rank from highest to lowest the ten elements that have the greatest values for their first ionization energies. Write down anything that
Texas Tech - CHEM - 3301
Chemistry 3301 - Descriptive Inorganic Chemistry Spring Semester 2009 Homework 2 (1) Draw Lewis dot structures, with formal charges, for the following molecules or ions. This includes drawing all reasonable resonance forms, and determining their relative
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Chemistry 3301 Descriptive Inorganic Chemistry Spring Semester 2009 Review for Exam 1 Be able to do the following: Draw and identify the five 3d-orbitals showing their shape, their orientation relative to Cartesian coordinate axes, and the sign of the wav
Texas Tech - CHEM - 3301
Ohio State - CHEM - 122
Purpose: To be able to separate the components of a mixture, as well as to be able to determine the mass percent of each component present.Procedure: Please see pgs. 15-16 of General Chemistry Laboratory Experiments, Volume 1 by Judith Casey & Robert Tat
Ohio State - PSYCH - 121
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Available online at www.sciencedirect.comJournal of Health Economics 27 (2008) 801807Comments and repliesThe income gradient in childrens health: A comment on Currie, Shields and Wheatley PriceAnne Case, Diana Lee, Christina Paxson Princeton Universi
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American Economic AssociationHealth, Nutrition, and Economic Development Author(s): John Strauss and Duncan Thomas Source: Journal of Economic Literature, Vol. 36, No. 2 (Jun., 1998), pp. 766-817 Published by: American Economic Association Stable URL: ht
U. Houston - ECON - 7395
American Economic AssociationStature and the Standard of Living Author(s): Richard H. Steckel Source: Journal of Economic Literature, Vol. 33, No. 4 (Dec., 1995), pp. 1903-1940 Published by: American Economic Association Stable URL: http:/www.jstor.org/s
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U. Houston - ECON - 7395
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U. Houston - ECON - 7395
The Review of Economic Studies Ltd.The Relationship between Education and Adult Mortality in the United States Author(s): Adriana Lleras-Muney Source: The Review of Economic Studies, Vol. 72, No. 1 (Jan., 2005), pp. 189-221 Published by: The Review of Ec
U. Houston - ECON - 7395
On the Concept of Health Capital and the Demand for Health Author(s): Michael Grossman Source: The Journal of Political Economy, Vol. 80, No. 2 (Mar. - Apr., 1972), pp. 223-255 Published by: The University of Chicago Press Stable URL: http:/www.jstor.org/
U. Houston - ECON - 7395
NBER WORKING PAPER SERIESSCHOOLING AND HEALTH. THE CIGARETTE CONNECTIONPhiflip Farrell Victor R. FuchsWorking Paper No. 68NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts Avenue Cambridge MA 02138September 1981This research was supported by a
U. Houston - ECON - 7395
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Journal of Health Economics 26 (2007) 213232The child health/family income gradient: Evidence from EnglandAlison Currie a , Michael A. Shields b, , Stephen Wheatley Price cb a Victorian Department of Treasury and Finance, Melbourne, Australia Departmen
U. Houston - ECON - 7395
Stature and Status: Height, Ability, and Labor Market OutcomesAnne Case and Christina PaxsonPrinceton UniversityThe well-known association between height and earnings is often thought to reect factors such as self-esteem, social dominance, and discrimi
U. Houston - ECON - 7395
Economic Status and Health in Childhood: The Origins of the GradientBy ANNE CASE, DARREN LUBOTSKY,ANDCHRISTINA PAXSON*The well-known positive association between health and income in adulthood has antecedents in childhood. Not only is childrens health
U. Houston - ECON - 7395
Forthcoming American Economic Review, Papers and Proceedings, May 2008 Height, Health and Cognitive Function at Older Ages By Anne Case and Christina Paxson Research across a number of disciplines has highlighted the role of early life health and circumst
U. Houston - ECON - 7395
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U. Houston - ECON - 7395
THE COSTS OF LOW BIRTH WEIGHT* DOUGLAS ALMOND KENNETH Y. CHAY DAVID S. LEELow birth weight (LBW) infants experience severe health and developmental difculties that can impose large costs on society. However, estimates of the return to LBW-prevention from
U. Houston - ECON - 7395
Is the 1918 Inuenza Pandemic Over? LongTerm Effects of In Utero Inuenza Exposure in the Post-1940 U.S. PopulationDouglas AlmondColumbia University and National Bureau of Economic ResearchThis paper uses the 1918 inuenza pandemic as a natural experiment
Arizona - EEE - 425
Homework #1 Due 9/5 EE591 - Mozdzen1. Complete the truth table for a 2 input 1 bitInput A Input B Carry In Sum Carry Out0 0 1 1 0 0 0 1 0 1 0 1 0 0 0 0 1 1adder with a carry in, a carry out and a sumOnly use And, Nand, Or, & NOR functions.1. Write t
Harper - ACC155 - 60176
Harper - ACC155 - 60176
Harper - ACC155 - 60176
Harper - ACC155 - 60176
Harper - ACC155 - 60176
Harper - ACC155 - 60176
Harper - ACC155 - 60176
Harper - ACC155 - 60176
Harper - ACC155 - 60176
Harper - ACC155 - 60176
Harper - ACC155 - 60176
Harper - ACC155 - 60176
Harper - ACC155 - 60176
Harper - ACC155 - 60176
Harper - ACC155 - 60176