Stores Jacobson Solution Guide ACCOUNTS RECEIVABLE (a) What amount of bad debts did management estimate for fiscal years ending in January 2005 and 2004? Allowance for Doubtful Debts (in thousands) 1/2003 from notes 793 Write-off 863 from notes Bad Debt Expense ? 1/2004 773 from notes Bad Debt Expense ? 1/2005 2004 2005 750 from notes
from notes
Write-off 1049
Bad Debt Expense = End - Beg. + Write-off = 773 - 793 + 863 = 843 Bad Debt Expense = End - Beg. + Write-off = 750 - 773 + 1049 = 1026
(b) Estimate the total amount of cash received from customers during fiscal year 1996 and 1995 from operations. Gross A/R 1/2003 44777 Credit Sales 43.6% x 414267 = 180620 1/2004 43907 Credit Sales 44.6% x 432469 = 1/2005 42460 Cash Collections ? Write-offs 863 Cash Collections ? 192,881 Write-offs
1049
End = Beg. + Credit Sales - Cash Collections - Write-offs Beg. + Credit Sales - End - Write-Offs Cash Collections in 2005 = 43907 + 192881 - 42460 1049 = 193,279 Cash Collections in 2004 = 44,777 + 180620 - 863 - 43907 = 180,627 Total Cash Receipts in 2005 = Cash Collections from credit customers + Cash Sales = 193279 + (1-.446).432469 = 193279 + 239,588 = 432 867 In 2004 = 180627 + (Cash Sales in 2004 = (1 - .436)(44267 = 233647) = 414274
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(c) Is management anticipating credit problems amongst its customers? Explain why briefly. I/S method: Bad Debt Expense/Credit Sales: .53% in 2005, .47% in 2004 % ed ; expect worsening credit status among customers B/S method: Allow for DD/A.R: 0.17% in 2005, 0.17% in 2004. Same The financial footnotes say some kind of aging A/R method is used. % credit sales in 2005 from 2004 so some increase in percentages might be appropriate. Analysts should also check whether there are any large customers that might amount for significant portion of sales and then figure about solvency of these customers. (d) Comment on the quality of A/R.[Hint: Compute avg collection period.] 365 Days in A / R = A / R turnover 365 = av. (Credi Sales / AR ) 2005 82; 2004 90; Quality has improved from 2004. (Note: I used credit sales here since we were given the info. In most cases, credit sales aren't available, so net sales are used instead. ) INVENTORY (a) How much inventory did the company purchased in 2005 and 2005? LIFO Inventories 1/2003 95848 Purchases 1/2004 89,249 Purchases
2003 COGS 279493
2004 COGS 293826
1/2005 94,875 EI = B1 + P - COGS => P = EI - BI + COGS 2005 = 299452; 2004 = 272894 (for part c) FIFO Inventories 1/2003 111,336 Purchases 272894 1/22004 106,061 Purchases 299452 COGSF = COGSL - LR = 279493 - 1324 = 278169 COGSF = 106,061 + 299452- 111,955 = 293558 2
1/2005 111,955 COGSF = COGSL - LR = 293826 - (17080 - 16812) = 293558 2005 N1F = LR + N1L = 268 + (17289) = (17021) 2004 N1F = (5217) (b) How did long average inventory remain in stock in 2005 and 2004? [Hint: calculate 365/inventory turnover] Has inventory management improved in efficiency between 2004 and 2005? Days inventory held = 365
Avg.
COGS / Inv 2005: 114 days; 2004: 121 days Inventory management improved in efficiency. (c) If the company did NOT switch to LIFO method of inventories in 1980, what would have been recorded as (i) Inventory in the balance sheet for 2005 and 2004? FIFO Inventory = 111955 in 2005 and 106061 in 2004. (ii) Cost of merchandise sold in 2005 and 2004? COGS F = COGS L - LR = 293558 for 2005 and 278169 in 2004.
(iii) Net income before taxes for 2005 and 2004? 2005 NIF = NIL + LR = -17021; 2004 NI F = - 5217 (iv) Is the company better off by switching to LIFO? Explain your answer very briefly. [No calculations needed.] If company management is concerned with showing higher current income, it is worse off ( becauseLR > 0) but cumulatively firm is doing better by switching because of net cumulative tax savings ( tax rate * LR > 0). However, one needs to consider signalling issues and whether investors focus on short horizon earnings and current stock price. (d) Explain briefly how management can influence net income by switching to LIFO. [No numbers needed.] Purchasing Policy can be tailored to affect COGS and hence NI
ADVERTISING The majority of prepaid expenses consist of advertising costs. amount of advertising expenditures in 2005 and 2004?. Estimate the
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Prepaid Expenses Advertising Expenses 11932 1/2003 3639 Cash paid ? 1/2004 3928 Cash paid ? 1/2005 2923 Advertising Expenses Advertising Expenses 13625 13962
End = Beg. + cash paid - expensed = Cash Payments = End - Beg. + Expensed 2005: : 2923 + 13962 - 3928 = 12957 2004: = 13914
MANAGEMENT EFFICIENCY AND FINANCIAL RATIO ANALYSIS An analyst noted that "... the indicators are suggesting that management is increasingly inefficient and the company's outlook is poor." Do you agree? Provide supporting facts. [Hint: Evaluate profitability, liquidity/solvency, efficiency of asset management.] From Previous Answers A/R and Inventory management has improved Profitability: Loss suffered in both years, larger loss in 2005 partly from trimming operations (store closings expect to be non-recurrent) and 2004 gain on asset sale. Excluding these two items, NI before tax = 13089 in 2005 and -7606 in 2004. The return on sales margins is -3% in 2005 and -1.8% in 2004. So there is deteriorating performance. On a gross profit margin bases however, the difference is slight 32% vs. 33%. Liquidity/Solvency Quick Ratio = Current Ratio = 2.8 in 2005, 2.9 in 2004 so no liquidity problems Times Int. Earned = terrible in 2005, ok in 95 so danger of insolvency Debt/Equity= increased in 2005
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