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chapter_11 - Chapter 11 Expanded Analysis TO THE NET 1...

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Chapter 11 Expanded Analysis TO THE NET 1. Cooper Tire & Rubber December 31 2001 2000 a. Inventory reserve b. 2001 effective tax rate c. 2001 net income d. Approximate income for 2001 if inventory had been valued at approximate cost. 2001 net income Reserve 2001 Reserve 2000 Decrease Tax rate Decrease in income Adjusted net income $46,565,000 37.7% $18,166,000 $46,565,000 52,476,000 5,911,000 37.7% $52,476,000 $18,166,000 2,228,447 $15,937,553 2. Albertson’s Inc. a. Net earnings for the 52 weeks January 31, 2002 $501,000,000 b. $6,000,000 (Disclosed in notes to consolidated financial statements – Inventories). 43
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QUESTIONS 11- 1. Based on the study reported in the text, liquidity and debt ratios are regarded as the most significant ratios by commercial loan officers. 11- 2. (a) Debt/equity, current ratio (b) Debt/equity, current ratio 11- 3. The dividend payout ratio does not primarily indicate liquidity, debt, or profitability. It is a ratio that is of interest to investors because it indicates the percentage of earnings that is being paid out in dividends. From a view of controlling a loan and preventing the stockholders from being paid before the bank is paid, the dividend payout ratio can be used as an effective ratio. 11- 4. Based on the study reported in the text, financial executives do regard profitability ratios as the most significant ratios. 11- 5. (a) Return on equity (b) Return on assets (c) Net profit margin (d) Earnings per share (e) Return on capital Each of these ratios would be considered a measure of profitability. 11- 6. The CPAs gave the highest significance rating to two liquidity ratios. These ratios are the current ratio and the accounts receivable turnover days. The highest-rated profitability ratio was after-tax net profit margin, while the highest-rated debt ratio was debt/equity. 11- 7. According to the study reported in this book, financial ratios are not used extensively in annual reports to interpret and explain financial statements. Likely reasons for this are that management does not want to interpret and explain the financial statements to the users, or management is of the opinion that interpretations and explanations can be made more effectively in a descriptive way rather than by the use of financial ratios. Also, there are no authoritative guidelines as to what financial ratios should be included in the annual report, except for earnings per share. 44
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11- 8. (a) Financial summary (b) Financial highlights (c) Financial review (d) President's letter (e) Management discussion 11- 9. Profitability ratios and ratios related to investing are the most likely to be included in annual reports. Profitability ratios are the most popular ratios with management. Ratios related to investing are logical to be included in the annual report because one of the major objectives of the annual report is to inform stockholders. 11-10. Earnings per share is the only ratio that is required to be disclosed in the annual report. It must be disclosed at the bottom of the income statement.
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