Solution manual financial accounting 9th harrison ch13

Find more at www.downloadslide.com Chapter 13 Financial Statement Analysis Short Exercises (5-10 min.) S 13-1 Increase (Decrease) 2012 2011 (Dollars in thousands) 2012 2011 2010 Amount Revenues $10,289 $10,045 $9,449 $244 2.4% $596 6.3% Expenses 5,915 5,238 5,100 $ 4,374 $ 4,807 $4,349 $(433) (9.0)% $458 10.5% Net income Percent Amount Percent (5-10 min.) S 13-2 Trend percentages: Sales…………… Net income…… 2012 116% 151% 2011 108% 112% Chapter 13 2010 102% 108% 2009 100% 100% Financial Statement Analysis 13-1 Find more at www.downloadslide.com (10-15 min.) S 13-3 Cash 2012 2011 2010 Amount Percent Amount Percent Amount Percent $ 23,200 Receivables, net Inventory Prepaid expenses Property, plant, and equipment, net Total assets 4.0% $ 15,600 3.0% $ 14,340 3.0% 34,800 6.0 20,800 4.0 23,900 5.0 266,800 46.0 197,600 38.0 148,180 31.0 34,800 6.0 41,600 8.0 33,460 7.0 220,400 38.0 244,400 47.0 258,120 54.0 $580,000 100.0% $520,000 100.0% $478,000 100.0% Inventory, as a percent of total assets, has grown dramatically Property, plant and equipment appears to be wearing out and is not being replaced due to the growth in inventory which has led to a tight cash position 13-2 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (10 min.) S 13-4 (Amounts in millions) Net sales Craft Amount Percent Kleen Amount Percent $17,800 100.0% $7,569 100.0% 10,573 59.4 4,965 65.6 4,895 27.5 1,521 20.1 Interest expense 53 0.3 23 0.3 Other expense 89 0.5 38 0.5 730 4.1 250 3.3 Cost of goods sold Selling and administrative expenses Income tax expense Net income $ 1,460 8.2% $ 772 10.2% Craft earned more net income, but Kleen’s net income was a higher percentage of net sales Students can argue that Craft is more profitable because it earns more net income than Kleen Students could also argue that Kleen is more profitable because it earns a higher percentage of profit on each dollar of sales than Craft does Chapter 13 Financial Statement Analysis 13-3 Find more at www.downloadslide.com (5-10 min.) S 13-5 2012 2011 2010 $497 $333 $445 $339 Total current assets Total current liabilities = $590 $362 Current ratio = 1.63 = 1.49 = 1.31 The company’s ability to pay its current liabilities is improving (5-10 min.) S 13-6 (Dollar amounts in millions) 2012 2011 Cash + $1,200 Short-term investments + Receivables, net Total current liabilities Quick (acid-test) ratio = = $ 900 + + 70 + 240 + 250 $1,227 1.18 $1,145 = 1.07 Allstott’s quick (acid-test) ratio looks fairly good both because it is slightly above 1.0 and it is higher than the ratios of the other three companies 13-4 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (10-15 min.) S 13-7 (Dollar amounts in millions) a Inventory turnover = Cost of goods sold = Average inventory = Days’ inventory 365 = = outstanding (DIO) Inventory turnover $2,509 ($96 + $81) / $2,509 $89 365 28 = 28 times = 13 days b Days’ sales outstanding (DSO): One day’s sales = Days’ sales = outstanding (DSO) $9,500 365 = $26.0 Average net receivables One day’s sales = $245* $26.0 = days *($240 + $250) / = $245 c Days’ payables outstanding: Accounts payable Cost of goods sold $2,509 = = = 2.6 turnover Average accounts ($1,000 + 900) / payable Days’ payables 365 outstanding (DPO) = Accounts payable = turnover Chapter 13 365 2.6 = 140 Financial Statement Analysis 13-5 Find more at www.downloadslide.com (continued) S 13-7 d Cash conversion cycle (in days): Cash conversion cycle = DIO + DSO - DPO = 13 + – 140 = - 118 Inventory turnover and DSO look strong Turning over inventory 28 times per year (every 13 days) is fast, and collecting average receivables in only days is also very fast However, the company is taking 140 days to pay off its accounts payable This is quite slow, indicative of a company that is having difficulty paying its trade creditors Companies who continue to this could face future credit problems if suppliers regard them as a high credit risk The sum of the ratios in the cash conversion cycle (-118) tells us that on average the company sells inventory and collects the cash for those sales 118 days before it pays trade creditors It is questionable whether a company can continue to take this long to pay off trade creditors without damaging its credit rating 13-6 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (5-10 min.) S 13-8 (Dollar amounts in millions) Debt ratio = Total liabilities Total assets = $5,844 $7,235 = 0.808 Allstott’s debt ratio is 80.8% Times-interestIncome from operations $1,020 + $184 = = = 6.5 earned ratio Interest expense $184 The debt ratio is high The times-interest-earned ratio is high Overall, the company’s ability to pay its liabilities and interest expense looks mixed Chapter 13 Financial Statement Analysis 13-7 Find more at www.downloadslide.com (10 min.) S 13-9 (Dollar amounts in millions) a Rate of return on sales = Net income Net sales = $735 $9,500 = 7.73% Net sales $9,500 b Asset turnover = Average = ($7,235 + 6,640) / = 1.369 total assets c Rate of return on total assets = (ROA) = Rate of return on sales 7.73% x x Asset turnover 1.369 10.6% Average total assets $6,937.50* d Leverage ratio = Average common = ($1,391 + $1,515) / = 4.78 stockholders’ equity e Rate of return Net Preferred on common income − dividends = = stockholders' Average common equity stockholders' equity = ROA x Leverage ratio = 10.6% x 4.78 = 50.6% f These rates of return are strong 13-8 Financial Accounting 9/e Solutions Manual $735 − $0 $1,453 = 50.6% Find more at www.downloadslide.com (5-10 min.) S 13-10 (Amounts, except per-share amounts, in millions) EPS = Net income − Preferred dividends Number of shares of common stock outstanding Price/earnings ratio = Market price per share of common stock EPS = = $600 − $21* 700 = $.83 $11.83 $.83 = 14.25 The stock market says that $1 of Feeney Cars’ net income is worth $14.25 _ *Preferred dividend = $21 ($700 × 03) Chapter 13 Financial Statement Analysis 13-9 Find more at www.downloadslide.com (10 min.) S 13-11 Income Statement Thousands Net sales $7,300 Cost of goods sold 2,358 (a) Selling expenses 1,520 Administrative expenses Interest expense 1,894 (b) Other expenses 156 Income before taxes Income tax expense Net income (a) 330 $800 + $772 1,042 385 (c) $ 657 (d) × = $2,358 (b) $7,300 − $2,358 − $1,520 − $330 − $156 − $1,042 = $1,894 (d) $7,300 × 0.09 = $657 (c) $1,042 − $657 = $385 13-10 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (continued) P 13-63 Amherst Corporation Comparative Balance Sheets December 31, 2013 and 2012 2013 ASSETS Current: Cash (l) Accounts receivable, net (k) Inventory (j) Total current assets (h) Plant and equipment, net Total assets $ 35,000 165,000 240,000 440,000 760,000 $1,200,000 2012 $ 30,000 135,000 180,000 345,000 555,000 $900,000 LIABILITIES Current liabilities $ 160,000 10% Bonds payable (r) 400,000 Total liabilities (q) 560,000 STOCKHOLDERS’ EQUITY Common stock, $5 par (o) 360,000 Retained earnings (p) 280,000 Total stockholders’ equity (n) 640,000 Total liabilities and stockholders’ equity (m) $1,200,000 $140,000 400,000 540,000 220,000 140,000 360,000 $900,000 Computations (alternate order of calculations is possible) (a) Cost of goods sold ($1,365,000) = Sales x COGS % ($2,100,000 × 65%) (b) Gross profit ($735,000) = Sales – COGS ($2,100,000 - $1,365,000) (c) Operating income ($270,000) = Operating income in 2012 × 2013 Trend % ($200,000 × 135%) (d) Operating expenses ($465,000) = Gross profit – Operating Income ($735,000 – $270,000) Chapter 13 Financial Statement Analysis 13-65 Find more at www.downloadslide.com (continued) P13-63 (e) Income before income tax ($230,000) = Operating income – Interest expense ($270,000 – $40,000) (f) Income tax expense ($69,000) = Income before income tax × tax rate ($230,000 × 30%) (g) Net income ($161,000) = Income before income tax – Income tax expense ($230,000 – $69,000) (h) Current assets ($440,000) = Current ratio × Current liabilities (2.75 × $160,000) (i) Cash + Accounts receivable = Quick assets ($200,000) = Quick ratio × Current liabilities (1.25 × $160,000) (j) Inventory ($240,000) = (h) – (i) ($440,000 – $200,000) (k) Average accounts receivable ($150,000) = Sales ÷ Accounts receivable turnover ($2,100,000 ÷ 14) Average accounts receivable = (Beginning + Ending) ÷ 2; $150,000 = ($135,000 + Ending) ÷ 2; Ending = $165,000 (l) Cash ($35,000) = Quick assets – Accounts Receivable ($200,000 – $165,000) (m) Average total assets ($1,050,000) = Sales ÷ Asset turnover ($2,100,000 ÷ 2); Average Assets = (Beginning + Ending) ÷ 2; $1,050,000 = ($900,000 + Ending) ÷ 2; Ending = $1,200,000; this amount is also total liabilities and stockholders’ equity (n) Average stockholders’ equity ($500,000) = (Beginning + Ending) ÷ 2; $500,000 = ($360,000 + Ending ) ÷ 2; Ending = $640,000 (o) Common stock ($360,000 = Common size % × total assets (30% × $1,200,000) (p) Retained earnings ($280,000) = Total stockholders’ equity – Common stock ($640,000 – $360,000) (q) Total liabilities ($560,000) = Total assets – Total stockholders’ equity ($1,200,000 – $640,000) (r) Bonds payable = Total liabilities – Current liabilities ($560,000 – $160,000) 13-66 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com Decision Cases (30 min.) Decision Case Req Transaction Current Ratio Increase Increase Decrease No effect Increase Decrease Debt Ratio Decrease Increase Increase Increase Decrease Increase TimesInterestEarned Ratio No effect No effect No effect Decrease Increase No effect Return on Equity Increase No effect Increase Decrease Increase No effect Book Value Per Share Increase No effect Indeterminate Decrease Increase No effect Req Transaction Overall Effect on the Company Positive (due to gain) Unclear Unclear* Negative (due to loss) Positive (due to gross profit) Unclear *May be negative because of decreasing assets to shrink the company Chapter 13 Financial Statement Analysis 13-67 Find more at www.downloadslide.com (20-30 min.) Decision Case Ratio CNH Caterpillar Current ratio Higher Lower Quick (acid-test) ratio No effect No effect Inventory turnover Lower Higher Receivable turnover and Days’ sales outstanding No effect No effect Debt ratio Lower Higher Times-interest-earned Higher Lower Return on sales, total assets, and equity, and earnings per share Higher Lower Price/earnings ratio Lower* Higher* _ *Assuming stock price is unaffected by the accounting difference If stock price is affected, the price/earnings ratio could be higher (lower) for either company Dividend yield 10 Book value per share 13-68 Financial Accounting 9/e Solutions Manual No effect No effect Higher Lower Find more at www.downloadslide.com (continued) Decision Case CONCLUSION: Overall, CNH will look better than Caterpillar because of:  Higher current ratio, times-interest-earned ratio, rate of return measures, and book value per share of common stock  Lower debt ratio Caterpillar may have the higher inventory turnover ratio and may have a higher price/earnings ratio Overall, CNH will appear stronger — based solely on the ratios Chapter 13 Financial Statement Analysis 13-69 Find more at www.downloadslide.com (20-30 min.) Decision Case To reduce losses and establish profitable operations, Outward Bound should take the following steps: Make a dedicated effort to collect receivables and consider extending less credit to customers Receivables make up 15.2% of assets, compared to 11.0% for the industry average The company’s inability to collect its receivables may explain the shortage of cash (3.0% of total assets compared to 6.8% for the industry) Reduce the amount of the company’s interest-bearing debt The company’s short-term notes payable equal 17.1% of total assets, compared to 14.0% for the industry average (Interest-bearing) longterm debt equals 19.7% of total assets, compared to 16.4% for the industry Outward Bound’s total interest-bearing debt is 36.8% of total assets, compared to only 30.4% for the industry This debt burden causes the company to pay more interest expense than the norm for the industry (5.8% of net sales, compared to only 1.3% for the average company in the industry) The high level of interest expense drags profits down Sell higher profit-margin products Cost of sales is 68.2% of sales, compared to 64.8% for the industry average Consequently, gross profit is only 31.8% of net sales, which is less than the 35.2% industry average Cut operating expenses below their current level of 37.1% of sales by finding cheaper ways of doing business The company should consider operating out of a less expensive building, spending less on advertising, laying off employees, and other cost-cutting measures to trim operating expenses 13-70 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com Ethical Issue Req The ethical issue is: Should Turnberry reclassify its investments from long-term to short-term? Req and Req The stakeholders in the decision are Turnberry Corporation, its officers and directors, and its current and future creditors Economic analysis: Reclassifying the long-term investments as short-term will increase current assets and, therefore, increase the current ratio Turnberry’s financial position is not improved by this reclassification because the company’s asset position has not changed However, its short-term debt paying ability will appear to be improved and thus might entice current or future creditors to loan money to the corporation that they would otherwise not lend, subjecting them to possible loan losses in the future, should Turnberry prove unable to service their debt Legal analysis: If Turnberry’s management truly believes that they intend to sell the investments within a year, thus justifying reclassification of the investments to current assets, nothing illegal has happened However, intentionally falsifying financial statements is considered illegal in all states, and is also a federal crime, with criminal or civil penalties, or both Chapter 13 Financial Statement Analysis 13-71 Find more at www.downloadslide.com (continued) Ethical Issue Ethical analysis: Reclassifying a long-term investment as current to meet a debt agreement does not, in itself, brand Turnberry managers as unethical The managers may have honestly intended to sell the investments in order to meet the company’s obligations In that case, the managers took appropriate action Req Reclassifying the investments from current back to long-term may suggest to some observers that managers are playing a shell game However, the case states that sales subsequent to the first reclassification have improved the current ratio Under these circumstances, Turnberry may not need to sell the investments The managers may prefer to hold the investments beyond one year and, therefore, need to reclassify them as long-term In that case, the managers’ action is appropriate This case illustrates how gray accounting can be Here the debt agreement depends on the current ratio, which is affected by an asset classification that managers control simply by their intentions Because the managers’ intentions cannot be observed, it would be hard to prove that the managers are acting unethically 13-72 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com Focus on Financials: Amazon.com, Inc (1-2 hours) Req 1 Ability to pay current liabilities Ratio Computation 2010 2009 Interpretation Current CA*/CL $13,747 / $10,372 = 1.3 $9,797 / $7,364 = 1.3 Flat Acid-test (Quick) QA**/CL ($3,777 + $4,985 + $1,587)/$10,372 = 1.00 ($3,444 + Flat $2,922+ $988)/$7,364 = 1.00 CA = Current Assets QA = Quick Assets (Cash and equivalents + Marketable securities + Receivables) Ability to sell inventory and collect receivables Ratio Computation 2010 2009 Inventory turnover COGS Avg Inventory* $26,561 $2,687 = 9.89 $18,978 $1,785 = 10.63 Days sales Avg in receivables** receivables One days’ sales $1,288 ($34,204 / 365) = 13.74 days Interpretation Declined slightly $908 ($24,509 / 365) = 13.52 days Lengthened slightly but still low *Avg inventory: 2010: ($3,202 + $2,171) / = $2,687 2009: ($2,171 + $1,399) / = $1,785 **Avg receivables 2010: ($1,587 + $988) / = $1,288 2009: ($988 + $827) / = $908 Chapter 13 Financial Statement Analysis 13-73 Find more at www.downloadslide.com (continued) Amazon.com Ability to pay long-term debt Ratio Computation Debt Ratio Tot.liabilities Total assets $10,373 + $1,561 $18,797 = 635 Times interest earned Income from operations $1,406 $39 = 36.05 Interest expense 2010 2009 Interpretation $7,364 + $1,192 Worsened $13,813 slightly = 619 $1,129 $34 = 33.21 Lengthened slightly but still very high Profitability Ratio Computation 2010 2009 Interpretation Return on Sales Net income Net sales $1,152 $34,204 = 034 $902 $24,509 = 036 Worsened slightly Return on assets Net income Average total assets $1,152 $16,305* = 073 $902 $11,064 = 082 Worsened significantly Return on equity Net income Pfd Div Ave stockholders’ equity $1,152 - $0 $6,061 = 190 $902 - $0 $3,965 = 227 Worsened slightly *2010 average assets: ($18,797 + $13,813) / = $16,305 2009 average assets: ($13,813 + 8,314) / = $11,064 **2010 average stockholders’ equity: ($6,864 + $5,257)/ = $6,061 2009 average stockholders’ equity : ($5,257 + $2,672) / = $3,965 13-74 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (continued) Amazon.com Ratio Earnings per share Computation Net income Pfd Div Ave common sh outstanding 2010 2009 $1,152 - $0 447 $902 - $0 433 = $2.58 =$2.08 Interpretation Improved significantly Cash flow from operations: 2010: $3,495 (per share = $3,495/448) = $7.80 2009: $3,293 (per share = $3,293/436) = $7.55 Cash flow from operations improved, both on a total and per share basis In 2010, cash flow from operations exceeded net income by about 203% In 2009, cash flow from operations exceeded net income by 265% The company is generating significant amounts of cash from operations and using it wisely Evaluating stock as an investment Student opinions and answers based on the market price of the stock will vary The following statistics will bolster their positions Ratio Computation 2010 2009 Price earnings ratio Market price EPS $180* $2.58 = 775 $134.52** $24,509 = 619 Worsened significantly Dividend yield Div per share 0 No dividends paid Market price *market price on 12/31/2010 Interpretation ** market price on 12/31/2009 Chapter 13 Financial Statement Analysis 13-75 Find more at www.downloadslide.com (continued) Amazon.com Ratio Computation 2010 Book value per share Stockholders’ equity – pfd equity Com.shares outstanding $6,864 - $0 448 = $15.32 2009 $5,257 436 = $12.06 Interpretation Improved significantly Amazon.com, Inc appears to be well positioned for the future Most would say their stock would be a decent buy at $180.00 a share as of December 31, 2010 On September 30, 2011, the stock was selling for $216.23, so in retrospect, it would have been a very good investment on December 31, 2010 It increased in price by 20% in months 13-76 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com Focus on Analysis: RadioShack Corporation (20 min.) Req Trend analysis: Net sales Cost of sales Gross profit (Net sales – Cost of sales) Gross profit rate Operating income Net income (net loss) 2010 106% 107% $2,011 105% 116% 109% 2009 101% 101% $1,963 102% 115% 108% 2008 100% 100% $1,923 100% 100% 100% The trend analysis paints a slightly favorable trend in RadioShack’s operations over the 2008 to 2010 period Sales increased very little in 2009, and then accelerated slightly in 2010 Meanwhile, cost of sales increased at a slightly more rapid pace through 2010, causing gross margin to increase by a lesser percentage than net sales However, the company saved money in the operating expense category Operating income increased by 15% in 2009 over 2008, and then just slightly in 2010 to 16% over 2008 levels Req Students’ responses will be updated through 2011 for the answers above At time of printing, these figures were not available Chapter 13 Financial Statement Analysis 13-77 Find more at www.downloadslide.com (continued) Focus on Analysis: RadioShack Corporation Req Student views on this part will vary RadioShack Corporation, like other mid-size retailers, is a mid-level performer that tends to struggle to compete with big-box retailers like Best Buy The company is viewed as ―in transition,‖ constantly attempting to improve its core business by introducing a more compelling assortment of brands and products to bolster its image as a leader in the wireless technology space In October of 2011, the company announced that it was doubling its annual dividend payout to 50 cents per share, which boosted its dividend yield (dividend/market price per share) to 3.8% The company also announced it would continue its stock buyback program and repurchase an additional $200 million of its common stock over the next 12 months That would amount to about 15% of the company’s recent total market capitalization of $1.33 billion The company failed to meet its target earnings for the third quarter of 2011, and finished the quarter with $668 million in cash RadioShack Corporation stock closed at $13.08 per share on November 8, 2011 That was down from 18.49 per share (29.3%) from the price on December 31, 2010 The analyst’s recommendation according to www.finance.yahoo.com was 2.6 (where 1.0 = strong buy and 5.0 = sell) 13-78 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com Group Projects (2-3 hours) Student responses will vary on this assignment Chapter 13 Financial Statement Analysis 13-79 ... replaced due to the growth in inventory which has led to a tight cash position 13-2 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (10 min.) S 13-4 (Amounts in millions)... slightly above 1.0 and it is higher than the ratios of the other three companies 13-4 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (10-15 min.) S 13-7 (Dollar amounts... take this long to pay off trade creditors without damaging its credit rating 13-6 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (5-10 min.) S 13-8 (Dollar amounts in