Week 12 tutorial solution PDF

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Exercise 14-3 (25 minutes)

Sales................................................... Cost of goods sold ........................... Gross profit ....................................... Operating expenses.......................... Net income.........................................

2011 100.0% 75.7 24.3 17.3 7.0%

2010 100.0% 46.5 53.5 35.0 18.5%

Analysis: Overall, this company’s situation has worsened. This is evident from the substantial decline in net income as a percent of sales for 2011 (7.0%) relative to 2010 (18.5%). The main culprit is the increase in cost of goods sold as a percent of sales from 46.5% in 2010 to 75.7% in 2011. On a somewhat positive note, the company has not experienced any increase in operating expenses as a percent of sales; indeed, declining from 35.0% in 2010 to 17.3% in 2011. Even more positive is the company’s level of sales increase from $625,000 in 2010 to $740,000 in 2011.

Problem 14-5A (60 minutes) Part 1 Barco Company

Kyan Company

a. Current ratio $155,440*

$238,050**

= 2.5 to 1

$61,340

= 2.6 to 1

$93,300

*$19,500 + $37,400 + $9,100 + $84,440 + $5,000 = $155,440 **$34,000 + $57,400 + $7,200 + $132,500 + $6,950 = $238,050

b. Acid-test ratio $66,000*

$98,600**

= 1.1 to 1

= 1.1 to 1

$93,300

$61,340

*$19,500 + $37,400 +$9,100 = $66,000 **$34,000 + $57,400 + $ 7,200 = $98,600

c. Accounts receivable turnover $770,000

= 20.2 times

times ($37,400 + $9,100 + $29,800)/2

$880,200

= 14.8

($57,400 + $7,200 + $54,200)/2

d. Inventory turnover $585,100

= 8.4 times

($84,440 + $55,600)/2

$632,500

= 5.3 times

($132,500 + $107,400)/2

e. Days’ sales in inventory $84,440

x 365 = 52.7 days

$585,100

$132,500 x 365 = 76.5 days $632,500

f. Days' sales uncollected $37,400 + $9,100 $770,000

x 365 = 22.0 days

$57,400 + $7,200

x 365 = 26.8 days

$880,200

Short-term credit risk analysis: Barco and Kyan have essentially equal current ratios and equal acid-test ratios. However, Barco both turns its merchandise and collects its accounts receivable more rapidly than does Kyan. On this basis, Barco probably is the better short-term credit risk.

Problem 14-5A (Concluded) Part 2 Barco Company

Kyan Company

a. Profit margin ratio $162,200

$210,400 = 23.9%

= 21.1%

$770,000

$880,200

b. Total asset turnover $770,000

= 1.8 times

($445,440 + $398,000)/2

$880,200

= 1.9 times

($542,450 + $382,500)/2

c. Return on total assets $162,200

= 38.5%

($445,440 + $398,000)/2

$210,400

= 45.5%

($542,450 + $382,500)/2

d. Return on ordinary shareholders' equity $162,200

= 55.8%

($303,300 + $278,300)/2

$210,400

= 65.0%

($348,150 + $299,600)/2

e. Price-earnings ratio $75

= 16.6

$4.51

$75

= 14.7

$5.11

f. Dividend yield $3.80 $75

= 5.1%

$3.80

= 5.1%

$75

Investment analysis: Kyan's profit margin ratio, total asset turnover, return on total assets, and return on ordinary shareholders' equity are all higher than Barco’s. Although the companies pay the same dividend, Kyan's price-earnings ratio is lower. All of these factors suggest that Kyan's shares is likely the better investment.

Ethics Challenge

— BTN 14-3

1. The CEO appears to have selectively chosen from the 11 available ratios to present only the ones that show trends that are favorable to the company. (However, some analysts may not interpret a decline in selling expenses as a percent of revenue as positive since it might imply a scaling back on advertising or promotion campaigns.) The CEO’s motivation might be to make her performance, or the company’s, or both, appear better than it is in the eyes of the analysts. 2. The consequences of this action by the CEO might be mixed. It is likely that the analysts will ask other questions that may reveal some negative trends such as the trends in return and profit margins. The CEO’s actions may become transparent to the analysts as they discover the presence of less favorable trends through their questions. If discovered, such a disclosure ploy by the CEO will not reflect favorably on the company. Both the CEO and the company are likely to suffer losses in reputation and credibility. Even if the CEO is able to succeed with this strategy in the short term, once the financial statements are issued all users can compile additional ratio information and see that some of the trends are unfavorable to the company. This is likely to damage the credibility of the CEO.

Exercise 13-3A (15 minutes) Statement of Cash Flows

Noncash Investing & Not Reported Operating Investing Financing Financing on Statement Activities Activities Activities Activities or in Notes a. Accepted six-month note receivable in exchange for property, plant and equipment b. Recorded depreciation expense c. Paid cash to acquire treasury shares d. Collected cash from sales e. Borrowed cash from bank by signing a 9-month note payable f. Paid cash to purchase a patent g. Retired long-term notes payable by issuing ordinary shares h. Paid cash toward accounts payable i. Sold inventory for cash j. Paid cash dividend that was declared in a prior period

X

X X X X X X X X X

X

Problem 13-6BA (35 minutes) TYRA COMPANY Cash Flows from Operating Activities—Direct Method For Year Ended December 31, 2011 Cash flows from operating activities Cash receipts from customers (1) ...................................................... $ 411,880 Cash payments to suppliers (2) ..........................................................

(244,016)

Cash payments for salaries (3) ...........................................................

(29,940)

Cash payments for rent (4) ..................................................................

(19,980)

Cash payments for insurance (5) .......................................................

(5,192)

Cash payments for utilities (6) ............................................................

(3,960)

Cash payments for interest .................................................................

(4,800)

Net cash from operating activities ..................................................... $ 103,992

Supporting calculations (1) Sales - Increase in receivables = $412,000 - ($820 - $700) = $411,880 (2)

Cost of goods sold $244,000

Decrease in inventory - ($296 - $272)

-

+ +

Decrease in payables = ($520 - $480) = $244,016

(3) Salaries expense - Increase in salaries payable = $30,000 - ($280- $220) = $29,940 (4) Rent expense - Decrease in prepaid rent = $20,000 - ($60- $40) = $19,980 (5) Insurance expense - Decrease in prepaid insurance = $5,200 - ($36- $28) = $5,192 (6) Utilities expense - Increase in utilities payable = $4,000 - ($40- $0) = $3,960

Entrepreneurial Decision

— BTN 13-7

1. It is common that small businesses must pay cash in advance for items such as rent, advertising, supplies, and facilities expansion. Consequently, those costs are usually recorded before revenues are earned, and before those revenues are ultimately collected in cash. If the business does not carefully plan, it is possible that it could show a positive net income, but not be able to effectively operate because it has little or no cash to pay its suppliers, creditors, and others to whom it owes money. 2. Scrawl can raise cash financing by borrowing. Scrawl is not a publicly traded company, so the potential to raise capital by selling shares is somewhat restricted. Moreover, potential lenders will want to evaluate the future profitability, cash flows, and solvency of the company before lending money....