Financial Reporting And Analysis, 13th Edition By Charles H. Gibson – Test Bank
PROBLEM 11 11
a. 2 Current Ratio = Current Assets
Current Liabilities
$30,000 – $2,000=$28,000=2.8 to 1.00
$12,000 – $2,000$10,000
b. 1 Quick (Acid-Test) Ratio = Cash Equivalents + Marketable Securities + Net Receivables
Current Liabilities
$6,000 + $6,600 – $2,000=$10,600=1.06 to 1.00
$12,000 – $2,000$10,000
c. 1 A two-for-one common stock split would result in doubling the number of
common shares. It would result in the par value being reduced from $1.00 to 50¢. It would not influence retained earnings or total stockholders’ equity.
Each $1,000 bond that was convertible into 300 shares of common stock would now be convertible into 600 shares of common stock.
d. 3 $36,000 – $6,000 = $30,000 = $1,500 Per Year
2020
$13,500 ÷ $1,500 = 9
e. 4 Book Value = Total Stockholders’ Equity
– Preferred Stock Equity
Number of Common Shares Outstanding
$48,200 – 0 = $2.41
20,000 Shares
f. 2 Sales $90,000,000
Gross profit20 percent
Cost of goods sold80 percent
Cost of goods sold$72,000,000
Divided by turnover 5
Average inventory 14,400,000
Ending inventory$16,000,000
Beginning inventory ? (a)
Total ? (b)
Total inventory = Average inventory x 2 = $14,400,000 x 2 = $28,800,000
= ($28,800,000) less ending inventory ($16,000,000)
= Beginning inventory $12,800,000
g. 3 Payout ratio of 80 percent (this is,80 percent of net income is being paid out in dividends):
$4,000,000 = .8X
X = $5,000,000 (Net income)
Retained earnings, November 30, 2011$16,000
Less net income for year (5,000)
Plus dividends 4,000
Retained earnings, December 1, 2010$15,000
PROBLEM 11-12
a. Calcor Company
Pro Forma Income Statement
For the Year Ending November 30, 2012
Net sales ($8,400,000 x 1.05 x 1.10) $9,702,000
Expenses:
Cost of goods sold ($6,300,000 x 1.05 x 1.04) 6,879,600
Selling expense ($780,000 + $420,000) 1,200,000
Administrative expense 900,000
Interest expense [$140,000 + ($300,000 x .10)] 170,000
Total expense 9,149,600
Income before income taxes 552,400
Income taxes 220,960
Net income $ 331,440
b. President Kuhn’s entire goal is not achieved because the return on sales (8 percent) and the turnover of average assets (five times per year) are not met. However, the return on average assets before interest and taxes, which is a multiplication of the first two ratios, would be achieved. This is reflected by the calculation of the following ratios.
1.Return on Sales Before
Interest and Taxes = Income Before Interest and Taxes
Sales
= $552,400 + $170,000
$9,702,000
= $722,400 = 7.4%
$9,702,000
The goal of an 8 percent return on sales before interest and taxes would not be achieved (7.4% < 8%).
2.Turnover of Average Assets=Sales
Average Assets
= $9,702,000
$2,100,000* + $300,000
= 4.0425 times per year
*2008 Average Assets=2008 Sales
2008 Turnover of Average Assets
= $8,400,000
4
= $2,100,000
The goal of a turnover of average assets of 5 times would not be achieved (4.0425 < 5).
3.Return on Average Assets
Before Interest and Taxes = Income Before Interest and Taxes
Average Assets
= $552,400 + $170,000
$2,100,000 + $300,000
= $722,400
$2,400,000
= 30.1%
The goal of return on average assets before interest and taxes of 30 percent would be achieved.
c. No. Return on average assets before interest and taxes (third goal) is equal to return on sales before interest and taxes (first goal) times turnover of average assets (second goal). If Calcor Company achieved the first two goals, the return on average assets before interest and taxes would be at least 40 percent (0.08 x 5), which is greater than the goal of 30 percent.
PROBLEM 11 13
a. A Company Z Score
X1 = Working Capital X1 = $90,000 = 30.00
Total Assets$300,000
X2 = Retained Earnings X2 = $80,000 = 26.67
Total Assets$300,000
X3 = E.B.I.T. X3 = $70,000 = 23.33
Total Assets$300,000
X4 = Market Value of Equity X4 = $180,000 = 600.0
Book Value of Total Debt$30,000
X5 = Sales X5 = $430,000 = 143.33
Total Assets$300,000
Z = .012X1 + .014X2 + .033X3 + .006X4 + .010X5
Z= 0.012 x 30.00
+ 0.014 x 26.67
+ 0.033 x 23.33
+ 0.006 x 600.00
+ 0.010 x 143.33
Z =0.36Z = 6.53
+0.37
+0.77
+3.60
+1.43
B Company Z Score
X1 = Working Capital X1 = $120,000 = 42.86
Total Assets$280,000
X2 = Retained Earnings X2 = $90,000 = 32.14
Total Assets$280,000
X3 = E.B.I.T. X3 = $60,000 = 21.43
Total Assets$280,000
X4 = Market Value of Equity X4 = $168,750 = 337.50
Book Value of Total Debt$50,000
X5 = Sales X5 = $400,000 = 142.86
Total Assets$280,000
Z = .012X1 + .014X2 + .033X3 + .006X4 + .010X5
Z= 0.012 x 42.86
+ 0.014 x 32.14
+ 0.033 x 21.43
+ 0.006 x 337.50
+ 0.010 x 142.86
Z= 0.51 Z = 5.13
+ 0.45
+ 0.71
+ 2.03
+ 1.43
C Company Z Score
X1 = Working Capital X1 = $150,000 = 60.00
Total Assets$250,000
X2 = Retained Earnings X2 = $60,000 = 24.00
Total Assets$250,000
X3 = E.B.I.T X3 = $50,000 = 20.00
Total Assets$250,000
X4 = Market Value of Equity X4 = $148,500 = 185.63
Book Value of Total Debt$80,000
X5 = Sales X5 = $200,000 = 80.00
Total Assets$250,000
Z = .012X1 + .014X2 + .033X3 + .006X4 + .010X5
Z= 0.012 x 60.00
+ 0.014 x 24.00
+ 0.033 x 20.00
+ 0.006 x 185.63
+ 0.010 x 80.00
Z=0.72Z = 3.63
+ 0.34
+ 0.66
+ 1.11
+ 0.80
b. All of these companies appear to have good financial condition. The company with the lowest score is Company C; therefore, Company C is most likely to experience financial failure.
PROBLEM 11 14
a.
X1 = Working Capital X1 = $152,800 = 30.90
Total Assets$494,500
X2 = Retained Earnings X2 = $248,000 = 50.15
Total Assets$494,500
X3 = E.B.I.T X3 = $84,000 = 16.99
Total Assets$494,500
X4 = Market Value of Equity X4 = $690,000 = 344.14
Book Value of Total Debt$200,500
X5 = Sales X5 = $860,000 = 173.91
Total Assets$494,500
Z = .012X1 + .014X2 + .033X3 + .006X4 + .010X5
Z= 0.012 x 30.90
+ 0.014 x 50.15
+ 0.033 x 16.99
+ 0.006 x 344.14
+ 0.010 x 173.91
Z= 0.37Z = 5.43
+ 0.70
+ 0.56
+ 2.06
+ 1.74
b. No. In a study using 1970-1973, a Z score of 2.675 was established as a practical cutoff point. The Z score for General Company is substantially above 2.675.
PROBLEM 11-15
2011 Net Income as Reported $90,200,000
Net Change in Inventory Reserve:
2011 $50,000,000
2010 46,000,000
(a) $ 4,000,000
(b) Effective Federal Tax Rate 37.9%
(c) Change In Taxes (a x b) $ 1,516,000
(d) Net Change In Income (a-c) 2,484,000
2011 Approximate Income If Inventory Had
Been Valued At Approximate Current Cost $92,684,000
PROBLEM 11-16
2011 Net Income as Reported $45,000,000
Net Change in Inventory Reserve:
2011 $20,000,000
2010 28,000,000
(a) ($8,000,000)
(b) Effective Federal Tax Rate 23.7%
(c) Change in Taxes (axb) 1,896,000
(d) Net Change in Income (a-c) (6,104,000)
2011 Approximate Income If Inventory Had
Been Valued At Approximate Current Cost $38,896,000
PROBLEM 11-17
The vertical axis does not start at zero.
PROBLEM 11-18 PROVISION FOR OBSOLETE INVENTORY – ETHICAL
a. The current earnings will be reduced. The expense will be recognized in the current year and the reserve will be set up.
b. No. The inventory will be reduced and the reserve account will be reduced.
c. No. The obsolete inventory should be identified and written off in the current year.
PROBLEM 11-19 PUSH FOR YEAR END SALES – ETHICAL?
a. This promotion appears to be ethical and likely does not require special disclosure.
b. This promotion may not be ethical without special disclosure describing the promotion and the risk. There needs to be a sales cutoff at December 31 not allowing for any guaranteed returns. Having a guaranteed return policy up until March of the following year violates the matching principle of accounting.
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