Problem #9 Rules for the Distribution of Profits or Losses In January 2016, Nick Marasigan and Dems Asacta agreed to produce and sell chocolate candies. Marasigan contributed P2,400,000 in cash to the business. Asacta contributed the building and equipment, valued at P2,200,000 and P1,400,000, respectively. The partnership had profits of P840,000 during 2016 but was léss successful during 2017, when profit was only P400,000.

XY Ltd sells 2 products which are manufactured in one plant. During the year 2009, it planned to sell the following quantities of each product Q1 Q2 Q3 Q4 X(Units) 90,000 230,000 300,000 80,000 Y(Units) 65,000 75,000 55,000 85,000 Product X sells at Ksh 10 per unit while Y at Ksh20 per unit. A study of past experience reveals that XY limited loses 3% of its billed revenue each year due to bad debts. REQUIRED: Prepare sales budget incorporating the given information.

Question 3: Keppel Manufacturing had a bad year in 2012, operating at a loss for the first time in its history. The company’s income statement showed the following results from selling 200,000 units of product: net sales Br.2,000,000; total costs and expenses Br.2,120,000; and net loss Br.120,000. Costs and expenses consisted of the following.   Total Variable Fixed Cost of goods sold Br.1,295,000 Br. 975,000 Br.320,000 Selling expenses 575,000 325,000 250,000 Administrative expenses 250,000 Br.2,120,000 100,000 Br.1,400,000 150,000 Br.720,000 Management is considering the following independent alternatives for 2013. Increase unit selling price 30% with no change in costs and Change the compensation of salespersons from fixed annual salaries totaling 170,000 to total salaries of Br.50,000 plus a 6% commission on net sales. Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold…

V4. The Ahram Company net income was 100,000 L.E. for the year ended on 31/12/2016. The examination of the income statement of this year revealed that the income statement included a deduction of the following a) The cost of computers that were purchased on 1/6/2016 for 15,000 b) Depreciation expense of 9,000 for furniture’s at a rate of 10% Required: Calculate Taxable net income and indicate the reasoning for your calculations for 2016. (Be careful, needs a bit of thought )

MANAGING CURRENT ASSETS Dan Barnes, financial manager of Ski Equipment Inc. (SKI), is excited, but apprehensive. The companys founder recently sold his 51% controlling block of stock to Kent Koren, who is a big fan of EVA (Economic Value Added). EVA is found by taking the after-tax operating profit and subtracting the dollar cost of all the capital the firm uses: EVA = EBIT(1 T) Annual dollar cost of capital = EBIT(1 T) (WACC Capital employed If EVA is positive, the firm is creating value. On the other hand, if EVA is negative, the firm is not covering its cost of capital and stockholders value is being eroded. Koren rewards managers handsomely if they create value, but those whose operations produce negative EVAs are soon looking for work. Koren frequently points out that if a company can generate its current level of sales with fewer assets, it will need less capital. That would, other things held constant, lower capital costs and increase EVA. Shortly after he took control, Koren met with SKIs senior executives to tell them his plans for the company. First, he presented some EVA data that convinced everyone that SKI had not been creating value in recent years. He then stated, in no uncertain terms, that this situation must change. He noted that SKIs designs of skis, boots, and clothing are acclaimed throughout the industry but that other aspects of the company must be seriously amiss. Either costs are too high, prices are too low, or the company employs too much capital; and he expects SKIs managers to identify and correct the problem. Barnes has long believed that SKIs working capital situation should be studiedthe company may have the optimal amounts of cash, securities, receivables, and inventories, but it may also have too much or too little of these items. In the past, the production manager resisted Barness efforts to question his holdings of raw materials inventories; the marketing manager resisted questions about finished goods; the sales staff resisted questions about credit policy (which affects accounts receivable); and the treasurer did not want to talk about her cash and securities balances. Korens speech made it clear that such resistance would no longer be tolerated. Barnes also knows that decisions about working capital cannot be made in a vacuum. For example, if inventories could be lowered without adversely affecting operations, less capital would be required, the dollar cost of capital would decline, and EVA would increase. However, lower raw materials inventories might lead to production slowdowns and higher costs, while lower finished goods inventories might lead to the loss of profitable sales. So before inventories are changed, it will be necessary to study operating as well as financial effects. The situation is the same with regard to cash and receivables. a. Barnes plans to use the ratios in Table IC 16.1 as the starting point for discussions with SKIs operating executives. He wants everyone to think about the pros and cons of changing each type of current asset and the way changes would interact to affect profits and EVA. Based on the data in Table IC 16.1, does SKI seem to be following a relaxed, moderate, or restricted current assets investment policy? b. How can we distinguish between a relaxed but rational current assets investment policy and a situation where a firm has a large amount of current assets due to inefficiency? Does SKIs current assets investment policy seem appropriate? Explain. c. SKI tries to match the maturity of its assets and liabilities. Describe how SKI could adopt a more aggressive or a more conservative financing policy. d. Assume that SKIs payables deferral period is 30 days. Now calculate the firms cash conversion cycle estimating the inventory conversion period as 365/Inventory turnover. e. What might SKI do to reduce its cash and securities without harming operations? In an attempt to better understand SKIs cash position, Barnes developed a cash budget. Data for the first 2 months of the year are shown in Table IC 16.2. (Note that Barness preliminary cash budget does not account for interest income or interest expense.) He has the figures for the other months, but they are not shown in Table IC 16.2. f. In his preliminary cash budget, Barnes has assumed that all sales are collected and thus that SKI has no bad debts. Is this realistic? If not, how would bad debts be dealt with in a cash budgeting sense? (Hint: Bad debts affect collections but not purchases.) g. Barness cash budget for the entire year, although not given here, is based heavily on his forecast for monthly sales. Sales are expected to be extremely low between May and September but then increase dramatically in the fall and winter. November is typically the firms best month, when SKI ships equipment to retailers for the holiday season. Interestingly, Barness forecasted cash budget indicates that the companys cash holdings will exceed the targeted cash balance every month except October and November, when shipments will be high but collections will not be coming in until later. Based on the ratios in Table IC 16.1, does it appear that SKIs target cash balance is appropriate? In addition to possibly lowering the target cash balance, what actions might SKI take to better improve its cash management policies and how might that affect its EVA? h. Is there any reason to think that SKI may be holding too much inventory? If so, how would that affect EVA and ROE? i. If the company reduces its inventory without adversely affecting sales, what effect should this have on the companys cash position (1) in the short run and (2) in the long run? Explain in terms of the cash budget and the balance sheet. j. Barnes knows that SKI sells on the same credit terms as other firms in the industry. Use the ratios presented in Table IC 16.1 to explain whether SKIs customers pay more or less promptly than those of its competitors. If there are differences, does that suggest that SKI should restrict or relax its credit policy? What four variables make up a firms credit policy, and in what direction should each be changed by SKI? k. Does SKI face any risks if it restricts its credit policy? Explain. l. If the company reduces its DSO without seriously affecting sales, what effect will this have on its cash position (1) in the short run and (2) in the long run? Answer in terms of the cash budget and the balance sheet. What effect should this have on EVA in the long run? m. Assume that SKI buys on terms of 1 10, net 30, but that it can get away with paying on the 40th day if it chooses not to take discounts. Also, assume that it purchases 3 million of components per year, net of discounts. How much free trade credit can the company get, how much costly trade credit can it get, and what is the percentage cost of the costly credit? Should SKI take discounts? Why or why not? n. Suppose SKI decided to raise an additional 100,000 as a 1-year loan from its bank, for which it was quoted a rate of 8%. What is the effective annual cost rate assuming simple interest and add-on interest on a 12-month installment loan? Table IC 16.1 Selected Ratios: SKI and Industry Average SKI Industry Current 1.75 2.25 Debt/Assets 58.76% 50.00% Turnover of cash and securities 16.67 22.22 Days sales outstanding (365-day basis) 45.63 32.00 Inventory turnover 4.82 7.00 Fixed assets turnover 11.35 12.00 Total assets turnover 2.08 3.00 Profit margin 2.07% 3.50% Return on equity (ROE) 10.45% 21.00% TABLE IC 16.2 Skis Cash Budget for January and February

ABC LTD sold 3000 bread loafs to XYZ Bakers in the year 2011 costing R1 each. XYZ Bakers has the option to return unsold breads to ABC LTD within 7 days of the sale. In the first week of 2012, XYZ Bakers returned 200 of unsold bread loafs to ABC LTD. How much sale should ABC LTD recognize in the income statement for the year 2011?

Financial update as of June 15 • Your existing business generates $135,000 in EBIT. • The corporate tax rate applicable to your business is 25%. • The depreciation expense reported in the financial statements is $25,714. • You don’t need to spend any money for new equipment in your existing cafés; however, you do need $20,250 of additional cash. • You also need to purchase $10,800 in additional supplies—such as tableclothes and napkins, and more formal tableware—on credit. • It is also estimated that your accruals, including taxes and wages payable, will increase by $6,750. Based on your evaluation you have______in free cash flow.

Delta Oil Company uses the successful-efforts method to account for oil exploration costs. Delta started business in 2014 and prepared the following income statements: DELTA OIL COMPANY Income Statements For the Years Ended December 31, 2014 - 2015 1   2014 2015 2 Revenue $1,000,000.00 $3,000,000.00 3 Other expenses 400,000.00 1,300,000.00 4 Exploration expenses 120,000.00 238,000.00 5 Income before income taxes $480,000.00 $1,462,000.00 6 Income tax expense (30%) 144,000.00 438,600.00 7 Net income $336,000.00 $1,023,400.00 8 Earnings per share $3.36 $10.23       The company chose to change to the full-cost method at the beginning of 2016. Under the full-cost method, Delta capitalizes all exploration costs of the Oil and Gas Properties asset account on its balance sheet. It determines the exploration and amortization expense amounts under the full-cost method to be as…

Research and Development ExpenseInternational Business Machines Corporation (IBM) reported the following on its 2018 form 10‑K. $ millions 2018 2017 2016 Total revenue $79,591 $79,139 $79,919 Research, development and engineering expense 5,379 5,590 5,726 Number of new patents awarded 9,100 9,043 8,088   Requireda. Calculate IBM’s common‑size research, development and engineering expense for each year. What pattern do we observe?Note: Round percentage to one decimal places (for example, enter 6.7% for 6.6555%).   2018 2017 2016 RD&E expense common-size Answer   Answer   Answer

Sufi Bhd (Sufi) is a technology start-up company, incorporated in Malaysia since year 2014. The company involves in providing information technology (IT) solutions and services. Sufi reported profit of RM42,000 for the financial year 2016. The following information are extracted from the financial accounting record of Sufi for the year ended 31 December 2016. 1. An IT equipment was bought in January 2014 for RM280,000. The company charged depreciation at a rate of 20% per annum. 2. A research and development cost amounted to RM25,000 incurred during year 2016 and qualified to be treated as intangible asset. 3. An interest revenue from investment in bond amounted to RM12,500 was earned during the year, but the amount is receivable in year 2017. 4. An entertainment expense of RM18,000 was paid to entertain new clients. 5. An interest expense amounted to RM29,200 was incurred due to borrowing from bank. Half of the amount is payable in year 2017. 6. A donation of RM5,000 was made to IRB…