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Explain the meaning of each of the following terms as they relate to a bond issue: (a) convertible and (b) callable.If you asked your broker to buy you a 12% bond when the market interest rate for such bonds was 11% would you expect to pay more or less than the face amount for the bond? Explain 4DQ If bonds issued by a corporation are sold at discount, is the market rate of interest greater less than the contract rate?The following data relate to a 2,000,000, 8% bond issued for a selected semiannual interest period: Bond carrying amount at beginning of period 2,125,000 Interest paid during period 160,000 Interest expense allocable to the period 148,750 (a) Were the bonds issued at a discount or at a premium? (b) What is the unamortized amount of the discount or premium account at the beginning of the period? (c) What account was debited to amortize the discount or premium?Bonds Payable has a balance of 5,000,000, and Discount on Bonds Payable has a balance of 50,000. If the issuing corporation redeems the bonds at 98, is there a gain or loss on the bond redemption?What is a mortgage note?Fleeson Company needs additional funds to purchase equipment for a new production facility and is considering either issuing bonds payable or borrowing the money from a local bank, in the form of an installment note. How does an installment note differ from a bond payable?In what section of the balance sheet would a bond payable be reported if (a) it is payable within one year and (b) it is payable beyond one year?14.1APE Alternative financing plans Brower co. is considering the following alternative financing plans: Plan1 Plan2 Issue 10% bonds (at face value) 4,000,000 2.500,000 Issue preferred 2.50 stock. 20 par 3,000,000 Issue common stock. 10 par 4000,000 2,500,000 Income tax is estimated at 40% of income. Determine the earnings per share of common stock, assuming that income before bond interest and income tax is 2,000,000.14.2APE Issuing bonds at face amount On January 1, the first day of the fiscal year, a company issues a 8,000,000, 4%, 10-year bond that pays semiannual interest of 16,000 (800,000 4% 12year), receiving cash of 800,000. Journalize the entries to record (a) the issuance of the bonds, (b) the first interest payment on June 30, and (c) the payment of the principal on the maturity date.Issuing bonds at a discount On the first day of the fiscal year, a company issues a 1,200,000, 9%, five-year bond that pays semiannual interest of 54,000 (1,200,000 9% ), receiving cash of 1,153,670. Journalize the bond issuance.Issuing bonds at a discount On the first day of the fiscal year, a company issues a 3,000,000, 11%, five-year bond that pays semiannual Interest of 165,000 (3,000,000 11% 12), receiving cash of 2,889,599. Journalize the bond issuance.14.4APE 14.4BPE 14.5APE 14.5BPE 14.6APE 14.6BPE A Redemption of bonds payable A 1,500,000 bond issue on which there is an unamortized discount of 70,100 is redeemed for 1,455,000. Journalize the redemption of the bonds.14.7BPE Journalizing installment notes On the first day of the fiscal year, a company issues 65,000, 6%, five-year installment notes that have annual payments of 15,431 The first note payment consists of 3,900 of interest and 11,531 of principal repayment. a. Journalize the entry to record the issuance of the installment notes. b. Journalize the first annual note payment.Journalizing installment notes On the first day of the fiscal year, a company issues 45,000, 8%, six-year installment notes that have annual payments of 9,734. The first note payment consists of 3,600 of interest and 6,134 of principal repayment. a. Journalize the entry to record the issuance of the installment notes. b. Journalize the first annual note payment.14.9APE 14.9BPE Effect of financing on earnings per share Domanico Co., which produces and sells biking equipment, is financed as follows: Bonds payable, 8% (issued at face amount) 10,000,000 Preferred 5% stock, 10 par 10,000,000 Common stock, 20 par 10,000,000 Income tax is estimated at 40% of income. Determine the earnings per share of common stock, assuming that the income before bond interest and income tax is (a) 10,500,000, (b) 11,800,000, and (c) 13,000, 000.Evaluate alternative financing plans Based on the data in Exercise 14-1, what factors other than earnings per share should be considered in evaluating these alternative financing plans?14.3EX 14.4EX Entries for issuing bonds Gabriel Co. produces and distributes semiconductors for use by computer manufacturers. Gabriel Co. issued 600,000 of 10-year, 8 % bonds on May 1 of the current year at face value, with interest payable on May 1 and November 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions for the current year: May 1. Issued the bonds for cash at their face amount. Nov. 1. Paid the interest on the bonds. Dec. 31. Recorded accrued interest for two months.14.6EX 14.7EX 14.8EX Entries for issuing and calling bonds; gain Emil Corp. produces and sells wind-energy-driven engines. To finance its operations, Emil Corp. issued 15 ,000,000 of 20-year, 9% callable bonds on May 1, 2016 at their face amount, with interest payable on May 1 and November 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions: 2016 May 1. Issued the bonds for cash at their face amount. Nov. 1. Paid the interest on the bonds. 2022 Nov. 1. Called the bond issue at 96, the rate provided in the bond indenture. (Omit entry for payment of interest.)Entries for installment note transactions On the first day of the fiscal year, Shiller Company borrowed 85,000 by giving a seven-year, 7% installment note to Soros Bank. The note requires annual payments of 15,772, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of 5,950 and principal repayment of 9,822. a. Journalize the entries to record the following: 1. Issued the installment note for cash on the first day of the fiscal year. 2. Paid the first annual payment on the note. b. Explain how the notes payable would be reported on the balance sheet at the end of the first year.14.11EX 14.12EX Reporting bonds At the beginning of the current year, two bond issues (Simmons Industries 7%, 20-year bonds and Hunter Corporation 8%, 10-year bonds) were outstanding. During the year, the Simmons Industries bonds were redeemed and a significant loss on the redemption of bonds was reported as cost of merchandise sold on the income statement. At the end of the year, the Hunter Corporation bonds were reported as a noncurrent liability. The maturity date on the Hunter Corporation bonds was early in the following year. Identify the flaws in the reporting practices related to the two bond issues.14.14EX 14.15EX 14.16EX Present value of amounts due Tommy John is going to receive 1,000,000 in three years. The current market rate of interest is 10%. a. Using the present value of 1 table in Exhibit 8, determine the present value of this amount compounded annually. b. Why is the present value less than the 1,000,000 to be received in the future?14.18EX 14.19EX 14.20EX 14.21EX Present value of bonds payable; premium Moss Co. issued 42,000,000 of five-year, 11% bonds, with interest payable semiannually, at a market (effective) interest rate of 9%. Determine the present value of the bonds payable using the present value tables in Exhibits 8 and 10. Round to the nearest dollar.14.23EX Appendix2 Amortize premium by interest method Shunda Corporation wholesales parts to appliance manufacturers. On January 1, 2016, Shunda Corporation issued 22,000,000 of five-year, 9% bonds at a market (effective) interest rate of 7%, receiving cash of 23,829,684. Interest is payable semiannually. Shunda Corporation's fiscal year begins on January 1. The company uses the interest method. a. Journalize the entries to record the following: 1. Sale of the bonds. 2. First semiannual interest payment, including amortization of premium. Round to the nearest dollar. 3. Second semiannual interest payment, including amortization of premium. Round to the nearest dollar. b. Determine the bond interest expense for the first year. c. Explain why the company was able to issue the bonds for 23,829,684 rather than for the face amount of 22,000,000.14.25EX 14.26EX 14.1APR 14.2APR 14.3APR Entries for bonds payable and installment note transactions The following transactions were completed by Winklevoss Inc., whose fiscal year is the calendar year: 2016 July 1. Issue d 74,000,000 of 20-year, 11% callable bonds dated July 1, 2016, at a market (effective) rate of 13%, receiving cash of 63 , 532,267. Interest is payable semiannually on December 31 and June 30. Oct. 1. Borrowed 200,000 by issuing a six-year, 6 % installment note to Nicks Bank. The note requires annual payments of 40,673, with the first payment occurring on September 30, 2017. Dec. 31. Accrued 3,000 of interest on the installment note. The interest is pay able on the date of the next installment note payment. 31. Paid the semiannual interest on the bonds. The bond discount amortization of 261,693 is combined with the semiannual interest payment. 31. Closed the interest expense account. 2017 June 30. Paid the semiannual interest on the bonds. The bond discount amortization of 261,693 is combined with the semiannual interest payment. Sept. 30. Paid the annual payment on the note, which consisted of interest of 12,000 and principal of 28,673. Dec. 31. Accrued 2,570 of interest on the installment note. The interest is payable on the date of the next installment note payment. 31. Paid the semiannual interest on the bonds. The bond discount amortization of 261, 693 is combined with the semiannual interest payment. 31. Closed the interest expense account. 2018 June 30. Recorded the redemption of the bonds, which were called at 98. The balance in the bond discount account is 9,420,961 after payment of interest and amortization of discount have been recorded. (Record the redemption only.) Sept. 30. Paid the second annual payment on the note, which consisted of interest of 10,280 and principal of 30,393. Instructions 1. Journalize the entries to record the foregoing transactions. Round all amounts to the nearest dollar. 2. Indicate the amount of the interest expense in (a) 2016 and (b) 2017. 3. Determine the carrying amount of the bonds as of December 31, 2017.14.5APR 14.6APR Effect of financing on earnings per share Three different plans for financing an 80,000,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amount, and the income tax rate is estimated at 40% of income: Plan 1 Plan 2 Plan 3 9% Bonds 40,000,000 Preferred 5% stock, 25 par 40,000,000 20,000,000 Common stock, 20 par 80,000,000 40,000,000 20,000,000 Total 80,000,000 80,000,000 80,000,000 Instructions 1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is 10,000,000 2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is 6,000,000 3. Discuss the advantage and disadvantages of each plan.14.2BPR 14.3BPR 14.4BPR 14.5BPR 14.6BPR 14.1CP Ethics and professional conduct in business Solar Industries develops and produces high-efficiency solar panels. The company has an outstanding 10,000,000, 30-year, 10% bond issue dated July 1, 2011. The bond issue is due June 30, 2040. Some bond indentures require the corporation issuing the bonds to transfer cash to a special cash fund, called a sinking fund, over the life of the bond. Such funds help assure investors that there will be adequate cash to pay the bonds at their maturity date. The bond indenture requires a bond sinking fund, which has a balance of 1,200,000 as of July 1, 2016. The company is currently experiencing a shortage of funds due to a recent acquisition. Bob Lachgar, the companys treasurer, is considering using the funds from the bond sinking fund to cover payroll and other bills that are coming due at the end of the month. Bobs brother-in-law, a trustee of Solars sinking fund, has indicated a willingness to allow Bob to use the funds from the sinking fund to temporarily meet the companys cash needs. Discuss whether Bobs proposal is appropriate.14.3CP 14.4CP 14.5CP Times interest earned The following financial data (in thousands) were taken from recent financial statements of Staples, Inc.: Year 3 Year 2 Year 1 Interest expense 173,751 214.824 237,025 Earnings before taxes 1,459,141 1,356,595 1,155,894 1. Determine the times interest earned ratio for Staples in Year 3, Year 2, and Year 1? Round your answers to one decimal place. 2. Evaluate this ratio for Staples.Why might a business invest cash in temporary investments?What causes a gain or loss on the sale of a bond investment?When is the equity method the appropriate accounting for equity investments?How does the accounting for a dividend received differ between the cost method and the equity method?5DQ What is the major difference in the accounting for a portfolio of trading securities and a portfolio of available-for-sale securities?7DQ How would a debit balance in Unrealized Gain (Loss) on Available-for-Sale Investments be reported in the financial statements?What are the factors contributing to the trend toward fair value accounting?10DQ 15.1APE Bond investment transactions Journalize the entries to record the following selected bond investment transactions for Starks Products: a. Purchased for cash 120,000 of Iceline, Inc. 5% bonds at 100 plus accrued interest of 1,000. b. Received first semiannual interest payment. c. Sold 60,000 of the bonds at 101 plus accrued interest of 500.15.2APE Stock investment transactions On September 12, 2,000 .shares of Aspen Company are acquired at a price of 50 per share plus a 200 brokerage commission. On October 15, a 0.50-per-share dividend was received on the Aspen Company stock. On November 10, 1,200 shares of the Aspen Company stock were sold for 42 per share less a 150 brokerage commission. Prepare the journal entries for the original purchase, the dividend, and the sale under the cost method.15.3APE 15.3BPE 15.4APE 15.4BPE 15.5APE 15.5BPE 15.6APE 15.6BPE 15.1EX 15.2EX 15.3EX 15.4EX 15.5EX Entries for investment in stock, receipt of dividends, and sale of shares On March 4, Breen Corporation acquired 7,500 shares of the 200,000 outstanding shares of Melton Co. common stock at 40 plus commission charges of 175. On J u ne 15, a cash dividend of 2.10 per share was received. On October 12, 3,000 shares were sold at 46, less commission charges of 175. Using the cost method, journalize the entries for (a) the purchase of stock, (b) the receipt of dividends, and (c) the sale of 3,000 shares.15.7EX 15.8EX Entries for stock investments, dividends, and sale of stock Seamus Industries Inc. buys and sells investments as part of its ongoing cash management. The following investment transactions were completed during the year: Feb. 24. Acquired 1,000 shares of Tett Co. stock for 85 per share plus a 150 brokerage commission. May 16. Acquired 2,500 shares of Issacson Co. stock for 36 per share plus a 100 commission. July 14. Sold 400 shares of Tett Co. stock for 100 per share less a 75 brokerage commission. Aug. 12. Sold 750 shares of Issacson Co. stock for 32.50 per share less an 80 brokerage commission. Oct. 31. Received dividends of 0.40 per share on Tett Co. stock. Journalize the entries for these transactions.15.10EX 15.11EX 15.12EX 15.13EX 15.14EX 15.15EX 15.16EX Fair value journal entries, trading investments Last Unguaranteed Financial Inc. purchased the following trading securities during 2016, its first year of operations: Name Number of Shares Cost Arden Enterprises Inc. 5,000 150,000 French Broad Industries Inc. 2,750 66,000 Pisgah Construction Inc. 1,600 104,000 Total 320,000 The market price per share for the trading security portfolio on December 31, 2016, was as follows: Market Price per Share, Dec. 31, 2016 Arden Enterprises Inc. 34 French Broad Industries Inc. 26 Pisgah Construction Inc. 60 a. Provide the journal entry to adjust the trading security portfolio to fair value on December 31, 2016. b. Assume the market prices of the portfolio were the same on December 31, 2017, as they were on December 31, 2016. What would be the journal entry to adjust the portfolio to fair value?15.18EX 15.19EX 15.20EX 15.21EX 15.22EX 15.23EX 15.24EX 15.25EX 15.26EX 15.27EX 15.28EX 15.29EX 15.1APR 15.2APR Stock Investment transaction, equity method and available for sale securities Forte Inc. produces and sells theater set designs and costumes. The company began operations on January 1. 2016. The following transactions relate to securities acquired by Forte Inc., which has a fiscal year ending on December 31: 2016 Jan. 22. Purchased 22.000 shares of Sankal Inc. as an available-for-sale security at 18 per share, including the brokerage commission. Mar. 8. Received a cash dividend of 0.22 per share on Sankal Inc. stock. Sept. 8. A cash dividend of 0.25 per share was received on the Sankal stock. Oct. 17. Sold 3.000 shares of Sankal Inc. stock at 16 per share, less a brokerage commission of 75. Dec. 31. Sankal Inc. is classified as an available-for-sale investment and is adjusted to a fair value of 25 per share. Use the valuation allowance for available-for-sale investments account in making the adjustment. 2017 Jan. 10. Purchased an influential interest in Imboden Inc. for 720,000 by purchasing 96,000 shares directly from the estate of the founder of Imboden Inc. There are 300.0(H) shares of Imboden Inc. stock outstanding. Mar. 10. Received a cash dividend of 0.30 per share on Sankal Inc. stock. Sept. 12. Received a cash dividend of 0.25 per share plus an extra dividend of 0.05 per share on Sankal Inc. stock. Dec. 31. Received 57,600 of cash dividends on Imboden Inc. stock. Imboden Inc. reported net income of 450,000 in 2017. Forte Inc. uses the equity method of accounting for its investment in Imboden Inc. 31. Sankal Inc. is classified as an available-for-sale investment and is adjusted to a fair value of 22 per share. Use the valuation allowance for available-for-sale investments account in making the adjustment for the decrease in fair value from 25 to 22 per share. Instructions 1. Journalize the entries to record these transactions. 2. Prepare the investment-related asset and stockholders equity balance sheet presentation for Forte Inc. on December 31, 2017, assuming the Retained Earnings balance on December 31, 2017, is 389,000.15.4APR 15.1BPR 15.2BPR Stock investment transactions, equity method and available-for-sale securities Glacier Products Inc. is a wholesaler of rock climbing gear. The company began operations on January 1. 2016. The following transactions relate to .securities acquired by Glacier Products Inc., which has a fiscal year ending on December 31: 2016 Jan. 18. Purchased 9,000 shares of Malmo Inc. as an available-for-sale investment at 40 per share, including the brokerage commission. July 22. A cash dividend of 3 00 per share was received on the Malmo stock. Oct. 5. Sold 500 shares of Malmo Inc. stock at 58.00 per share, less a brokerage commission of 100. Dec. 18. Received a regular cash dividend of 3.00 per share on Malmo Inc. stock. 31. Malmo Inc. is classified as an available-for-sale investment and is adjusted to a fair value of 36.00 per share. Use the valuation allowance for available-for-sale investments account in making the adjustment. 2017 Jan. 25. Purchased an influential interest in Helsi Co. for 800,000 by purchasing 75,000 shares directly from the estate of the founder of Helsi. There are 250,000 shares of Helsi Co. stock outstanding. July 16. Received a cash dividend of 3.00 per share on Malmo Inc. stock. Dec. 16. Received a cash dividend of 3.00 per share plus an extra dividend of 0.20 per share on Malmo Inc. stock. 31. Received 38,000 of cash dividends on Helsi Co. stock. Helsi Co. reported net income of 170,000 in 2015. Glacier Products Inc. uses the equity method of accounting for its investment in Helsi Co. 31. Malmo Inc. is classified as an available-for-sale investment and is adjusted to a fair value of 44 per share. Use the valuation allowance for available-for-sale investments account in making the adjustment for the increase in fair value from 36 to 44 per share. Instructions 1. Journalize the entries to record the preceding transactions. 2. Prepare the investment-related asset and stockholders equity balance sheet presentation for Glacier Products Inc. on December 31, 2017, assuming the Retained Earnings balance on December 31, 2017, is 700,000.15.4BPR Selected transactions completed by Equinox Products Inc. during the fiscal year ended December 31, 2016, were as follows: a. Issued 15,000 shares of 20 par common stock at 30, receiving cash. b. Issued 4, 000 shares of 80 par preferred 5% stock at 100, receiving cash. c. Issued 500,000 of 10-year, 5% bonds at 104, with interest payable semiannually. d. Declared a quarterly dividend of 0.50 per share on common stock and 1.00 per share on preferred stock. On the date of record, 100,000 shares of common stock were outstanding, no treasury shares were held, and 20,000 shares of preferred stock were outstanding. e. Paid the cash dividends declared in (d). f. Purchased 7,500 shares of Solstice Corp. at 40 per share, plus a 150 brokerage commission. The investment is classified as an available-for-sale investment. g. Purchased 8,000 shares of treasury common stock at 33 per share. h. Purchased 40,000 shares of Pinkberry Co. stock directly from the founders for 24 per share. Pinkberry has 125,000 shares issued and outstanding. Equinox Products Inc. treated the investment as an equity method investment. i. Declared a 1.00 quarterly cash dividend per share on preferred stock. On the date of record, 20,000 shares of preferred stock had been issued. j. Paid the cash dividends to the preferred stockholders. k. Received 27,500 dividend from Pinkberry Co. investment in (h). l. Purchased 90,000 of Dream Inc. 10-year, 5% bonds, directly from the issuing company, at their face amount plus accrued interest of 37 5. The bonds are classified as a held-to-maturity long -term investment. m. Sold, at 38 per share, 2,600 shares of treasury common stock purchased in (g). n. Received a dividend of 0 .60 per share from the Solstice Corp. investment in (f). o. Sold 1,000 shares of Solstice Corp. at 45, including commission. p. Recorded the payment of semiannual interest on the bonds issue d in (c) and the amortization of the premium for six months. The amortization is determined using the straight-line method . q. Accrued interest for three months on the Dream Inc. bonds purchased in (I). r. Pinkberry Co. recorded total earnings of 240 ,000. Equinox Products recorded equity earnings for its share of Pinkberry Co. net income. s. The fair value for Solstice Corp. stock was 39. 02 per share on December 31, 2016. The investment is adjusted to fair value , using a valuation allowance account. Assume Valuation Allowance for Available-for-Sale Investments h ad a beginning balance of zero. Instructions 1. Journalize the selected transactions. 2. After all of the transaction s for the year ended December 31, 201 6, had been poste d [including the transactions recorded in part (1) and all adjusting entries), the data that follows were taken from the records of Equinox Products Inc. a. Prepare a multiple-step in come statement for the year ended December 31, 201 6, concluding with earnings per share . In computing earnings per share, assume that the average number of common shares outstanding was 100,000 and preferred dividends were 100,000. ( Round earnings per share to the nearest cent.) b. Prepare a retained earnings statement for the year ended December 31, 20 6. c. Prepare a balance sheet in report form as of December 31, 2016.Benefits of fair value On July 16, 1998, Wyatt Corp. purchased 40 acres of land for 350,000. The land has been held for a future plant site until the current date, December 31, 2016. On December 18, 2016, TexoPete Inc. purchased 40 acres of land for 2,000,000 to be used for a distribution center. The TexoPete land is located next to the Wyatt Corp. land. Thus, both Wyatt Corp. and TexoPete Inc. own nearly identical pieces of land. 1. What are the valuations of land on the balance sheets of Wyatt Corp. and TexoPete Inc. using generally accepted accounting principles? 2. How might fair value accounting aid comparability when evaluating these two companies?International fair value accounting International Financial Reporting Standard No. 16 provides companies the option of valuing property, plant, and equipment at either historical cost or fair value. If fair value is selected, then the property, plant, and equipment must be revalued periodically to fair value. Under fair value, if there is an increase in the value of the property, plant, and equipment during the reporting period, then the increase is credited to stockholders equity. However, if there is a decrease in fair value, then the decrease is reported as an expense for the period. How is the international accounting treatment for changes in fair value for property, plant, and equipment similar to investments?15.3CP Warren Buffett and "look-through" earnings Berkshire Hathaway, the investment holding company of Warren Buffett, reports its less than 20% ownership" investments according to generally accepted accounting principles. However, it also provides additional disclosures that it terms look-through" earnings. Warren Buffett states, Many of these companies (in the less than 20%-owned category) pay out relatively small proportions of their earnings in dividends. This means that only a small proportion of their earning power is recorded in our own current operating earnings. But, while our reported operating earnings reflect only the dividends received from such companies, our economic well-being is determined by their earnings, not their dividends. The value to Berkshire Hathaway of retained earnings (of our investees) is not determined by whether we own 100%, 50%, 20%,or 1% of the businesses in which they reside.... Our perspective on such forgotten-but-not-gone earnings is simple, the way they are accounted for is of no importance, but their ownership and subsequent utilization is all-important. We care not whether the auditors hear a tree fall in the forest; we do care who owns the tree and what's next done with it. I believe the best way to think about our earnings is in terms of look-through results, calculated as follows. Take 250 million, which is roughly our share of the operating earnings retained by our investees (20% ownership holdings); subtract... incremental taxes we would hove owed had that 250 million been paid to us in dividends then add the remainder, 220 million, to our reported earnings of 371 million. Thus, our look-through earnings were about 590 million. Source: Warren Buffett. The Essays of Warren Buffett lessons for Corporate America, edited by Lawrence A. Cunningham, pp. 180-183 (excerpted) Write a brief memo to your instructor, explaining look through-earnings and why Mr. Buffet favors look-through earnings.15.5CP 1DQ What is the difference between classifying an expense by nature or function?3DQ 4DQ 5DQ 6DQ 7DQ 8DQ 9DQ 10DQ 1IFRS 2IFRS Under U.S. GAAP, LIFO is an acceptable inventory method. Financial statement information for three companies that use LIFO follows. All table numbers are in millions of dollars. Assume these companies adopted IFRS, and thus were required to use FIFO, rather than LIFO. a. Prepare a table with the following columns: (1) Difference between FIFO and LIFO inventory valuation. (2) Revised IFRS net income using FIFO. (3) Difference between FIFO and LIFO inventory valuation as a percent of total current assets. (4) Revised IFRS net income as a percent of the reported net income. b. Complete the table for the three companies. c. For which company would a change to IFRS for inventory valuation have the largest percentage impact on total current assets (Col. 3)? d. For which company would a change to IFRS for inventory valuation have the largest percentage impact on net income (Col. 4)? e. Why might Kroger have a negative impact on net income from using LIFO, while the other two companies have a positive impact on net income from using LIFO?What is the principal disadvantage of the direct method of reporting cash flows from operating activities?2DQ A corporation issued 2,000,000 of common stock in exchange for 2,000,000 of fixed assets. Where would this transaction be reported on the statement of cash flows?A retail business, using the accrual method of accounting, owed merchandise creditors (accounts payable) 320,000 at the beginning of the year and 350,000 at the end of the year. How would the 30,000 increase he used to adjust net income in determining the amount of cash flows from operating activities by the indirect method.''5DQ A long-term investment in bonds with a cost of 500,000 was sold for 600,000 cash. (a) What was the gain or loss on the sale? (b) What was the effect of the transaction on cash flows? (c) How would the transaction be reported on the statement of cash flows if cash flows from operating activities are reported by the indirect method?A corporation issued 2,000,000 of 20-year bonds for cash at 98. How would the transaction be reported on the statement of cash flows?Fully depreciated equipment costing 50,000 is discarded. What is the effect of the transaction on cash flows if (a) 15,000 cash is received for the equipment, (b) no cash is received for the equipment?9DQ Name five common major classes of operating cash receipts or operating cash payments presented on the statement of cash flows when the cash flows from operating activities are reported by the direct method.16.1APE Classifying cash flows Identify whether each of the following would be reported as an operating, investing, or financing activity on the statement of cash flows: a. Purchase of investments b. Disposal of equipment c. Payment for selling expenses d. Collection of accounts receivable e. Cash sales f. Issuance of bonds payable 16.2APE 16.2BPE Changes in current operating assets and liabilities-indirect method Alpenrose Corporations comparative balance sheet for current assets and liabilities was as follows: Dec. 31, 2016 Dec. 31, 2015 Accounts receivable 27,000 32,400 Inventory 18,000 15,480 Accounts payable 16,200 14,220 Dividends payable 49,500 53,100 Adjust net income of 207,000 for changes in operating assets and liabilities to arrive at net cash flow from operating activities.Changes in current operating assets and liabilities-indirect method Huluduey Corporations comparative balance sheet for current assets and liabilities was as follows: Dec. 31, 2016 Dec. 31, 2015 Accounts receivable 18,000 14,400 Inventory 34,800 29,700 Accounts payable 27,600 20,700 Dividends payable 8,400 10,800 Adjust net income of 160,000 for changes in operating assets and liabilities to arrive at net cash flow from operating activities.16.4APE 16.4BPE 16.5APE Land transactions on the statement of cash flows IZ Corporation purchased land for 400.000. Later in the year, the company sold a different piece of land with a book value of 200,000 for 240,000. How are the effects of these transactions reported on the statement of cash flows?16.6APE 16.6BPE Cash payments for merchandisedirect method The cost of merchandise sold reported on the income statement was 770,000. The accounts payable balance decreased 44,000, and the inventory balance decreased by 66,000 over the year. Determine the amount of cash paid for merchandise.Cash payments for merchandisedirect method The cost of merchandise sold reported on the income statement was 240,000. The accounts payable balance increased 12,000, and the inventory balance increased by 19,200 over the year. Determine the amount of cash paid for merchandise.Free cash flow McMahon Inc. reported the following on the company's statement of cash flows in 2016 and 2015: 2016 2015 Net cash flow from operating activities 294,000 280,000 Net cash flow used for investing activities (224,000) (252,000) Net cash flow used for financing activities (63,000) (42,000) Seventy percent of the net cash flow used for investing activities was used to replace existing capacity. a. Determine McMahons free cash flow for both years. b. Has McMahons free cash flow improved or declined from 2015 to 2016?16.8BPE 16.1EX Effect of transactions on cash flows State the effect (cash receipt or payment and amount) of each of the following transactions, considered individually, on cash flows: a. Retired 500,000 of bonds, on which there was 5,000 of unamortized discount, for 525,000. b. Sold 6,000 shares of 20 par common stock for 30 per share. c. Sold equipment with a book value of 98,200 for 117,500. d. Purchased land for 322,000 cash. e. Purchased a building by paying 75,000 cash and issuing a 62,500 mortgage note payable. f. Sold a new issue of 300,000 of bonds at 101. g. Purchased 2,500 shares of 40 par common stock as treasury stock at 50 per share. h. Paid dividends of 2.00 per share. There were 50,000 shares issued and 10,000 shares of treasury stock.16.3EX 16.4EX Cash flows from operating activities-indirect method The net income reported on the income statement for the current year was 400,000. Depreciation recorded on store equipment for the year amounted to 16,000. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows: End of Year Beginning of Year Cash 41,600 38,400 Accounts receivable (net) 30,400 28,000 Merchandise inventory 40,000 44,000 Prepaid expenses 4,800 3,600 Accounts payable (merchandise creditors) 40,000 36,000 Wages payable 21,200 24,000 a. Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method. b. Briefly explain why net cash flow from operating activities is different than net income.16.6EX 16.7EX Determining cash payments to stockholders The board of directors declared cash dividends totaling 585,000 during the current year. The comparative balance sheet indicates dividends payable of 167,625 at the beginning of the year and 146,250 at the end of the year. What was the amount of cash payments to stockholders during the year?Reporting changes in equipment on statement of cash flows An analysis of the general ledger accounts indicates that office equipment, which cost 202,500 and on which accumulated depreciation totaled 84,375 on the date of sale, was sold for 101,250 during the year. Using this information, indicate the items to be reported on the statement of cash flows.16.10EX Reporting land transactions on statement of cash flows On the basis of the details of the following fixed asset account, indicate the items to be reported on the statement of cash flows:16.12EX Reporting land acquisition for cash and mortgage note on statement of cash flows On the basis of the details of the following fixed asset account, indicate the items to be reported on the statement of cash flows:Reporting issuance and retirement of longterm debt On the basis of the details of the following bonds payable and related discount accounts, indicate the items to be reported in the financing activities section of the statement of cash flows, assuming no gain or loss on retiring the bonds.16.15EX 16.16EX 16.17EX 16.18EX 16.19EX 16.20EX 16.21EX 16.22EX Cash flows from operating activitiesdirect method. The income statement for Rhino Company for the current year ended June 30 and balances of selected accounts at the beginning and the end of the year are as follows: Sales........................................... 445,500 Cost of merchandise sold........................ 154,000 Gross profit..................................... 291,500 Operating expenses: Depreciation expense........................ 38,500 Other operating expenses.................... 115,280 Total operating expenses.................. 153,780 Income before income tax....................... 137,720 Income tax expense............................. 39,600 Net income..................................... 98,120 End Of Year Beginning of Year Accounts receivable (net)............................... 36,300 31,240 Inventories............................................ 92,400 80,300 Prepaid expenses...................................... 14,520 15,840 Accounts payable (merchandise creditors)............... 67,540 62,700 Accrued expenses payable (operating expenses)......... 19,140 20,900 Income tax payable..................................... 4,400 4,400 Prepare the Cash flows from operating activities section of the statement of cash flows, using the direct method.16.24EX Free cash flow The financial statement for Nike, Inc., art provided in Appendix C al the end of the text. a. Determine the free cash flow for the most recent fiscal year. Assume that 90% of the additions to property, plant, and equipment were used to maintain productive capacity. Round to the nearest thousand dollars. b. How might a lender use free cash flow to determine whether or not to give Nike, Inc., a loan? c. Would you feel comfortable giving Nike a loan, based on the free cash flow calculated in (a)?Free cash flow Lovato Motors Inc. has cash flows from operating activities of 720,000. Cash flows used for investments in property, plant, and equipment totaled 440,000, of which 85% of this investment was used to replace existing capacity. Determine the free cash flow for Lovato Motors Inc.16.1APR Statement of cash flowsindirect method The comparative balance sheet of Del Ray Enterprises Inc. at December 31, 2016 and 2015, is as follows: Additional data obtained from the income statement and from an examination of the accounts in the ledger for 2016 are as follows: a. Net income, 332,000 b. Depreciation reported on the income statement, 83,400 c. Equipment was purchased at a cost of 162,800 and fully depreciated equipment costing 44,800 was discarded, with no salvage realized. d. The mortgage note payable was not due until 2018 but the terms permitted earlier payment without penalty. e. 10,000 shares of common stock were issued at 20 for cash. f. Cash dividends declared and paid, 153,600 Instructions Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities.16.3APR Statement of cash flows-direct method The comparative balance sheet of Canace Products Inc. for December 31, 2016 and 2015, is as follows: Additional data obtained from an examination of the accounts in the ledger for 2016 are as follows: a. Equipment and land were acquired for cash. b. There were no disposals of equipment during the year. c. The investments were sold for 176, 000 cash. d. The common stock was issue d for cash. e. There was a 28,000 debit to Retained Earnings for cash dividends declared. Instructions Prepare a statement of cash flows, using the direct method of presenting cash flows from operating activities.16.5APR 16.1BPR Statement of cash flowsindirect method The comparative balance sheet of Harris Industries Inc. at December 31, 2016 and 2015, is as follows: An examination of the income statement and the accounting records revealed the following additional information applicable to 2016: a. Net income, 524,580. b. Depreciation expense reported on the income statement: buildings, 51,660; machinery and equipment, 22,680. c. Patent amortization reported on the income statement, 5,040. d. A building was constructed for 579,600. e. A mortgage note for 224,000 was issued for cash. f. 30,000 shares of common stock were issued at 13 in exchange for the bonds payable. g. Cash dividends declared, 131,040. Instructions Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities.16.3BPR Statement of cash flows-direct method The comparative balance sheet of Martinez Inc. for December 31, 2016 and 2015, is as follows: The income statement for the year ended December 31, 2016, is as follows: Additional data obtained from an examination of the accounts in the ledger for 2016 are as follows: a. Equipment and land were acquired for cash. b. There were no disposals of equipment during the year. c. The investments were sold for 588,000 cash. d. The common stock was issued for cash. e. There was a 528,000 debit to Retained Earnings for cash dividends declared. Instructions Prepare a statement of cash flows, using the direct method of presenting cash flows from operating activities.16.5BPR Ethics in Action Lucas Hunter, president of Simmons Industries Inc., believes that reporting operating cash flow per share on the income statement would be a useful addition to the companys just completed financial statements. The following discussion took place between Lucas Hunter and Simmons' controller, John Jameson, in January, after the close of the fiscal year: Lucas: Ive been reviewing our financial statements for the last year. I am disappointed that our net income per share has dropped by 10% from last year. This won't look good to our shareholders. Is there anything we can do about this? John. What do you means? The past is the past, and the numbers are in. There isnt much that can be done about it Our financial statements were prepared according to generally accepted accounting principles, and I dont see much leeway for significant change at this point. Lucan No, no. Ive not suggesting that we cook the books. But look at the cash flow from operating activities on the statement of cash flows. The cash flow from operating activities has increased by 20%. This is very good newsand. I might add, useful information. The higher cash flow from operating activities will give our creditors comfort. John. Well, the cash flow from operating activities is on the statement of cash flows, so I guess users will be able to see the improved cash flow figures there Lucas: This is true, but somehow I think this information should be given a much higher profile. I don't like this information being buried in the statement of cash flows. You know as well as I do that many users will focus on the income statement Therefore. I think we ought to include an operating cash flow per share number on the face of the income statementsomeplace under the earnings per share number In this way, users will get the complete picture of our operating performance. Yes, our earnings per share dropped this year, but our cash flow from operating activities improved! And all the information is in one place where users can see and compare the figures. What do you think? John I've never really thought about it like that before I guess we could put the operating cash flow per share on the income statement, underneath the earnings per share amount. Users would really benefit from this disclosure. Thanks for the ideaI'll start working on it. Lucas: Glad to be of service. How would you interpret this situation? Is John behaving in an ethical and professional manner?Using the statement of cash flows You are considering an investment in a new start-up company, Giraffe Inc., an Internet service provider. A review of the companys financial statements reveals a negative retained earnings. In addition, it appears as though the company has been running a negative cash flow from operating activities since the company's inception. How is the company staying in business under these circumstances? Could this be a good investment?Dillip Lachgar is the president and majority shareholder of Argon Inc., a small retail chain store. Recently, Dillip submitted a loan application for Argon Inc. to Compound Bank. It called for a 600,000, 9%, 10-year loan to help finance the construction of a building and the purchase of store equipment, costing a total of 750,000. This will enable Argon Inc. to open a store in the town of Compound. Land for this purpose was acquired last year. The bank's loan officer requested a statement of cash flows in addition to the most recent income statement, balance sheet, and retained earnings statement that Dillip had submitted with the loan application. As a close family friend, Dillip asked you to prepare a statement of cash flows. From the records provided, you prepared the following statement: Argon Inc. Statement of Cash Flows For the Year Ended December 31, 20Y7 Cash flows from operating activities: Net income.................................................... 300,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation................................................ 84,000 Gain on sale of investments.................................. (30,000) Changes in current operating assets and liabilities: Decrease in accounts receivable............................ 21,000 Increase in inventories..................................... (42,000) Increase in accounts payable............................... 30,000 Decrease in accrued expenses payable...................... (6,000) Net cash flow from operating activities.......................... 357,000 Cash flows from (used for) investing activities: Cash from investments sold..................................... 180,000 Cash used for purchase of store equipment..................... (120,000) Net cash flow from investing activities........................... 60,000 Cash flows from (used for) financing activities: Cash used for dividends........................................ (126,000) Net cash flow used for financing activities........................ (126,000) Increase (decrease) in cash......................................... 291,000 Cash at the beginning of the year................................... 108,000 Cash at the end of the year......................................... 399,000 After reviewing the statement, Dillip telephoned you and commented, Are you sure this statement is right?" Dillip then raised the following questions: 1. How can depreciation be a cash flow?" 2. Issuing common stock for the land is listed in a separate schedule. This transaction has nothing to do with cash! Shouldn't this transaction be eliminated from the statement?" 3. How can the gain on the sale of investments be a deduction from net income in determining the cash flow from operating activities? 4. Why does the bank need this statement anyway? They can compute the increase in cash from the balance sheets for the last two years." After jotting down Dillip's questions, you assured him that this statement was right." But to alleviate Dillip's concern, you arranged a meeting for the following day. a. How would you respond to each of Dillip's questions? b. Do you think that the statement of cash flows enhances the chances of Argon Inc. receiving the loan? Discuss.16.4CP 1DQ 2DQ 3DQ How would the current and quick ratios of a service business compare?a. Why is it advantageous to have a high inventory turnover? b. Is it possible to have a high inventory turnover and a high number of days sales in inventory? Discuss.What do the following data, taken from a comparative balance sheet, indicate about the companys ability to borrow additional long-term debt in the current year as compared to the preceding year? Current Year Preceding Year Fixed assets (net) Total long-term liabilities 1,260,000 300,000 1,360,000 400,000 a. How does the rate earned on total assets differ from the rate earned on stockholders equity? b. Which ratio is normally higher? Explain.Kroger, a grocery store, recently had a price-earnings ratio of 13 7, while the average price-earnings ratio in the grocery store industry was 22.5. What might explain this difference?9DQ 10DQ Horizontal analysis The comparative temporary investments and inventory balances of a company follow. Current Year Previous Year Temporary investments 59,280 52,000 Inventory 70,680 76,000 Based on this information, what is the amount and percentage of increase or decrease that would be shown in a balance sheet with horizontal analysis?17.1BPE Vertical analysis Income statement information for Axiom Corporation follows: Sales 725,000 Cost of goods sold 391,500 Gross profit 333,500 Prepare a vertical analysis of the income statement for Axiom Corporation.Vertical analysis Income statement information for Einsworth Corporation follows: Sales 1,200,000 Cost of goods sold 780,000 Gross profit 420,000 Prepare a vertical analysis of the income statement for Einsworth Corporation.17.3APE 17.3BPE Accounts receivable analysis A company reports the following: Sales 832 ,000 Average accounts receivable (net) 80,000 Determine (a) the accounts receivable turnover and (b) the number of days sales in receivables. Round to one decimal place.Accounts receivable analysis A company reports the following: Sales 3,150,000 Average accounts receivable (net) 210,000 Determine (a) the accounts receivable turnover and (b) the number of days sales in receivables. Round to one decimal place.Inventory analysis A company reports the following: Cost of goods sold 660,000 Average inventory 60,000 Determine (a) the inventory turnover and (b) the number of days sales in inventory. Round to one decimal place.Inventory analysis A company reports the following: Cost of goods sold 660,000 Average inventory 60,000 Determine (a) the inventory turnover and (b) the number of days sales in inventory. Round to one decimal place.17.6APE 17.6BPE Times interest earned A company reports the following: Income before income tax 4,000,000 Interest expense 400,000 Determine the times interest earned ratio. Round to one decimal place.Times interest earned A company reports the following: Income before income tax 8,000,000 Interest expense 500.000 Determine the times interest earned ratio. Round to one decimal place.Asset turnover A company reports the following: Sales 1,800,000 Average total assets 1,125,000 Determine the asset turnover ratio. Round to one decimal place.Asset turnover A company reports the following: Sales 4,400,000 Average total assets 2,000,000 Determine the asset turnover ratio. Round to one decimal place.Return on total assets A company reports the following income statement and balance sheet information for the current year: Net income 250,000 Interest expense 100,000 Average total assets 2,500,000 Determine the return on total assets. Round percentage to one decimal place.Return on total assets A company reports the following income statement and balance sheet information for the current year: Net income 410,000 Interest expense 90,000 Average total assets 5,000,000 Determine the return on total assets. Round percentage to one decimal place.Common stockholders profitability analysis A company reports the following: Net income 375,000 Preferred dividends 75,000 Average stockholders equity 2,500,000 Average common stockholders equity 1,875,000 Determine (a) the return on stockholders equity and (b) the return on common stockholders equity. Round percentages to one decimal place.Common stockholders profitability analysis A company reports the following: Net income 1,000,000 Preferred dividends 50,000 Average stockholders equity 6,250,000 Average common stockholders equity 3,800,000 Determine (a) the return on stockholders equity and (b) the return on common stockholders equity. Round percentages to one decimal place.17.11APE 17.11BPE 17.1EX Vertical analysis of income statement The following comparative income statement (in thousands of dollars) for the two recent fiscal years was adapted from the annual report of Speedway Motorsports, Inc., owner and operator of several major motor speedways, such as the Atlanta , Texas, and Las Vegas Motor Speedways. a. Prepare a comparative income statement for these two years in vertical form, stating each item as a percent of revenues. Round to one decimal place. b. Comment on the significant changes.Common-sized income statement Revenue and expense data for the current calendar year for Tannenhill Company and for the electronics industry are as follows. Tannenhills data are expressed in dollars. The electronics industry averages are expressed in percentages. Tannenhill Company Electronics Industry Average Sales 4,000,000 100% Cost of goods sold 2,120,000 60 Gross profit 1,880,000 40% Selling expenses 1,080,000 24% Administrative expenses 640,000 14 Total operating expenses 1,720,000 38% Operating income 160,000 2% Other revenue 120,000 3 280.000 5% Other expense 80,000 2 Income before income tax 200,000 3% Income tax expense 80,000 2 Net income 120,000 1% a. Prepare a common-sized income statement comparing the results of operations for Tannenhill Company with the industry average. Round to the nearest whole percentage. b. As far as the data permit, comment on significant relationships revealed by the comparisons.Vertical analysis of balance sheet Balance sheet data for Novak Company on December 31, the end of two recent fiscal years, follows: Current Year Previous Year Current assets 1,300,000 945,000 Property, plant, and equipment 3,000,000 3,150,000 Intangible assets 700,000 405,000 Current liabilities 1,000,000 720,000 Long-term liabilities 1,500,000 1,575,000 Common stock 500,000 495,000 Retained earnings 2,000,000 1,710,000 Prepare a comparative balance sheet for both years, stating each asset as a percent of total assets and each liability and stockholders equity item as a percent of the total liabilities and stockholders equity. Round to one decimal place.17.5EX 17.6EX 17.7EX 17.8EX Accounts receivable analysis The following data are taken from the financial statements of Krawcheck Inc. Terms of all sales are 2/10, n/55. a. For 2015 and 2016, determine (1) the accounts receivable turnover and (2) the number of days sales in receivables. Round to the nearest dollar and one decimal place. b. What conclusions can be drawn from these data concerning accounts receivable and credit policies?Accounts receivable analysis Xavier Scores Company and Lestrade Stores Inc. are large retail department stores. Both companies offer credit to their customers through their own credit card operations. Information from the financial statements for both companies for two recent years is as follows (in millions): Xavier Lestrade Sales 8,500,000 4,585,000 Credit card receivablesbeginning 820,000 600,000 Credit card receivablesending 880,000 710,000 a. Determine the (1) accounts receivable turnover and (2) the number of days sales in receivables for both companies. Round to one decimal place. b. Compare the two companies with regard to their credit card policies.Inventory analysis The following data were extracted from the income statement of Saleh Inc.: Current Year Previous Year Sales 12,750,000 13,284,000 Beginning inventories 840,000 800,000 Cost of goods sold 6,375,000 7,380,000 Ending inventories 860,000 840,000 a. Determine for each year (1) the inventory turnover and (2) the number of days sales in inventory. Round to the nearest dollar and one decimal place. b. What conclusions can be drawn from these data concerning the inventories?17.12EX Ratio of liabilities to stockholders equity and times interest earned The following data were taken from the financial statements of Hunter Inc. for December 31 of two recent years: Current Year Previous Year Accounts payable 924,000 800,000 Current maturities of serial bonds payable 200,000 200,000 Serial bonds payable. 10% 1,000,000 1,200,000 Common stock 10 par value 250,000 250,000 Paid-in capital in excess of par 1,250,000 1,250,000 Retained earnings 860,000 500,000 The income before income tax was 480,000 and 420,000 for the current and previous years, respectively. a. Determine the ratio of liabilities to stockholders equity at the end of each year. Round to one decimal place. b. Determine the times interest earned ratio for both years. Round to one decimal place. c. What conclusions can be drawn from these data as to the companys ability to meet its currently maturing debts?Ratio of liabilities to stockholders equity and number of times interest charges are earned Hasbro and Mattel, Inc., are the two largest toy companies in North America. Condensed liabilities and stockholders equity from a recent balance sheet are shown for each company as follows (in thousands): The income from operations and interest expense from the income statement for each company were as follows (in thousands): Hasbro Mattel Income from operations (before income tax) 945,045 453,402 Interest expense 117,403 88,835 a. Determine the ratio of liabilities to stockholders equity for both companies. Round to one decimal place. b. Determine the number of times interest charges are earned for both companies. Round to one decimal place. c. Interpret the ratio differences between the two companies.Ratio of liabilities to stockholders equity and ratio of fixed assets to long term liabilities Recent balance sheet information for two companies in the food industry, Mondelez International, Inc. and The Hershey Company, is as follows (in thousands): Mondelez Hershey Net property, plant, and equipment 10,010,000 1,674,071 Current liabilities 14,873,000 1,471,110 Long-term debt 15,574,000 1,530,967 Other long-term liabilities 12,816,000 716,013 Stockholders equity 32,215,000 1,036,749 a. Determine the ratio of liabilities to stockholders equity for both companies. Round to one decimal place. b. Determine the ratio of fixed assets to long-term liabilities for both companies. Round to one decimal place. c. Interpret the ratio differences between the two companies.17.16EX Profitability ratios The following selected data were taken from the financial statements of Robinson Inc. for December 31, 2016, 2015 and 2014: The 2016 net income was 372,000, and the 2015 net income was 492,000. No dividends on common stock were declared between 2014 and 2016. a. Determine the rate earned on total assets, the rate earned on stockholders equity, and the rate earned on common stockholders equity for the years 2015 and 2016. Round to one decimal place. b. What conclusions can be drawn from these data as to the companys profitability?Profitability ratios Ralph Lauren Corporation sells apparel through company-owned retail stores. Recent financial information for Ralph Lauren follows (in thousands): Assume that the apparel industry average return on total assets is 8.0% and the average return on stockholders equity is 10.0% for the year ended April 2, Year 3 a. Determine the return on total assets for Ralph Lauren for fiscal Years 2 and 3 Round percentages to one decimal place. b. Determine the return on stockholders equity for Ralph Lauren for fiscal Years 2 and 3. Round percentages to one decimal place. c. Evaluate the two-year trend for the profitability ratios determined in (a) and (b). d. Evaluate Ralph Laurens profit performance relative to the industry.Six measures of solvency or profitability The following data were taken from the financial statements of Gates Inc. for the current fiscal year. Assuming that long-term investments totaled 3,000,000 throughout the year and that total assets were 7,000,000 at the beginning of the current fiscal year, determine the following: (a) ratio of fixed assets to long-term liabilities, (b) ratio of liabilities to stockholders equity, (c) ratio of sales to assets, (d) rate earned on total assets, (e) rate earned on stockholders equity, and (f) rate earned on common stockholders' equity. Round to one decimal place.Six measures of solvency or profitability The balance sheet for Garcon Inc. at the end of the current fiscal year indicated the following: Bonds payable, 8% (issued in 2006, due in 2026) 5,000,000 Preferred 4 stock, 50 par 2,500,000 Common stock, 1 0 par 5,000,000 Income before income tax was 3,000,000, and income taxes were 1,200,000 for the current year. Cash dividends paid on common stock during the current year totaled 1,200,000. The common stock was selling for 32 per share at the end of the year. Determine each of the following: (a) number of times bond interest charges are earned, (b) number of times preferred dividends are earned, (c) earnings per share on common stock, (d) price-earnings ratio, (e) dividends per share of common stock, and (f) dividend yield. Round to one decimal place, except earnings per share, which should be rounded to two decimal places.17.21EX 17.22EX Earnings per share, discontinued operations The net income reported on the income statement of Cutler Co. was 4,000,000. There were 500,000 shares of 10 par common stock and 100,000 shares of 2 preferred stock outstanding throughout the current year. The income statement included a gain on discontinued operations of 400,000 after applicable income tax. Determine the per-share figures for common stock for (a) income before discontinued operations and (b) net income.17.24EX 17.25EX 17.26EX Horizontal analysis of income statement For 2016, Clapton Company reported a decline in net income. At the end of the year, S. Hand, the president, is presented with the following condensed comparative income statement: Instructions 1. Prepare a comparative income statement with horizontal analysis for the two-year period, using 2015 as the base year. Round to one decimal place. 2. To the extent the data permit, comment on the significant relationships revealed by the horizontal analysis prepared in (1).17.2APR 17.3APR Nineteen measures of solvency and profitability The comparative financial statements of Bettancort Inc. are as follows. The market price of Bettancort Inc. common stock was 71.25 on December 31, 2016. Instructions Determine the following measures for 2016, rounding to one decimal place: 1. Working capital 2. Current ratio 3. Quick ratio 4. Accounts receivable turnover 5. Number of days sales in receivables 6. Inventor) turnover 7. Number of days sales in inventory 8. Ratio of fixed assets to long-term liabilities 9. Ratio of liabilities to stockholders equity 10.Number of times interest charges are earned 11. Number of times preferred dividends are earned 12. Ratio of sales to assets 13. Rate earned on total assets 14. Rate earned on stockholders equity 15. Rate earned on common stockholders equity 16. Earnings per share on common stock 17. Price-earnings ratio 18. Dividends per share of common stock 19. Dividend yield 17.5APR 17.1BPR 17.2BPR Effect of transactions on current position analysis Data pertaining to the current position of Lucroy Industries Inc. follow: Cash 800,000 Marketable securities 550,000 Accounts and notes receivable (net) 850,000 Inventories 700,000 Prepaid expenses 300,000 Accounts payable 1,200,000 Notes payable (short-term) 700,000 Accrued expenses 100,000 Instructions 1. Compute (a) the working capital, (b) the current ratio, and (c) the quick ratio. Round ratios in parts b through j to one decimal place. 2. List the following captions on a sheet of paper: Compute the working capital, the current ratio, and the quick ratio after each of the following transactions and record the results in the appropriate columns. Consider each transaction separately and assume that only that transaction affects the data given. Round to one decimal place. a. Sold marketable securities at no gain or loss, 500,000. b. Paid accounts payable, 287,500. c. Purchased goods on account, 400,000. d. Paid notes payable, 125,000. e. Declared a cash dividend, 325,000. f. Declared a common stock dividend on common stock, 150,000. g. Borrowed cash from bank on a long-term note, 1,000,000. h. Received cash on account, 75,000. i. Issued additional shares of stock for cash, 2,000,000. j. Paid cash for prepaid expenses, 200,000.Nineteen measures of solvency and profitability The comparative financial statements of Stargel Inc. are as follows. The market price of Stargel Inc. common stock was 119.70 on December 31, 2016. Instructions Determine the following measures for 2016, rounding to one decimal place, except per-share amounts, which should be rounded to the nearest penny: 1. Working capital 2. Current ratio 3. Quick ratio 4. Accounts receivable turnover 5. Number of days sales in receivables 6. Inventory turnover 7. Number of days sales in inventory 8.Ratio of fixed assets to long-term liabilities 9. Ratio of liabilities to stockholders equity 10. Number of times interest charges are earned 11. Number of times preferred dividends are earned 12. Ratio of sales to assets 13. Rate earned on total assets 14. Rate earned on stockholders equity 15. Rate earned on common stockholders equity 16. Earnings per share on common stock 17. Price-earnings ratio 18. Dividends per share of common stock 19. Dividend yield Solvency and profitability trend analysis Crosby Company has provided the following comparative information: You have been asked to evaluate the historical performance of the company over the last five years. Selected industry ratios have remained relatively steady at the following levels for the last five years: 2012-2016 Rate earned on total assets 19% Rate earned on stockholders equity 26% Number of times interest charges are earned 3.4 Ratio of liabilities to stockholders equity 1.4 Instructions 1. Prepare four line graphs with the ratio on the vertical axis and the years on the horizontal axis for the following four ratios (rounded to one decimal place): a. Rate earned on total assets b. Rate earned on stockholders equity c. Number of times interest charges are earned d. Ratio of liabilities to stockholders equity Display both the company ratio and the industry benchmark on each graph. That is, each graph should have two lines. 2. Prepare an analysis of the graphs in (1).Nike, Inc., Problem Financial Statement Analysis The financial statements for Nike, Inc., are presented in Appendix C at the end of the text. The following additional information (in thousands) is available: Instructions Accounts receivable at May 31, 2010 3,138 Inventories at May 31, 2010 2,715 Total assets at May 31, 2010 14,998 Stockholders equity at May 31, 2010 9,843 1. Determine the following measures for the fiscal years ended May 31, 2013 (fiscal 2012), and May 31, 2012 (fiscal 2011), rounding to one decimal place. a. Working capital b. Current ratio c. Quick ratio d. Accounts receivable turnover e. Number of days sales in receivables f. Inventory turnover g. Number of days sales in inventory h. Ratio of liabilities to stockholders equity i. Ratio of sales to assets j. Rate earned on total assets, assuming interest expense is 23 million for the year ending May 31, 2013, and 31 million for the year ending May 31, 2012 k. Rate earned on common stockholders equity l. Price-earnings ratio, assuming that the market price was 61.66 per share on May 31, 2013, and 53.10 per share on May 31, 2012 m. Percentage relationship of net income to sales 2. What conclusions can be drawn from these analyses?17.1CP 17.2CP Vertical analysis The condensed income statements through income from operations for Dell Inc. and Apple Inc. for recent fiscal years follow (numbers in millions of dollars): Prepare comparative common-sized statements, rounding percents to one decimal place. Interpret the analyses.17.4CP Comprehensive profitability and solvency analysis Marriott International, Inc., and Hyatt Hotels Corporation are two major owners and managers of lodging and resort properties in the United States. Abstracted income statement information for the two companies is as follows for a recent year: Balance sheet information is as follows: The average liabilities, average stockholders equity, and average total assets were as follows: Marriott (in millions) Hyatt (in millions) Average total liabilities 7,095 2,132 Average total stockholders equity 1,364 5,067 Average total assets 8,458 7,199 1. Determine the following ratios for both companies (round to one decimal place after the whole percent): a. Rate earned on total assets b. Rate earned on stockholders' equity c. Number of times interest charges are earned d. Ratio of liabilities to stockholders' equity 2. Analyze and compare the two companies, using the information in (1).What are the major differences between financial accounting and managerial accounting?a. Differentiate between a department with line responsibility and a department with staff responsibility. b. In an organization that has a Sales Department and a Personnel Department, among others, which of the two departments has (1) line responsibility and (2) staff responsibility?What manufacturing cost term is used to describe the cost of materials that are an integral part of the manufactured end product?Distinguish between prime costs and conversion costs.What is the difference between a product cost and a period cost?Name the three inventory accounts for a manufacturing business and describe what each balance represents at the end of an accounting period.In what order should the three inventories of a manufacturing business be presented on the balance sheet?What three Categories of manufacturing costs are included in the cost of finished goods and the cost of work in process?For a manufacturer, what is the description of the account that is comparable to a merchandising businesss cost of merchandise sold?10DQ Management process Three phases of the management process are controlling, planning, and decision making. Match the following descriptions to the proper phase: Phase of management process Description Controlling a. Monitoring the operating results of implemented plans and comparing the actual results with expected results. Planning b. Inherent in planning, directing, controlling, and improving. Decision making c Long-range courses of action.

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