Profitability Declines and the Statement of
The Bookbarn Inc. is a retail seller of new books in a moderate-sized city. Although initially very successful, The Bookbarn’s sales volume has declined since the opening of two competing bookstores 2 years ago. The accountant for The Bookbarn prepared the following statement of cash flows at the end of the current year:
Your analysis suggests that The Bookbarn’s net income will continue to decline by $8,000 per year to $18,500 as sales continue to fall. Thereafter, you expect sales to stabilize.
Assume that equipment is nearly fully
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Cornerstones of Financial Accounting
- Mattel, Inc., designs, manufactures, and markets toy products worldwide. Mattels toys include Barbie fashion dolls and accessories, Hot Wheels, and Fisher-Price brands. For a recent year, Mattel reported the following net cash flows from operating activities (in thousands): Explain why Mattel reported negative net cash flows from operating activities during the second and third quarters and a large positive cash flow for the fourth quarter, with overall net positive cash flow for the year.arrow_forwardYour consulting firm was recently hired to improve the performance of ABC Inc, which is highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to analyze the firm's cash cycle. Using the following information and a 365-day year, what is the firm’s operating cycle? Average inventory = $75,000 Annual sales = $875,000 Annual cost of goods sold = $525,000 Average accounts receivable = $160,000 Average accounts payable = $25,000arrow_forwardPrepare and Interpret a Statement of Cash Flows; Free Cash Flow Mary Walker, president of Rusco Company, considers $14,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $8,000 in cash was available at the end of this year. Since the company reported a large net income for the year, and also issued both bonds and common stock, the sharp decline in cash is puzzling to Ms. Walker. The following additional information is available for this year. a. The company declared and paid a cash dividend. b. Equipment was sold during the year for $8,000. The equipment originally cost $20,000 and had accumulated depreciation of $10,000. c. Long-term investments that cost $20,000 were sold during the year for $30,000. d. The company did not retire any bonds payable or repurchase any of its common stock. Required: 1. Using the indirect method, compute the net cash provided by operating activities for this year. 2. Using the data from (1) above,…arrow_forward
- Mary Walker, president of Rusco Company, considers $21,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $16,000 in cash was available at the end of this year. Since the company reported a large net income for the year, and also issued both bonds and common stock, the sharp decline in cash is puzzling to Ms. Walker. Rusco CompanyComparative Balance Sheetat July 31 This Year Last Year Assets Current assets: Cash $ 16,000 $ 34,200 Accounts Receivable 221,400 211,300 Inventory 250,900 196,600 Prepaid expenses 7,700 16,200 Total current assets 496,000 458,300 Long-term investments 93,000 125,000 Plant and equipment 862,000 751,000 Less accumulated depreciation 210,500 190,300 Net plant and equipment 651,500 560,700 Total assets $ 1,240,500 $ 1,144,000 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 231,100 $ 175,200 Accrued liabilities 8,100…arrow_forwardBerman & Jaccor Corporation's current sales and partial balance sheet are shown below. This year Sales $ 1,000 Balance Sheet: Assets Cash $ 200 Short-term investments $ 105 Accounts receivable $ 100 Inventories $ 300 Total current assets $ 705 Net fixed assets $ 400 Total assets $ 1,105 Sales are expected to grow by 12% next year. Assuming no change in operations from this year to next year, what are the projected total operating assets? Do not round intermediate calculations. Round your answer to the nearest dollar.arrow_forwardMary Walker, president of Rusco Company, considers $14,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $8,000 in cash was available at the end of this year. Since the company reported a large net income for the year, and also issued both bonds and common stock, the sharp decline in cash is puzzling to Ms. Walker. Mary Walker, president of Rusco Company, considers $14,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $8,000 in cash was available at the end of this year. Since the company reported a large net income for the year, and also issued both bonds and common stock, the sharp decline in cash is puzzling to Ms. Walker. Rusco CompanyComparative Balance Sheetat July 31 This Year Last Year Assets Current assets: Cash $ 8,000 $ 21,000 Accounts receivable 120,000 80,000 Inventory 140,000 90,000 Prepaid expenses 5,000 9,000 Total…arrow_forward
- Mary Walker, president of Rusco Company, considers $14,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $8,000 in cash was available at the end of this year. Since the company reported a large net income for the year, and also issued both bonds and common stock, the sharp decline in cash is puzzling to Ms. Walker. Mary Walker, president of Rusco Company, considers $14,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $8,000 in cash was available at the end of this year. Since the company reported a large net income for the year, and also issued both bonds and common stock, the sharp decline in cash is puzzling to Ms. Walker. Rusco CompanyComparative Balance Sheetat July 31 This Year Last Year Assets Current assets: Cash $ 8,000 $ 21,000 Accounts receivable 120,000 80,000 Inventory 140,000 90,000 Prepaid expenses 5,000 9,000 Total…arrow_forwardA firm’s balance sheets for the last two years are as follows (refer to image): Sales in 20X1 were $250,000. Sales in 20X2 were $250,000. a. Based solely on the current ratio and the quick ratio, has the firm’s liquidity position deteriorated or improved? b. Without doing a calculation, has days sales outstanding (receivables turnover) improved? How do you know? c. Without doing a calculation, has inventory turnover deteriorated? How do you know? d. If the firm earned $5,000 during 2012, what proportion of those earningswere distributed?arrow_forwardStatement of cash flows You have just been hired as a financial analyst for Barrington Industries. Unfortunately, company headquarters (where all of the firm's records are kept) has been destroyed by fire. So, your first job will be to recreate the firm's cash flow statement for the year just ended. The firm had $100,000 in the bank at the end of the prior year, and its working capital accounts except cash remained constant during the year. It earned $5 million in net income during the year but paid $700,000 in dividends to common shareholders. Throughout the year, the firm purchased $5.4 million of machinery that was needed for a new project. You have just spoken to the firm's accountants and learned that annual depreciation expense for the year is $460,000; however, the purchase price for the machinery represents additions to property, plant, and equipment before depreciation. Finally, you have determined that the only financing done by the firm was to issue long-term debt of $1…arrow_forward
- 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 wont look good to our shareholders. Is there anything we can do about this? John: What do you mean? 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. Lucas: No, no. Im 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 dont 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: Ive 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 ideaIll 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?arrow_forwardStrickler Technology is considering changes in its working capital policies to improve its cash flow cycle. Stricklers sales last year were 3,250,000 (all on credit), and its net profit margin was 7%. Its inventory turnover was 6.0 times during the year, and its DSO was 41 days. Its annual cost of goods sold was 1,800,000. The firm had fixed assets totaling 535,000. Stricklers payables deferral period is 45 days. a. Calculate Stricklers cash conversion cycle. b. Assuming Strickler holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. c. Suppose Stricklers managers believe the annual inventory turnover can be raised to 9 times without affecting sale or profit margins. What would Stricklers cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9 for the year?arrow_forwardThe Raattama Corporation had sales of $3.5 million last year, and it earned a 5% return (after taxes) on sales. Recently, the company has fallen behind in its accounts payable. Although its terms of purchase are net 30 days, its accounts payable represents 60 days’ purchases. The company’s treasurer is seeking to increase bank borrowing in order to become current in meeting its trade obligations (that is, to have 30 days’ payables outstanding). The company’s balance sheet is as follows (in thousands of dollars): How much bank financing is needed to eliminate the past-due accounts payable? Assume that the bank will lend the firm the amount calculated in part a. The terms of the loan offered are 8%, simple interest, and the bank uses a 360-day year for the interest calculation. What is the interest charge for 1 month? (Assume there are 30 days in a month.) Now ignore part b and assume that the bank will lend the firm the amount calculated in part a. The terms of the loan are 7.5%, add-on interest, to be repaid in 12 monthly installments. What is the total loan amount? What are the monthly installments? What is the APR of the loan? What is the effective rate of the loan? Would you, as a bank loan officer, make this loan? Why or why not?arrow_forward
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