Business Finance
Need accounting help with Problem Set II

Question Description

Complete the following problem sets in Ch. 2 & 13 of Financial Accounting: use the attached template.  Week 4 Template.xlsx

  • P2-6A
  • P13-2A

You can use these chapters to do the work if needed.



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PROBLEM 2-6A (a) Put the answer in the yellow cell. 2011 Earnings per share. =$60,000/30,000 shares (b) Working capital. =($20,000 + $62,000 + $73,000) – $70,000 (c) Current ratio. = $155,000 / $70,000 (d) Debt to total assets ratio. = $160,000 / $685,000 (e) Free cash flow. $56,000 – $38,000 – $15,000 (f) Fill in your narative answer: PROBLEM 13-2A (a) Earnings per share = =$218,000 / 59,000 60,000* + 58,000**  (1)    2 *$300,000 $5 **$290,000 $5 (b) Return on common stockholders’ equity = =$218,000/(($465,400+$603,400)/2) (c) Return on assets = =$218,000/(($852,800+$1,026,900)/2) (d) Current ratio = =$377,900/$203,500 (e) Receivables turnover = =$1,890,540/(($102,800+$117,800)/2) (f) Average collection period = 365 days ÷ 17.1 = 21.3 days =365 days / 17.1 (g) Inventory turnover = =$1,058,540/(($115,500+$126,000)/2) (h) Days in inventory = =365 days / 8.8 (i) Times interest earned = = 332,000 / $22,000 (j) Asset turnover = =$1,890,540/(($1,026,900+$852,800)/2) (k) Debt to total assets = = 423,500 / $1,026,900 (l) Current cash debt coverage = =$220,000/(($187,400+$203,500)/2) (m) Cash debt coverage = =$220,000/(($387,400+$423,500)/2) (n) Free cash flow = =$220,000 - $136,000-$70,000 Answer 2012 =$70,000/33,000 shares =($28,000 + $70,000 + $90,000) – $75,000 = $188,000 / $75,000 = $155,000 / $760,000 $82,000 – $45,000 – $20,000 Fill in your narative answer: Answer CHAPTER 2: A FURTHER LOOK AT FINANCIAL STATEMENTS © mattjeacock/iStockphoto The Navigator • • • • Scan Learning Objectives Read Feature Story Scan Preview • Read Text and Answer p. 52 Work Using the Decision Toolkit Review Summary of Learning Objectives • Work Comprehensive • Answer Self-Test Questions Complete Assignments Go to WileyPLUS for practice and tutorials • • • • p. 71 Read A Look at IFRS p. 95 LEARNING OBJECTIVES p. 53 p. 62 p. 66 After studying this chapter, you should be able to: • • • • • • • 1 Identify the sections of a classified balance sheet. 2 Identify tools for analyzing financial statements and ratios for computing a company’s profitability. 3 Explain the relationship between a retained earnings statement and a statement of stockholders’ equity. 4 Identify and compute ratios for analyzing a company’s liquidity and solvency using a balance sheet. 5 Use the statement of cash flows to evaluate solvency. 6 Explain the meaning of generally accepted accounting principles. 7 Discuss financial reporting concepts. Feature Story: JUST FOOLING AROUND? Few people could have predicted how dramatically the Internet would change the investment world. One of the most interesting results is how it has changed the way ordinary people invest their savings. More and more people are striking out on their own, making their own investment decisions. Two early pioneers in providing investment information to the masses were Tom and David Gardner, brothers who created an online investor website called The Motley Fool. The name comes from Shakespeare’s As You Like It. The fool in Shakespeare’s plays was the only one who could speak unpleasant truths to kings and queens without being killed. Tom and David view themselves as 21st-century “fools,” revealing the “truths” of Wall Street to the small investor, who they feel has been taken advantage of by Wall Street insiders. The Motley Fool’s online bulletin board enables investors to exchange information and insights about companies. Critics of these bulletin boards contend that they are simply high-tech rumor mills that cause investors to bid up stock prices to unreasonable levels. For example, the stock of PairGain Technologies jumped 32 percent in a single day as a result of a bogus takeover rumor on an investment bulletin board. Some observers are concerned that small investors—ironically, the very people the Gardner brothers are trying to help—will be hurt the most by misinformation and intentional scams. To show how these bulletin boards work, suppose that in a recent year you had $10,000 to invest. You were considering Best Buy Company, the largest seller of electronics equipment in the United States. You scanned the Internet investment bulletin boards and found messages posted by two different investors. Here are excerpts from actual postings during the same year: • TMPVenus: “Where are the prospects for positive movement for this company? Poor margins, poor management, astronomical P/E!” broachman: “I believe that this is a LONG TERM winner, and presently at a good price.” One says sell, and one says buy. Whom should you believe? If you had taken “broachman’s” advice and purchased the stock, the $10,000 you invested would have been worth over $300,000 five years later. Best Buy was one of America’s bestperforming stocks during that period of time. Rather than getting swept away by rumors, investors must sort out the good information from the bad. One thing is certain—as information services such as The Motley Fool increase in number, gathering information will become even easier. Evaluating it will be the harder task. INSIDE CHAPTER 2... • • • • Can a Company Be Too Liquid? (p. 59) When Debt Is Good (p. 60) The Korean Discount (p. 63) What Do These Companies Have in Common? (p. 64) PREVIEW OF CHAPTER 2 If you are thinking of purchasing Best Buy stock, or any stock, how can you decide what the stock is worth? If you manage J. Crew’s credit department, how should you determine whether to extend credit to a new customer? If you are a financial executive of IBM, how do you decide whether your company is generating adequate cash to expand operations without borrowing? Your decision in each of these situations will be influenced by a variety of considerations. One of them should be your careful analysis of a company’s financial statements. The reason: Financial statements offer relevant and reliable information, which will help you in your decision-making. In this chapter, we take a closer look at the balance sheet and introduce some useful ways for evaluating the information provided by the financial statements. We also examine the financial reporting concepts underlying the financial statements. We begin by introducing the classified balance sheet. The Classified Balance Sheet In Chapter 1, you learned that a balance sheet presents a snapshot of a company’s financial position at a point in time. It lists individual asset, liability, and stockholders’ equity items. However, to improve users’ understanding of a company’s financial position, companies often use a classified balance sheet instead. A classified balance sheet groups together similar assets and similar liabilities, using a number of standard classifications and sections. This is useful because items within a group have similar economic characteristics. A classified balance sheet generally contains the standard classifications listed in Illustration 2-1. LEARNING OBJECTIVE 1 Identify the sections of a classified balance sheet. Illustration 2-1: Standard balance sheet classifications Assets Liabilities and Stockholders’ Equity Current assets Current liabilities Long-term investments Long-term liabilities Property, plant, and equipment Stockholders’ equity Intangible assets These groupings help financial statement readers determine such things as (1) whether the company has enough assets to pay its debts as they come due, and (2) the claims of short- and long-term creditors on the company’s total assets. Many of these groupings can be seen in the balance sheet of Franklin Corporation shown in Illustration 2-2. In the sections that follow, we explain each of these groupings. CURRENT ASSETS Illustration 2-2: Classified balance sheet FRANKLIN CORPORATION Balance Sheet October 31, 2014 Assets Current assets Cash $ 6,600 Debt investments 2,000 Accounts receivable 7,000 Notes receivable 1,000 Inventory 3,000 Supplies 2,100 Prepaid insurance 400 Total current assets $22,100 Long-term investments Stock investments 5,200 Investment in real estate 2,000 7,200 Property, plant, and equipment Land 10,000 Equipment $24,000 Less: Accumulated depreciation—equipment 5,000 19,000 29,000 Intangible assets Patents 3,100 Total assets $61,400 Liabilities and Stockholders’ Equity Current liabilities Notes payable $11,000 Accounts payable 2,100 Unearned sales revenue 900 Salaries and wages payable 1,600 Interest payable 450 Total current liabilities $16,050 Long-term liabilities Mortgage payable 10,000 Notes payable 1,300 Total long-term liabilities 11,300 Total liabilities 27,350 Stockholders’ equity Common stock 14,000 Retained earnings 20,050 Total stockholders’ equity 34,050 Total liabilities and stockholders’ equity $61,400 Helpful Hint Recall that the accounting equation is Assets = Liabilities + Stockholders’ Equity. Current assets are assets that a company expects to convert to cash or use up within one year or its operating cycle, whichever is longer. In Illustration 2-2, Franklin Corporation had current assets of $22,100. For most businesses, the cutoff for classification as current assets is one year from the balance sheet date. For example, accounts receivable are current assets because the company willcollect them and convert them to cash within one year. Supplies is a current asset because the company expects to use the supplies in operations within one year. Some companies use a period longer than one year to classify assets and liabilities as current because they have an operating cycle longer than one year. The operating cycle of a company is the average time required to go from cash to cash in producing revenue—to purchase inventory, sell it on account, and then collect cash from customers. For most businesses, this cycle takes less than a year, so they use a one-year cutoff. But for some businesses, such as vineyards or airplane manufacturers, this period may be longer than a year. Except where noted, we will assume that companies use one year to determine whether an asset or liability is current or long-term. Common types of current assets are (1) cash, (2) investments (such as short-term U.S. government securities), (3) receivables (accounts receivable, notes receivable, and interest receivable), (4) inventories, and (5) prepaid expenses (insurance and supplies). Companies list current assets in the order in which they expect to convert them into cash. Follow this rule when doing your homework. Illustration 2-3 presents the current assets of Southwest Airlines Co. in a recent year. Illustration 2-3: Current assets section SOUTHWEST AIRLINES CO. Balance Sheet (partial) (in millions) Current assets Cash and cash equivalents $1,390 SOUTHWEST AIRLINES CO. Balance Sheet (partial) (in millions) Short-term investments 369 Accounts receivable 241 Inventories 181 Prepaid expenses and other current assets 420 Total current assets $2,601 As explained later in the chapter, a company’s current assets are important in assessing its short-term debt-paying ability. LONG-TERM INVESTMENTS Long-term investments are generally: (1) investments in stocks and bonds of other corporations that are held for more than one year, (2) long-term assets such as land or buildings that a company is not currently using in its operating activities, and (3) longterm notes receivable. In Illustration 2-2, Franklin Corporation reported total longterm investments of $7,200 on its balance sheet. Alternative Terminology Long-term investments are often referred to simply as investments. Yahoo! Inc. reported long-term investments on its balance sheet in a recent year as shown inIllustration 2-4. Illustration 2-4: Long-term investments section YAHOO! INC. Balance Sheet (partial) (in thousands) Long-term investments Investments in securities $90,266 PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are assets with relatively long useful lives that are currently used in operating the business. This category includes land, buildings, equipment, delivery vehicles, and furniture. In Illustration 2-2, Franklin Corporation reported property, plant, and equipment of $29,000. Alternative Terminology Property, plant, and equipment is sometimes called fixed assets or plant assets. Depreciation is the allocation of the cost of an asset to a number of years. Companies do this by systematically assigning a portion of an asset’s cost as an expense each year (rather than expensing the full purchase price in the year of purchase). The assets that the company depreciates are reported on the balance sheet at cost less accumulated depreciation. The accumulated depreciationaccount shows the total amount of depreciation that the company has expensed thus far in the asset’s life. In Illustration 2-2, Franklin Corporation reported accumulated depreciation of $5,000. International Note In 2007, China adopted International Financial Reporting Standards (IFRS). This was done in an effort to reduce fraud and increase investor confidence in financial reports. Under these standards, many items, such as property, plant, and equipment, may be reported at current fair values rather than historical cost. Illustration 2-5 presents the property, plant, and equipment of Cooper Tire & Rubber Company in a recent year. Illustration 2-5: Property, plant, and equipment section COOPER TIRE & RUBBER COMPANY Balance Sheet (partial) (in thousands) Property, plant, and equipment Land and land improvements $ 41,553 Buildings 298,706 Machinery and equipment 1,636,091 COOPER TIRE & RUBBER COMPANY Balance Sheet (partial) (in thousands) Molds, cores, and rings 268,158 $2,244,508 Less: Accumulated depreciation 1,252,692 $ 991,816 INTANGIBLE ASSETS Many companies have assets that do not have physical substance and yet often are very valuable. We call these assets intangible assets. One common intangible is goodwill. Others include patents, copyrights, and trademarks or trade names that give the company exclusive right of use for a specified period of time. Franklin Corporation reported intangible assets of $3,100. Helpful Hint Sometimes intangible assets are reported under a broader heading called “Other assets.” Illustration 2-6 shows the intangible assets of media giant Time Warner, Inc. in a recent year. Illustration 2-6: Intangible assets section TIME WARNER, INC. Balance Sheet (partial) (in millions) Intangible assets Goodwill Film library Customer lists Cable television franchises Sports franchises Brands, trademarks, and other intangible assets $40,953 2,690 2,540 38,048 262 8,313 $92,806 ASSETS SECTION OF CLASSIFIED BALANCE SHEET Baxter Hoffman recently received the following information related to Hoffman Corporation’s December 31, 2014, balance sheet. Prepaid insurance $ 2,300 Cash 800 Equipment 10,700 Inventory $3,400 Accumulated depreciation— equipment Accounts receivable 2,700 1,100 Prepare the assets section of Hoffman Corporation’s classified balance sheet. Action Plan • • • Present current assets first. Current assets are cash and other resources that the company expects to convert to cash or use up within one year. Present current assets in the order in which the company expects to convert them into cash. Subtract accumulated depreciation—equipment from equipment to determine net equipment. Solution HOFFMAN CORPORATION Balance Sheet (partial) December 31, 2014 Assets Current assets Cash Accounts receivable Inventory Prepaid insurance Total current assets Property, plant, and equipment Equipment $ 800 1,100 3,400 2,300 $ 10,700 7,600 HOFFMAN CORPORATION Balance Sheet (partial) December 31, 2014 Less: Accumulated depreciation—equipment Total assets Related exercise material: BE2-2, 2,700 8,000 $15,600 2-1, and E2-4. CURRENT LIABILITIES In the liabilities and stockholders’ equity section of the balance sheet, the first grouping is current liabilities. Current liabilities are obligations that the company is to pay within the next year or operating cycle, whichever is longer. Common examples are accounts payable, salaries and wages payable, notes payable, interest payable, and income taxes payable. Also included as current liabilities are current maturities of longterm obligations—payments to be made within the next year on long-term obligations. In Illustration 2-2, Franklin Corporation reported five different types of current liabilities, for a total of $16,050. Illustration 2-7 shows the current liabilities section adapted from the balance sheet of Marcus Corporation in a recent year. Illustration 2-7: Current liabilities section MARCUS CORPORATION Balance Sheet (partial) (in thousands) Current liabilities Notes payable $ 239 Accounts payable 24,242 Current maturities of long-term debt 57,250 MARCUS CORPORATION Balance Sheet (partial) (in thousands) Other current liabilities Income taxes payable Salary and wages payable Total current liabilities 27,477 11,215 6,720 $127,143 LONG-TERM LIABILITIES Long-term liabilities (long-term debt) are obligations that a company expects to pay after one year. Liabilities in this category include bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities. Many companies report long-term debt maturing after one year as a single amount in the balance sheet and show the details of the debt in notes that accompany the financial statements. Others list the various types of long-term liabilities. InIllustration 2-2, Franklin Corporation reported long-term liabilities of $11,300. Illustration 2-8 shows the long-term liabilities that The Procter & Gamble Company reported in its balance sheet in a recent year. Illustration 2-8: Long-term liabilities section THE PROCTER & GAMBLE COMPANY Balance Sheet (partial) (in millions) Long-term liabilities Long-term debt Deferred income taxes Other noncurrent liabilities Total long-term liabilities $23,375 12,015 5,147 $40,537 STOCKHOLDERS’ EQUITY Stockholders’ equity consists of two parts: common stock and retained earnings. Companies record as common stock the investments of assets into the business by the stockholders. They record asretained earnings the income retained for use in the business. These two parts, combined, make upstockholders’ equity on the balance sheet. In Illustration 2-2 (page 49), Franklin reported common stock of $14,000 and retained earnings of $20,050. Alternative Terminology Common stock is sometimes called capital stock. BALANCE SHEET CLASSIFICATIONS The following financial statement items were taken from the financial statements of Callahan Corp. • • • • • • • • • • • • _____ Salaries and wages payable _____ Service revenue _____ Interest payable _____ Goodwill _____ Debt investments (short-term) _____ Mortgage payable (due in 3 years) _____ Investment in real estate _____ Equipment _____ Accumulated depreciation—equipment _____ Depreciation expense _____ Retained earnings _____ Unearned service revenue Match each of the items to its proper balance sheet classification, shown below. If the item would not appear on a balance sheet, use “NA.” • • • • • • • Current assets (CA) Long-term investments (LTI) Property, plant, and equipment (PPE) Intangible assets (IA) Current liabilities (CL) Long-term liabilities (LTL) Stockholders’ equity (SE) Action Plan • • Analyze whether each financial statement item is an asset, liability, or stockholders’ equity item. Determine if asset and liability items are current or long-term. Solution • • • • • CL Salaries and wages payable NA Service revenue CL Interest payable IA Goodwill • CA Debt investments (short-term) LTL Mortgage payable (due in 3 years) LTI Investment in real estate PPE Equipment PPE Accumulated depreciation—equipment NA Depreciati ...
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