1.
Required:
1. Using the information provided prepare a Balance Sheet. Separate the current assets from noncurrent assets and provide a total for each. Also separate the current liabilities from the non-current
liabilities and provide a total for each.
2. Using the Balance Sheet from your answer above calculate;
Balance Sheet
Assets
Cash
8,442
Short-term Investments and
Marketable Securities
Receivables
8,109
4,812
Allowance for Doubtful Accounts
Prepaid Expenses
Inventories
Other Current Assets
Total Current Assets
Long-term Investments
-53
2,781
3,264
2,973
10,448
Property, Plant and Equipment
23,486
Accumulated Depreciation
Trademarks
Other Intangible Assets
Other Non-current Assets
Total Non Current Assets
Total Assets
Liabilities and SHE
Liabilities
Income Taxes Payable
Accounts Payable
-9,010
6,527
20,810
3,585
55,846
Short Term Notes Payable
Other Current Liabilities
Current Liabilities
Long-Term Liabilities
17,874
796
Other non-current Liabilities
Common Stock
10,449
1,760
30328
55846
86174
$471
8,680
27821
14,736
26,945
54,766
Non current Liabilities
Total Liabilities
Shareholders' Equity
Paid-in-Capital in Excess of Par
Value
Retained Earnings
Treasury Stock
Total SHE
Liabilities and SHE
Current Ratio,
Days in Inventory,
Average Collection Period,
Return on Assets Ratio,
Debt to Total Assets and
Return on common stockholders’
equity
11,379
55,038
-35,009
31,408
86,174
1.09
60.89
36.79
10.86%
63.55%
Working
30328/27821
365*3178.5/19053
365*4839.5/48017
9019/83074
54766/86174
28.48% 9019/31664.5
Required:
Using the information provided above:
1. Prepare a multiple-step income statement
2. Calculate the Profit Margin, and Gross profit rate for the company. Be sure to provide the
formula you are using, show your calculations, and discuss your findings/results.
(Points : 36)
Income Statement
Net Sales
Cost of Goods Sold
Gross Profit
Operating, Selling and Administrative
Expenses
Operating Profit
add other Income
Membership Revenues
Earnings before interest and taxes
#REF!
Earnings before taxes
less Taxes
Net Income
Gross profit/Sales
113626/466114
Net Income /Sales
17756/466114
466,114
352,488
113,626
88,873
24,753
3048
27,801
2,064
25,737
7981
17,756
24.38%
3.81%
The gross profit margin is around 24%, while the net profit margin is around 4%. It shows that the
profit margin available to recover operating expenses which is around 24% and after deduction of
operating expense, only 4% of sales are available; it shows that 20% has been used to meet
operating expenses.
3.
Required:
1) Please calculate the percentage increase or decrease in cash for the operating, investing, and
financing sections and explain the major reasons for the increase or decrease for each of these
sections.
2) Please calculate the free cash flow for 2012 and explain the meaning of this ratio.
3. (TCO C) Please review the following real-world Hewlett Packard Statement of Cash flows
and address the 2 questions below:
Cash flow from operating activities
In millions
In millions
For the year ended For the year ended
2012
2011
Net (loss) earnings
$(12,650)
$7,074
Depreciation and amortization
5,095
4,984
Impairment of goodwill and purchased intangible
18,035
885
assets
Stock-based compensation expense
635
685
Provision for doubtful accounts
142
81
Provision for inventory
277
217
Restructuring charges
2,266
645
Deferred taxes on earnings
(711)
166
Excess tax benefit from stock-based competition
(12)
(163)
Other, net
265
(46)
Accounts and financing receivables
1,269
(227)
Inventory
890
(1,252)
Accounts payable
(1,414)
275
Taxes on earnings
(320)
610
Restructuring
(840)
(1,002)
Other assets and liabilities
(2,356)
(293)
Net cash provided by operating activities
10,571
12,639
Cash flows from investing activities:
Investment in property, plant, and equipment
(3,706)
(4,539)
Proceeds from sale of property, plant, and equipment 617
999
Purchases of available-for-sale securities and other (972)
(96)
investments
Maturities and sales of available-for-sale securities 662
68
and other investment
Payments in connection with business acquisitions, (141)
(10,480)
net of cash acquired
Proceeds from business divestiture, net
87
89
Net cash used in investing activities
(3,453)
(13,959)
Cash flow from financing activities:
(Payments) issuance of commercial paper and notes
payable, net
Issuance of debt
Payment of debt
Issuance of common stock under employee stock
plans
Repurchase of common stock
Excess tax benefit from stock-based compensation
Cash dividends paid
Net cash used in financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
(2,775)
(1,270)
5,154
(4,333)
716
11,942
(2,336)
896
(1,619)
12
(1,015)
(3,860)
3,258
8,043
$11,301
(10,117)
163
(844)
(1,566)
(2,886)
10,929
$8,043
Required:
1) Please calculate the percentage increase or decrease in cash for the operating,
investing, and financing sections and explain the major reasons for the increase or
decrease for each of these sections.
Cash flow from operating
activities
Net (loss) earnings
Depreciation and
amortization
Impairment of goodwill
and purchased intangible
assets
In millions
2012
($12,650)
In millions
Difference %
Change
2011
$7,074
5,095
4,984
18,035
885
($19,724)
-278.82%
$111
2.23%
$17,150 1937.85%
Stock-based
compensation expense
635
685
Provision for doubtful
accounts
142
81
Provision for inventory
277
217
2,266
645
-711
166
-12
-163
Restructuring charges
Deferred taxes on
earnings
Excess tax benefit from
stock-based competition
Other, net
Accounts and financing
receivables
Inventory
Accounts payable
Taxes on earnings
Restructuring
265
1,269
890
-1,414
-320
-840
($50)
-7.30%
$61
75.31%
$60
27.65%
$1,621
251.32%
($877)
-528.31%
$151
-92.64%
$311
-676.09%
$1,496
$2,142
-659.03%
-171.09%
($1,689)
-614.18%
($930)
-152.46%
$162
-16.17%
-46
-227
-1,252
275
610
-1,002
Other assets and liabilities
Net cash provided by
operating activities
Investment in property,
plant, and equipment
Proceeds from sale of
property, plant, and
equipment
Purchases of availablefor-sale securities and
other investments
-2,356
10,571
-293
704.10%
($2,068)
-16.36%
$833
-18.35%
($382)
-38.24%
($876)
912.50%
12,639
-3,706
-4,539
617
999
-972
($2,063)
-96
Maturities and sales of
available-for-sale
securities and other
investment
662
68
Payments in connection
with business
acquisitions, net of cash
acquired
-141
-10,480
Proceeds from business
divestiture, net
Net cash used in investing
activities
87
-3,453
$594
873.53%
$10,339
-98.65%
($2)
-2.25%
$10,506
-75.26%
89
-13,959
Cash flow from financing
activities:
$0
#DIV/0!
(Payments) issuance of
commercial paper and
notes payable, net
-2,775
-1,270
Issuance of debt
5,154
11,942
Payment of debt
-4,333
-2,336
716
896
Issuance of common
stock under employee
stock plans
Repurchase of common
stock
Excess tax benefit from
stock-based compensation
Cash dividends paid
-1,619
($1,505)
118.50%
($6,788)
-56.84%
($1,997)
85.49%
($180)
-20.09%
$8,498
-84.00%
($151)
-92.64%
($171)
20.26%
-10,117
12
163
-1,015
-844
Net cash used in
financing activities
Increase (decrease) in
cash and cash equivalents
-3,860
3,258
-1,566
($2,294)
146.49%
$6,144
-212.89%
-2,886
The cash flow from operating activities was decline by around 16% and it was mainly
due to change in current assets and current liabilities, which comprises of account
receivable, inventory and accounts payable. The cash used for investing activities was
declined by around 75% in 2012, due to less purchase of fixed assets and the other
business acquisition was also on lower side in 2012 as compared to 2011. The cash
used for financing activates was around 146% more in 2012 as compared to 2011, due
to more payments of long term debt and dividends payment in 2012 as compared to
2011.
2) Please calculate the free cash flow for 2012 and explain the meaning of this ratio.
Cash flow from operating activities
Less Investment in Property plant and Equipment
Free Cash flow
= 10571
=3706
= 6865
It shows the free cash flow available for investment and payment of dividend after
deducting the necessary investment in property plant and equipment from operating
cash flows.
-
4. Required:
Required:
a. Goforit carries significant electronics inventory in a competitive environment where
prices are actually falling. Which inventory valuation method would you choose—
LIFO, FIFO, or average cost? Assume that unit purchases exceed unit sales.
In this scenario the LIFO method will create more profit as the cost of goods sold will
be charged with lower cost as the prices are falling.
b. Goforit has a large investment in warehouse equipment including conveyor belts,
forklifts, and automated packaging systems. Which depreciation method would you
choose: Straight line (SL) or double declining balance (DDB)?
The straight line method will show the higher income in early years, but not in later
years, but the double declining balance method will show vice versa. If company
wants to show net income more in early years, then the straight line method should be
used to show the depreciation on lower side as compared to double declining balance
method.
(Points : 36)
5. (TCO F) Please review the following real-world ratios for Johnson & Johnson and Pfizer for the
year ended 2012 and address the 2 questions below
Ratio Name
Profit margin
Inventory turnover ratio
Average collection period
Cash debt coverage ratio
Debt to Total assets
Johnson & Johnson
Pfizer
It shows that the profit earned on
sales. It shows the relationship
Net income to sales. The Pfizer
has earned around 25% on its
ales after covering all expenses.
The Pfizer is doing better than
Johnson as it has higher profit
margin.
It shows the efficient usage of
inventory. The Pfizer has used
its inventory 1.7 times to
generate sales. The Johnson is
better than Pfizer as it has higher
inventory turnover ratio.
It shows how many days are
needed to collect form
customers. It is 69 days for
Pfizer to collect from customer.
The Johnson is doing better as it
has collection period of 59 days.
It shows the relationship of cash
to debt. It is 16% of debt for
Pfizer. The Johnson is better has
it has higher Cash to debt
coverage ratio.
It shows the amount of total
assets financed by total
liabilities. For Pfizer it is around
127%, it means that the
company has more liabilities
than total assets. The Johnson is
doing better as it has lower debt
ratio.
Required:
1) Please explain the meaning of each of the Pfizer ratios above.
2) Please state which company performed better for each ratio.
(Points : 36)
QCM
1. (TCO A) An advantage of the corporate form of business is that
_____. (Points : 5)
its ownership is easily transferable via the sale of shares of stock
2. (TCO A) The Dividends account
_____. (Points : 5)
All of the above
3. (TCOs A, B) Below is a partial list of account balances for Denton
Company:
Cash $7,000
Prepaid insurance 700
Accounts receivable 3,500
Accounts payable 2,800
Notes payable 4,200
Common stock 1,400
Dividends 700
Revenues 21,000
Expenses 17,500
What did Denton Company show as total credits? (Points : 5)
$$29,400
4. (TCOs B, E) A small and private company may be able to justify using a cash basis of
accounting if it has _____. (Points : 5)
insignificant receivables and payables
5. (TCO D) Two companies report the same cost of goods available for sale, but each employs a
different inventory costing method. If the price of goods has increased during the period, then the
company using _____. (Points : 5)
FIFO will have the highest ending inventory
6. (TCO A, E) Equipment was purchased for $17,000 on January 1, 2006. Freight charges
amounted to $700 and there was a cost of $2,000 for building a foundation and installing the
equipment. It is estimated that the equipment will have a $3,000 salvage value at the end of its 5year useful life. What is the amount of accumulated depreciation at December 31, 2007, if the
straight-line method of depreciation is used? (Points : 5)
$6,680
7. (TCOs D, G) Lopez Corporation issues 500 ten-year, 8%, $1,000 bonds dated January 1, 2007,
at 96. The journal entry to record the issuance will show a _____. (Points : 5)
debit to Cash for $480,000
8. (TCO C) Accounts receivable arising from sales to customers amounted to $80,000 and
$70,000 at the beginning and end of the year, respectively. Income reported on the income
statement for the year was $240,000. Exclusive of the effect of other adjustments, the cash flows
from operating activities to be reported on the statement of cash flows is _____. (Points : 5)
$250,000
9. (TCO F) If you are comparing the 2010 income statement numbers with the income statement
numbers from 2009 and 2008, you are conducting a _____.(Points : 5)
horizontal analysis
10. (TCO F) Vertical analysis is also known as
_____. (Points : 5)
common-size analysis
11. (TCO F) Which one of the following is not a characteristic generally evaluated in ratio
analysis? (Points : 5)
Marketability of the product
12. (TCO F) A common measure of profitability is the
_____. (Points : 5)
return on common stockholder's equity ratio
13. (TCO F) Long-term creditors are usually most interested in evaluating
_____. (Points : 5)
solvency
14. (TCO G) To calculate the market value of a bond, we need to
_____. (Points : 5)
find out the present value of all of the future cash payments promised by the bond