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Questions and Answers of Accounting

A firm should always purchase inventory and supplies on credit rather than paying cash. Correct?
A reduction in the advertising expense ratio increases return on common equity and share value. Correct?
A firm states that one of its goals is to earn a return on common equity of 17-20 percent. What is wrong with setting a goal in terms of return on common equity?
Why might operating losses increase after-tax borrowing cost?
Some retail analysts use a measure called “inventory yield,” calculated as gross profit-to-inventory. What does this measure tell you?
Return on total assets (ROA) is a common measure of profitability. The historical average is about 7.0 percent. The historical yield on corporate bonds is about 6.6 percent. Why is the ROA so low?
Low profit margins always imply low return on net operating assets. True or false?
The following information is from reformulated financial statements (in millions of dollars):a. (1) Calculate the dividends, net of capital contributions, for 2008.(2) Calculate ROCE for 2008; use
A firm whose shares traded at three times their book value on December 31, 2008, had the accompanying financial statements. Amounts are in millions of dollars. The firm's marginal tax rate is 33
The exercise continues Exercise 9.5 in Chapter 9. The following financial statement were reported for a firm for fiscal year 2009 (in millions of dollars):The firm's income tax rate is 35%. The firm
a. A firm has a return on common equity of 13.4 percent, a net after-tax borrowing cost of 4.5 percent, and a return of 11.2 percent on net operating assets of $405 million. What is the firm's
A firm earns a profit margin of 3.8 percent on sales of $436 million and employs net operating assets of $150 million to do so. It considers adding another product line that will earn a 4.8 percent
Below are summary numbers from reformulated balance sheets for 2007 and 2006 for Kimberly-Clark Corporation, the products company, along with numbers from the reformulated income statement for 2007
Here is a reformulated income statement for the Coca-Cola Company for 2007 (in millions):Sales .................... $ 28,857Cost of sales ................ 10,406Gross margin ...............
In the late 1990s, many grocery supermarkets shifted from regular storewide sales to issuing membership in discount and points programs, much like frequent flyer programs run by airlines.A
Refer to the financial statements for Starbucks, the coffee vendor, in Exercise E9.9 in Chapter 9. Be sure to read the notes under the financial statements.a. Prepare a reformulated income statement
Comparative balance sheets and income statements for fiscal year ended 2005 are given below for the warehouse retailer Home Depot. Amounts are in millions, except per-share data.a. Reformulate the
Financial statements for the Procter & Gamble Co. are presented in Exhibit 9.15 in Chapter 9. If you worked Mini case 9.1, you will have reformulated the statements in preparation for financial
What is a growth firms?
In analysis growth, should the analyst focus on residual earnings, abnormal earnings growth, or both?
What measure tells you that a firm is a no-growth firm?
Why would an analyst wish to distinguish the part of earnings that is sustainable?
Why would an analyst wish to distinguish the part of earnings that is sustainable? Discuss.
What are transitory earnings? Give some examples.
Are unrealized gains and losses on financial assets persistent or transitory income?
Distinguish operating leverage from operating liabilities leverage.
The higher a firm’s contribution margin ratio, the more leverage it gets from increasing sales. Correct?
Would you see s high profit margin of, say, 6 percent for a grocery retailer as sustainable?
What determines growth in equity investment in a firm?
A firm can have a high trailing P/E ratio, yet have an expected cum-dividend earnings growth rate after the forward year that is less than the required rate. Is this so?
For a firm with a normal trailing P/E ratio, expected future residual earnings must be the same as current residual earnings. Correct?
Can a firm have a high P/E ratio yet a low P/B ratio? How would you characterize the growth expectation for this firm?
Firms with high unsustainable earnings should have low (trailing) P/E ratio. Is this correct?
The following numbers were calculated from the financial statements for a firm for 2009 and 2008:Calculate core return of net operating assets (core RNOA) and show how much of its change from 2008
The following numbers were calculated from the financial statements for a firm for 2009 and 2008:Explain how much of the change in ROCE from 2008 to 2009 is due to operating activities and how much
The following numbers were calculated from the financial statements for a firm for 2009 and 2008:Explain to what extent the change in common equity from 2008 to 2009 is due to sales growth, net
A firm reports operating income before tax in its income statement of $73.4 million on sales of $667.3 million. After net interest expense of $20.5 million and taxes of $18.3 million, its net income
Consider the following information:Prepare a succinct analysis that explain the changes in ROCE from 2008 to 2009. The marginal tax rate is 34 percent, and dividends paid on preferred stock cannot be
An analyst summarizes the following information for a firm (dollar amounts in millions);Analyze the growth of average common shareholders' equity in2009.
A student in your study group prepared the following reformulated income statement for the Coca-Cola Company for 2007 (in millions):Sales ................... $28,857Cost of sales ...............
The consolidated statement of earnings for Starbucks Corporation for 2007 is given in Exercise E9.9 in Chapter 9. The firm’s statutory tax rate is a 38.4 percent. Note 4 on “net interest and
Comparative income statements and balance sheets for the warehouse retailer Home Depot are given in Exercise E11.10 in Chapter 11 for fiscal year 2005. Reformulate those statements and explain what
US Airways Group the holding company for US Airways reported the following income statements for 1997 and 1998 (in millions of dollars):a. Reported operating income before interest and taxes
Refer to the 1998 income statement for US Airways Group in Exercise E12.10 above. Of the total $7,674 million in operating expenses, suppose the following are fixed costs (in millions):Personnel
This case continues the financial statement analysis of Procter& Gamble Co. begun in Mini case 9.1 and developed further in Mini case 11.1. This final installment covers issues in dealing with core
By 2005, Microsoft Corporation, the premier software firm of the computer age, had matured into an established firm. Maturity, however, often brings slower growth and many observers claimed that
International Business Machines Corporation (IBM) was once the dominant computer manufacturer in the world and, from 1960 to 1980, the leading growth company. Indeed, in those years IBM became the
Tom Wells claims the formula for the cash payback technique is the same as the formula for the annual rate of return technique. Is Tom correct? What is the formula for the cash payback technique?
Discuss the factors that determine the appropriate discount rate to use when calculating the net present value.
What simplifying assumptions were made in the chapter regarding calculation of net present value?
What are some examples of potential intangible benefits of investment proposals? Why do these intangible benefits complicate the capital budgeting evaluation process? What might happen if intangible
What steps can be taken to incorporate intangible benefits into the capital budget evaluation process?
What advantages does the profitability index provide over direct comparison of net present value when comparing two projects?
What is a post-audit? What are the potential benefits of a post-audit?
Identify the steps required in using the internal rate of return method when the net annual cash flows are equal.
El Cajon Company uses the internal rate of return method. What is the decision rule for this method?
What are the strengths of the annual rate of return approach? What are its weaknesses?
Your classmate, Mike Dawson, is confused about the factors that are included in the annual rate of return technique. What is the formula for this technique?
Sveta Pace is trying to understand the term “cost of capital.” Define the term and indicate its relevance to the decision rule under the internal rate of return technique.
Bella Company is considering purchasing new equipment for $450,000. It is expected that the equipment will produce net annual cash flows of $50,000 over its 10-year useful life. Annual depreciation
Hsung Company accumulates the following data concerning a proposed capital investment: cash cost $215,000, net annual cash flows $40,000, present value factor of cash inflows for 10 years 5.65
Magic Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $136,000 and have an estimated useful life of 5 years. It will be sold for $65,000
Caine Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $200,000 and has an estimated useful life of 8 years with zero salvage value. Management
Beacon Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $400,000, has an expected useful life of 10 years, a salvage value of zero, and is
Quillen Company is performing a post-audit of a project completed one year ago. The initial estimates were that the project would cost $250,000, would have a useful life of 9 years, zero salvage
Horowitz Company is evaluating the purchase of a rebuilt spot-welding machine to be used in the manufacture of a new product. The machine will cost $176,000, has an estimated useful life of 7 years,
Viera Corporation is considering investing in a new facility. The estimated cost of the facility is $2,045,000. It will be used for 12 years, then sold for $716,000. The facility will generate annual
Mecha Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $130,000 and will increase annual expenses by $70,000 including
Wallowa Company is considering a long-term investment project called ZIP. ZIP will require an investment of $120,000. It will have a useful life of 4 years and no salvage value. Annual cash inflows
Wallowa Company is considering a long-term investment project called ZIP. ZIP will require an investment of $120,000. It will have a useful life of 4 years and no salvage value. Annual cash inflows
Wallowa Company is considering a long-term investment project called ZIP. ZIP will require an investment of $120,000. It will have a useful life of 4 years and no salvage value. Annual cash inflows
Wallowa Company is considering a long-term investment project called ZIP. ZIP will require an investment of $120,000. It will have a useful life of 4 years and no salvage value. Annual revenues would
Palo Alto Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company’s current truck (not the least of which is that it runs). The new truck would
Doug's Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,000. Each project will last for 3 years and produce the following net annual cash
Hiland Inc. manufactures snowsuits. Hiland is considering purchasing a new sewing machine at a cost of $2.45 million. Its existing machine was purchased five years ago at a price of $1.8 million; six
BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn€™t equipped to do.
Eisler Corporation is involved in the business of injection molding of plastics. It is considering the purchase of a new computer-aided design and manufacturing machine for $430,000. The company
BSU Inc. wants to purchase a new machine for $29,300, excluding $1,500 of installation costs. The old machine was bought five years ago and had an expected economic life of 10 years without salvage
Ueker Company is considering three capital expenditure projects. Relevant data for the projects are as follows.Annual income is constant over the life of the project. Each project is expected to have
Pierre’s Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $300,000. A new salon will normally generate annual revenues of $70,000,
Brady Service Center just purchased an automobile hoist for $35,000. The hoist has an 8-year life and an estimated salvage value of $3,000. Installation costs and freight charges were $3,300 and
Vilas Company is considering a capital investment of $190,000 in additional productive facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation
BAP Corporation is reviewing an investment proposal. The initial cost and estimates of the book value of the investment at the end of each year, the net cash flows for each year, and the net income
Henkel Company is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows.Depreciation is computed by the
Lon Timur is an accounting major at a midwestern state university located approximately 60 miles from a major city. Many of the students attending the university are from the metropolitan area and
Goltra Clinic is considering investing in new heart-monitoring equipment. It has two options: Option A would have an initial lower cost but would require a significant expenditure for rebuilding
Jane’s Auto Care is considering the purchase of a new tow truck. The garage doesn’t currently have a tow truck, and the $60,000 price tag for a new truck would represent a major expenditure. Jane
Goldbloom Corp. is thinking about opening a soccer camp in southern California. To start the camp, Goldbloom would need to purchase land and build four soccer fields and a sleeping and dining
The Borders and Noble partnership is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows.Depreciation
Ben Paul is an accounting major at a western university located approximately 60 miles from a major city. Many of the students attending the university are from the metropolitan area and visit their
Platteville Eye Clinic is considering investing in new optical-scanning equipment. It has two options: Option A would have an initial lower cost but would require a significant expenditure for
Isaac’s Auto Repair is considering the purchase of a new tow truck. The garage doesn’t currently have a tow truck, and the $65,000 price tag for a new truck would represent a major expenditure
Lewis Corp. is thinking about opening a basketball camp in Texas. In order to start the camp, the company would need to purchase land and build eight basketball courts and a dormitory-type sleeping
A company that manufactures recreational pedal boats has approached Mike Cichanowski to ask if he would be interested in using Current Designs€™ rotomold expertise and equipment to produce
Luang Company is considering the purchase of a new machine. Its invoice price is $122,000, freight charges are estimated to be $3,000, and installation costs are expected to be $5,000. Salvage value
Hawke Skateboards is considering building a new plant. Bob Skerritt, the company€™s marketing manager, is an enthusiastic supporter of the new plant. Lucy Liu, the company€™s
Tecumseh Products Company has its headquarters in Tecumseh, Michigan. It describes itself as “a global multinational corporation producing mechanical and electrical components essential to
Campbell Soup Company is an international provider of soup products. Management is very interested in continuing to grow the company in its core business, while “spinning off” those businesses
Refer back to E12-9 to address the following.InstructionsPrepare a memo to Maria Fierro, your supervisor. Show your calculations from E12-9, (a) and (b).In one or two paragraphs, discuss important
NuComp Company operates in a state where corporate taxes and workers’ compensation insurance rates have recently doubled. NuComp’s president has just assigned you the task of preparing an

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