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financial reporting and analysis

Questions and Answers of Financial Reporting and Analysis

Following your retirement as senior vice president of finance for a large company, you joined the board of Cayman Grand Cruises, Inc. You serve on the compensation committee and help set the bonuses
Alliant Energy just received regulatory approval for its 2008 electricity rate. The company has been authorized to charge customers \($0.10\) per kilowatt-hour (kwh), a rate lower than other
Here's how Level 3 Communication’s “moving target” stock option plan works. Suppose options are granted on January 1, 2000, when the company’s stock is selling for \($50\) a share. The
Sunny Day Stores operates convenience stores throughout much of the United States. The industry is highly competitive, with low profit margins. The company's competition includes national, regional,
Margaret Magee has served both as an outside director to Maxcor Manufacturing since 2000 and as a member of the company’s compensation committee since 2004. Margaret has been reviewing Maxcor’s
Whole Foods Market is one of many companies today that use economic value added (EVA)as the performance metric for determining managerial compensation. Here's what Whole Foods Market has to say about
Regulated utilities such as Duke Energy are authorized to earn a specific rate of return on their capital investments. Energy regulators set a rate that the utility can charge its customers for the
For the month of December 2008, Ranger Corporation's records show the following information:Required:Determine the gross sales for the month of December 2008. Cash received on accounts receivable
At the close of its first year of operations on December 31, 2008, Walker Company had accounts receivable of \($250,000\), which were net of the related allowance for doubtful accounts. During 2008,
Delta Corporation wrote off a \($100\) uncollectible account receivable against the \($1,200\) balance in its allowance account.Required:For the following amounts or ratios, determine the
The following information is available for Parker Company:During 2008, Parker estimated that its bad debt expense should be 1% of all credit sales.As a result of a review and aging of accounts
Lake Company sold some machinery to View Company on January 1, 2008 for which the cash selling price was \($758,200\). View entered into an installment sales contract with Lake at a 10%interest rate.
On January 1, 2008, Carpet Company loaned \($100,000\) to its supplier, Loom Corporation, which was evidenced by a note, payable in five years. Interest at 5% is payable annually with the first
On December 31, 2008, Vale Company had an unadjusted credit balance of $1,000 in its Allowance for uncollectible accounts. An analysis of Vale's trade accounts receivable at that date revealed the
The following information relates to Jay Company's accounts receivable for 2008:Required:What amount should Jay report for accounts receivable before allowances for sales returns and uncollectible
Mare Company’s December 31, 2008 balance sheet reported the following current assets:An analysis of the accounts disclosed that accounts receivable consisted of the following:Required:What are the
Blue, Inc. sells playground equipment to schools and municipalities. It mails invoices at the end of each month for all goods shipped during that month; credit terms are net 30 days. Sales and
On December 31, 2008, Fenton Company sold equipment to Denver, Inc., accepting a $275,000 noninterest-bearing note receivable in full payment on December 31, 2011. Denver, Inc., normally pays 12% for
Slifer, Inc. sells \($125,000\) of its accounts receivable to M&T Finance with recourse. M&T charges a 3% fee and withholds 10% of the face amount of the receivables to cover possible un- collectible
Smithfield Farms purchased a combine from John Deere for \($175,000\) on January 2, 2008. Smithfield paid \($25,000\) in cash and signed an installment note calling for five annual pay- ments of
Central Valley Construction (CVC) purchased \($80,000\) of sheet metal fabricating equipment from Buffalo Supply on January 1, 2008. CVC paid \($15,000\) cash and signed a five-year, 10% note for the
1. Describe the role of accounting numbers in corporate valuation.2. What does sustainable earnings mean? What types of earnings are not sustainable?3. Briefly describe what the process of valuation
Three components of earnings: permanent, transitory, and valuation-irrelevant.Required:1. Provide a one-sentence explanation for each component.2. Provide some examples of each component.
The price/earnings (P/E) ratios in October 2007 for two groups of companies wereRequired:1. What factors might explain the difference in the P/E ratios of the firms in Group A?2. What factors might
The quarterly cash flows from operations for two software companies areRequired:1. Explain why Firm B has more credit risk than Firm A.2. Suppose that Firm B’s cash flow was $200 higher each
Randall Manufacturing has requested a $2 million, four-year term loan from Farmers State Bank. It will use the money to expand its warehouse and to upgrade its assembly line. Randall supplied the
As discussed in the chapter, abnormal earnings (AE) arewhere NOPAT is the firm’s net operating profit after taxes, r is the cost of equity capital, and BVt_1 _, is the book value of equity at time
As discussed in the chapter, abnormal earnings (AE) areRequired:1. Calculate each firm’s AE each year from 2004 to 2008.2. Which firm was better managed over the 2004-2008 period? Why?3. Which firm
A firm’s P/E ratio can be written using equation (6.9) as:where r is the cost of equity capital (discount rate).Required:Briefly discuss how a firm’s P/E ratio is related to (1) the present value
In each of the following situations, assume a zero-growth rate for earnings and dividends(NPVGO is zero), that all earnings are paid out as dividends, and that the earnings-based valuation model in
Assume that General Motors (GM) announces on September 30, 2008 that it expects its EPS to be $4.50 for the year ending December 31, 2008. At the time of the announcement, financial analysts are
Figure 6.6 in this chapter illustrates the behavior of stock returns over the period before a quarterly earnings announcement (from trading days —60 to —1); at the time of an earnings
Exhibit 6.8 describes the key financial ratios that Standard & Poor's analysts use to assess credit risk and assign credit ratings to industrial companies.The same financial ratios for three
Exhibit 6.8 describes the key financial ratios that Standard & Poor's analysts use to assess credit risk and assign credit ratings to industrial companies. Those same financial ratios for a
Consider the following information:Required:1. Use a risk-adjusted cost of capital of 15% to calculate each firm’s implied share price and earnings multiples. Why are the implict share prices and
Colonel Electric Company is one of the largest and most diversified industrial corporations in the world. From the time of its incorporation in 1892, the company has engaged in developing,
Companies that want to "manage" their reported earnings can do so through real transactions that alter operating cash flows or through accounting gimmicks that change only net income accruals (the
Allison Manufacturing and BS} Manufacturing both produce after-market accessories for sports utility vehicles. Both companies are about to launch strategic initiatives that will increase sales and
In August 2007, analysts were expecting Whole Foods Market's sales to be $6,450 million in 2007 and $7,500 million in 2008. Net income was expected to be $147 million and $151 million in 2007 and
In October 2003, analysts were expecting sales at Krispy Kreme Doughnuts, Inc. to be $657 million in 2003 and $819 million in 2004. Net income was expected to be $50.7 million in 2003 and $65.9
In August 2003, Krispy Kreme’s common stock was trading at $44 per share. Several analysts and investors believed at the time that its shares were worth considerably less. They were right |because
Dell Computer Corporation designs, manufactures, and markets a wide range of computer systems, including desktops, notebooks, and network servers; it also markets software, peripherals, and service
The following excerpt is from an article appearing in The Wall Street Journal.LOW-BALLING: HOW SOME COMPANIES SEND STOCKS ALOFT What makes a stock a high flyer? Consistently beating the
As described in the chapter, the abnormal earnings approach for estimating common share value iswhere P is the total value of all outstanding shares, BV is the (beginning) book value of
The following excerpt is from an article that appeared in The Wall Street Journal.Nike Inc. warned that shifts in order patterns and other factorswould drag fiscal fourth-quarter earnings below Wall
Microsoft develops, manufactures, licenses, sells, and supports a wide range of software products, including operating systems for personal computers (PCs) and servers; server applications for
What are affirmative debt covenants? What are negative covenants? Provide two examples of each.
The top five executives at Marvel Manufacturing are paid annual bonuses based on predetermined earnings goals. These bonuses can be as much as 500% of salary. As a member of the company’s
The executive who became the most visible symbol of profitdriven medical care stepped down yesterday as the top officer of the Columbia/HCA Healthcare Corporation amid a criminal investigation of
SIGN OF TIMES: GE CHIEF IMMELTT O GET STOCK—NOT OPTIONS For General Electric Co. chief Jeffrey Immelt, stock-option grants—those wealth generators of the 1990s—will be a thing of the past.In
1. The company’s bonus plan for top executives follows. One way Krispy Kreme executives can achieve their earnings growth target is to open new stores as fast as possible. Explain why this might
The following table presents ROA calculations for three companies in the retail grocery industry using earnings (EBI) and balance sheet data for each company. These companies compete on price,
Electronic Arts develops, markets, publishes, and distributes interactive software games. An abridged “lease commitments” footnote from the company’s 2002 annual report reads:In 2001, we
The following table reports the operating cycle, cash conversion cycle, and current ratio for three retailers in the apparel business. The GAP built its brand name on basic, casual clothing styles
AK Steel is a fully integrated producer of steel. It operates seven manufacturing and finishing plants in Indiana, Kentucky, Ohio, and Pennsylvania. These plants produce cold-rolled and hot-rolled
The following table breaks down ROCE for Best Buy, a retailer of consumer electronics.Required:How did Best Buy’s profitability change over the three years? Best Buy 2001 2002 2003 ROA 0.10 0.10
Georgia-Pacific and Weyerhaeuser are forest products companies. Georgia-Pacific manufactures and distributes building products, consumer products (Brawny, Coronet, Dixie, and Quilted Northern
Danaher Corporation has two business segments. The process/environmental controls group produces monitoring, sensing, controlling, and testing products. The company's tools and components segment
Lennox International makes air conditioning, heating, and fireplace systems for residential and commercial uses, as well as commercial refrigeration equipment. American Standard Companies is a
The following table shows six profitability measures derived from the financial statements of three real companies, labeled A, B, and C in the table. (They are not listed in the table in any
Daley, Inc. is consistently profitable. Its normal financial statement relationships are as follows:Required: (SSIES Determine whether each transaction or event that follows increased, decreased, or
The December 31, 2008 balance sheet of Ratio, Inc. follows. These are the only accounts in Ratio’ balance sheet. Amounts indicated by a question mark (?) can be calculated from the additional
Following are the comparative statements of cash flows for Toys "A" Us for 2002, 2001, and 2000. The company reported sales (in millions) of $11,305, $11,019, and $11,332, respectively, in those
Maytag Corporation manufactures and distributes a broad line of home appliances including gas and electric ranges, dishwashers, refrigerators, freezers, laundry equipment, and vacuum cleaning
Margaret O'Flaherty, a portfolio manager for MCF Investments, is considering investing in Alpine Chemical 7% bonds, which mature in 10 years. She asks you to analyze the company to Analyzing ratios
A cash flow statement and partial balance sheet for Woods Company and supplemental information follow. The omitted items are numbered from (1) through (16) and can be calculated from the other
Use the following information and your knowledge of financial ratios and balance sheet relationships to fill in the missing items on the balance sheet of Clapton Corporation. Round all amounts to the
Kroger operates retail food and drug stores, multidepartment stores, jewelry stores, and convenience stores throughout the United States. These stores are operated under banners such as Kroger,
Crocs designs, develops, and manufactures consumer products from specialty resins. The company's primary product line is Crocs-branded footwear for men, women, and children. It sells its products
It's late Tuesday evening, and you've just received a phone call from Dennis Whiting, your boss at GE Capital. Dennis wants to know your reaction to the Argenti loan request before tomor- row's loan
Alpha Manufacturing, Inc. issued audited financial statements on March 10, 2009, for its year ended December 31, 2008. The following events occurred after December 31, 2008, but before the financial
John Rigas founded Adelphia Communications Corporation with a $300 license in 1952, took the company public in 1986, and built it into the sixth largest cable television operator by acquiring other
The balance sheet and income statement for Debbie Dress Shops are presented along with some additional information about the accounts. You are to answer the questions that follow concerning cash
Following is Drop Zone Corporation's balance sheet at the end of 2007 and its cash flow statement for 2008. Drop Zone manufactures equipment for sky divers.Additional Information:a. During 2008, 500
The following information was taken from Kellogg Company’s Year 2 statement of cash flows.Kellogg is the world’s largest maker of ready-to-eat cereals. Its cereal products account for about 38%
Motley Company’s merchandise inventory and other related accounts for 2008 follow:Required:Assuming that the merchandise inventory buildup was relatively constant during the year, how many times
Selected data of Islander Company follow:Required:1. What is the accounts receivable turnover for 2008?2. What is the inventory turnover for 2008? As of December 31 Balance Sheet Data Accounts
On January 1, 2008, River Company’s beginning inventory was \($400,000\). During 2008, the company purchased \($1,900,000\) of additional inventory, and on December 31, 2008 its ending inventory
Utica Company’s net accounts receivable was \($250,000\) at December 31, 2007 and \($300,000\) at December 31, 2008. Net cash sales for 2008 were \($100,000\). The accounts receivable turnover for
Todd Corporation wrote off $100,000 of obsolete inventory at December 31, 2008.Required:What effect did this write-off have on the company’s 2008 current and quick ratios?
The following data were taken from the financial records of Glum Corporation for 2008:Required:How many times was bond interest earned in 2008? Sales $3,600,000 Bond interest expense 120,000 Income
In a comparison of 2008 to 2007 performance, Neir Company’s inventory turnover increased substantially although sales and inventory amounts were essentially unchanged.Required:Which of the
Selected information taken from the accounting records of Vigor Company follows:Required:1. What was Vigor’s gross margin for 2008?2. Suppose that there are 360 business days in the year. What were
Typical balance sheet classifications appear follow:Required:Use the preceding letters to indicate the proper classification for each of the following December 31, 2008, balance sheet items. Place
The following balance sheet for Northumberland Farm Machinery and Supply, Inc. was prepared by an inexperienced accountant and contains several errors.Additional Information:1. Inventory is valued at
A number of balance sheet accounts for Harvey’s Heavy Metals, Inc. follow.. Raw materials inventory . Available-for-sale securities . 5,000 shares of XYZ common stock . Property taxes payable .
Bunny's Fashions, Inc. used the following headings on the company’s December 31, 2008 balance sheet.a. Current assetsb. Long-term investmentsc. Property, plant, and equipmentd. Intangible assetse.
During 2008, Kew Company, a service organization, had \($200,000\) in cash sales and \($3,000,000\) in credit sales. The accounts receivable balances were \($400,000\) and \($485,000\) at December
The following information is available from Sand Corporation’s accounting records for the year ended December 31, 2008:Required:Compute cash flow provided by operations for 2008. Cash received from
Fresh Company is preparing its cash budget for the month of May. The following information is available concerning its accounts receivable:Required:What are the estimated cash receipts from accounts
The following information is available for Alex Corporation's first year of operation:All merchandise items were marked to sell at 30% above cost.Required:What should be the ending balance in
Serven Corporation has estimated its accrual-basis revenue and expenses for June 2008 and would like your help in estimating cash disbursements. Selected data from these estimated amounts are as
The following information was taken from the 2008 financial statement of Planet Corporation:No accounts receivable were written off or recovered during the year.Required:Determine the cash collected
Lance Corporation's statement of cash flows for the year ended September 30, 2008, was prepared using the indirect method, and it included the following items:Lance reported revenues from customers
The following information was taken from the 2008 financial statements of Eiger Corporation, a maker of equipment for mountain and rock climbers:Required:1. Calculate Eiger’s cash flow from
The following information was taken from the 2008 financial statements of Zurich Corporation, a maker of fine Swiss watches:Required:1. Calculate Zurich’s cash flow from operating activities for
The following information was taken from Abbott Laboratory’s financial statements. Abbott makes a variety of health care products and uses the indirect method to determine cash flows from
Bambis House Wares, Inc. produced the unadjusted trial balance shown below at December 31, 2008.Required:Prepare a balance sheet at December 31, 2008 for Bambi’s House Wares, Inc. The company’s
Shawn Mikeska, Inc. prepared the following balance sheet at December 31, 2007.The following occurred during 2008.1. Exchanged \($25,000\) in cash and a \($35,000\) note payable for land valued at
A December 31, 2008, post-closing trial balance for Short Erin Company follows.1. Cash includes \($12,000\) in U.S. treasury bills purchased on December 21, 2008 that mature in January 2009. The

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