I am looking for "Progress Test 3 and 4" for ACCT 652 @ Pepperdine University...

Attached are "Progress Test 1 and 2" for ACCT 652 @ Pepperdine University to help reference what I am looking for...

Thank you in Advance!

\fACCT 652 Progress Test 2 Student name Problem 1 Problem 2 Problem 3 Problem 4 Problem 5 PROBLEM # 1: Statement of Cash Flow - (30 points) a. Fey Inc. Statement of Cash Flows (operating section) For the Year Ended December 31, 2014 Cash received from customers 1 Cash paid for merchandise purchased $1,855,000 2 Cash paid for selling and administrative expense Cash paid for income taxes (627,400) 3 (568,000) 4 (92,780) Net cash from operating activities $566,820 1 $1,890,000 - ($85,000 - $50,000) 2 $610,400 - (31,000 - $24,000) + ($189,000 - $165,000) 3 $574,000 - ($32,000 - $26,000) 4 $134,780 - ($114,000 - $72,000) b. Fey Inc. Statement of Cash Flows (Operating section) For the Year Ended December 31, 2014 Net income Depreciation Change in accounts receivable Change in inventory $517,820 53,000 (35,000) 7,000 Change in accounts payable (24,000) Change in accrued expenses 6,000 Change in taxes payable Net cash from operating activities Dr. Andreas Simon, ACCT 652 42,000 $566,820 2 PROBLEM #2: Interpreting the Statement of Cash Flow (40 Points) 1. What information is conveyed by the statement of cash flows? How does the statement convey that information? The statement of cash flows explains how the company's cash balance changed during the period (for example, during the fiscal year). The statement has three sections - operating, investing, and financing. The operating section details the net cash generated (or used) by operations. This provides information about how much cash came from (or was used by) the main operating activities of the company. The investing section reports cash used to purchase additional operating assets such as equipment and buildings. This section also includes any cash the company received from the disposals of operating assets. Any cash used or generated from investing in marketable securities or the stock of other companies, including cash to acquire subsidiaries, is also reported in the investing section. The last section, the financing section, reports funds for debt (cash inflows from new debt and cash outflow to repay debt) and stock (cash inflows from selling additional stock and cash outflows from repurchasing or retiring stock) as well as cash paid for dividends. 2. Does the composition of Verizons' cash flow present a \"healthy\" picture for 2010? Explain using the following matrix. Assume Verizon is a mature firm. Use this table for Part 2) What is your expectation (positive/ negative/ uncertain) of the cash flow item? Why do you expect it to be positive/ negative/ uncertain? Operating Cash Flow Positive and growing (major source of cash) Investing Cash Flow Negative due to investments in growth (capital expenditures and acquisitions). What is Verizon's actual performance? Does it differ from your expectation? Why? Please interpret each section. The company generated positive operating cash flows in the past year. However, the bulk of the cash came from adding back depreciation This does not bode well for cash flows in the future especially considering that new investments in PPE are just slightly higher than the depreciation of old ones. Its capital expenditures are significant as the company continues to upgrade its infrastructure to implement new technology to remain competitive with other telecom and cable companies. In general, we should expect capital expenditures (CAPEX) to exceed depreciation expense. This indicates that the company is growing its infrastructure as well as replacing the portion that is wearing out. Verizon's Dr. Andreas Simon, ACCT 652 3 CAPEX is only depreciation. slightly higher than Verizon also sold some of its PPE. \"Proceeds from Disposition\" it is a small amount, but could raise a red flag if cash is generated through the sale of investments. Financing Cash Flow Negative because firm is repaying debt, paying dividends and/or repurchasing shares Verizon's high debt load places severe demands on its operating cash flow. Cash that should be used to develop its infrastructure must be allocated to the payment of debt. This is particularly problematic for Verizon as it is facing stiff competition from rival Comcast and must make substantial capital investments to remain competitive. High capital outlays would, ordinarily, not be a problem (SEE CFI) were it not for the company's significant existing debt load. Verizon's debt repayment for 2010 was over $8 billion for long-term debt and an additional $1 billion for short-term debt. In addition, the company paid interest expense that is recorded in its income statement. Although the company is financially strong, balancing its debt level with the cash flow needs for capital expenditures to support its operating activities and dividends to support its stock price is a difficult challenge facing the company Dr. Andreas Simon, ACCT 652 4 PROBLEM # 3: Accounting Concepts and Articulation of Financial Statements (15 points, 3 points each) Match the following principles of financial accounting to their definitions: a. Financial statements are linked within and across time 1) Revenue recognition principle b. Revenue and expenses are recognized when a cash transaction is completed 2) Articulation of financial statements c. Revenue is recognized when earned 3) Cash basis accounting d. Recognizes revenue when earned and expenses when incurred, even if no cash is received or paid 4) Accrual accounting e. In order for revenue to be recognized on the income statement, the following applied 5) Earned & realized Answer: a. b. c. d. e. 2) 3) 1) 4) 5) Dr. Andreas Simon, ACCT 652 5 PROBLEM # 4: Revenue Recognition (28 points, 3.5 points each cell) Point of revenue Risks RealMoney: record revenue when cash is received The recognition of revenue is dependent upon Real Money providing updates. Thus, the company should recognize revenue ratably over the period of time that customers can access its Website, not when the cash is received .i.e. services have rendered Boeing: Record revenue using percentage-ofcompletion method (i.e. during production) Plane may never be finished, or substantial updates have to be made (kook at what Boing is going through right with their 777) that could hurt revenues. i.e. delivery has occurred concern http://online.wsj.com/article/SB100008723963904440 83304578014280710469660.html Wells Fargo: Interest is earned by the passage of time. If cash is not received, Wells Fargo accrues income on its loans and establishes an account receivable on its balance sheet. (i.e cash collection) Customers may default on their loan. Hence, interest charged may be too low to justify revenue. i.e. collectability issue Harley-Davidson: Retail revenue recorded when customer takes delivery of the motorcycle. Sales that are financed will yield interest revenue over the life of the note. This is similar to how banks earn revenue (i.e. point of sale) Harley will also set up a reserve for anticipated warranty costs and recognize the expected warranty cost expense when it recognizes the sales revenue. These costs may be understated. i.e. services (repairs) have been rendered Even though cash is received (credit cards are essentially cash), revenue should not be recognized until the product is shipped. Until that time, the cash received is recognized as an asset on the balance sheet and a liability (deferred revenue) is recorded to reflect an obligation to deliver product. One revenue risk is that J. Jill could record the cash receipts as revenue, before the product is delivered, to boost current sales and profit. This risk is small however in that most shipments follow cash receipt by only a few days. Dr. Andreas Simon, ACCT 652 6 PROBLEM #5: Revenue recognition and Ethics: Biovail Inc. (15 points) Answer to 1) Answer to 2) There is a great book by Baruch Lev, Accounting Professor at NYU, \"Winning Investors Over\" and he says the best tactic is to warn investors of the impending shortfall as soon as practicable, share with them the corrective actions planned, report the financials honestly, and follow with detailed and credible progress reports. http://www.amazon.com/Winning-Investors-Over-SurprisingEarnings/dp/142211502X Dr. Andreas Simon, ACCT 652 7 \fACCT 652 Progress Test 2 Student name Problem 1 Problem 2 Problem 3 Problem 4 Problem 5 PROBLEM # 1: Statement of Cash Flow - (30 points) a. Fey Inc. Statement of Cash Flows (operating section) For the Year Ended December 31, 2014 Cash received from customers 1 Cash paid for merchandise purchased $1,855,000 2 Cash paid for selling and administrative expense Cash paid for income taxes (627,400) 3 (568,000) 4 (92,780) Net cash from operating activities $566,820 1 $1,890,000 - ($85,000 - $50,000) 2 $610,400 - (31,000 - $24,000) + ($189,000 - $165,000) 3 $574,000 - ($32,000 - $26,000) 4 $134,780 - ($114,000 - $72,000) b. Fey Inc. Statement of Cash Flows (Operating section) For the Year Ended December 31, 2014 Net income Depreciation Change in accounts receivable Change in inventory $517,820 53,000 (35,000) 7,000 Change in accounts payable (24,000) Change in accrued expenses 6,000 Change in taxes payable Net cash from operating activities Dr. Andreas Simon, ACCT 652 42,000 $566,820 2 PROBLEM #2: Interpreting the Statement of Cash Flow (40 Points) 1. What information is conveyed by the statement of cash flows? How does the statement convey that information? The statement of cash flows explains how the company's cash balance changed during the period (for example, during the fiscal year). The statement has three sections - operating, investing, and financing. The operating section details the net cash generated (or used) by operations. This provides information about how much cash came from (or was used by) the main operating activities of the company. The investing section reports cash used to purchase additional operating assets such as equipment and buildings. This section also includes any cash the company received from the disposals of operating assets. Any cash used or generated from investing in marketable securities or the stock of other companies, including cash to acquire subsidiaries, is also reported in the investing section. The last section, the financing section, reports funds for debt (cash inflows from new debt and cash outflow to repay debt) and stock (cash inflows from selling additional stock and cash outflows from repurchasing or retiring stock) as well as cash paid for dividends. 2. Does the composition of Verizons' cash flow present a \"healthy\" picture for 2010? Explain using the following matrix. Assume Verizon is a mature firm. Use this table for Part 2) What is your expectation (positive/ negative/ uncertain) of the cash flow item? Why do you expect it to be positive/ negative/ uncertain? Operating Cash Flow Positive and growing (major source of cash) Investing Cash Flow Negative due to investments in growth (capital expenditures and acquisitions). What is Verizon's actual performance? Does it differ from your expectation? Why? Please interpret each section. The company generated positive operating cash flows in the past year. However, the bulk of the cash came from adding back depreciation This does not bode well for cash flows in the future especially considering that new investments in PPE are just slightly higher than the depreciation of old ones. Its capital expenditures are significant as the company continues to upgrade its infrastructure to implement new technology to remain competitive with other telecom and cable companies. In general, we should expect capital expenditures (CAPEX) to exceed depreciation expense. This indicates that the company is growing its infrastructure as well as replacing the portion that is wearing out. Verizon's Dr. Andreas Simon, ACCT 652 3 CAPEX is only depreciation. slightly higher than Verizon also sold some of its PPE. \"Proceeds from Disposition\" it is a small amount, but could raise a red flag if cash is generated through the sale of investments. Financing Cash Flow Negative because firm is repaying debt, paying dividends and/or repurchasing shares Verizon's high debt load places severe demands on its operating cash flow. Cash that should be used to develop its infrastructure must be allocated to the payment of debt. This is particularly problematic for Verizon as it is facing stiff competition from rival Comcast and must make substantial capital investments to remain competitive. High capital outlays would, ordinarily, not be a problem (SEE CFI) were it not for the company's significant existing debt load. Verizon's debt repayment for 2010 was over $8 billion for long-term debt and an additional $1 billion for short-term debt. In addition, the company paid interest expense that is recorded in its income statement. Although the company is financially strong, balancing its debt level with the cash flow needs for capital expenditures to support its operating activities and dividends to support its stock price is a difficult challenge facing the company Dr. Andreas Simon, ACCT 652 4 PROBLEM # 3: Accounting Concepts and Articulation of Financial Statements (15 points, 3 points each) Match the following principles of financial accounting to their definitions: a. Financial statements are linked within and across time 1) Revenue recognition principle b. Revenue and expenses are recognized when a cash transaction is completed 2) Articulation of financial statements c. Revenue is recognized when earned 3) Cash basis accounting d. Recognizes revenue when earned and expenses when incurred, even if no cash is received or paid 4) Accrual accounting e. In order for revenue to be recognized on the income statement, the following applied 5) Earned & realized Answer: a. b. c. d. e. 2) 3) 1) 4) 5) Dr. Andreas Simon, ACCT 652 5 PROBLEM # 4: Revenue Recognition (28 points, 3.5 points each cell) Point of revenue Risks RealMoney: record revenue when cash is received The recognition of revenue is dependent upon Real Money providing updates. Thus, the company should recognize revenue ratably over the period of time that customers can access its Website, not when the cash is received .i.e. services have rendered Boeing: Record revenue using percentage-ofcompletion method (i.e. during production) Plane may never be finished, or substantial updates have to be made (kook at what Boing is going through right with their 777) that could hurt revenues. i.e. delivery has occurred concern http://online.wsj.com/article/SB100008723963904440 83304578014280710469660.html Wells Fargo: Interest is earned by the passage of time. If cash is not received, Wells Fargo accrues income on its loans and establishes an account receivable on its balance sheet. (i.e cash collection) Customers may default on their loan. Hence, interest charged may be too low to justify revenue. i.e. collectability issue Harley-Davidson: Retail revenue recorded when customer takes delivery of the motorcycle. Sales that are financed will yield interest revenue over the life of the note. This is similar to how banks earn revenue (i.e. point of sale) Harley will also set up a reserve for anticipated warranty costs and recognize the expected warranty cost expense when it recognizes the sales revenue. These costs may be understated. i.e. services (repairs) have been rendered Even though cash is received (credit cards are essentially cash), revenue should not be recognized until the product is shipped. Until that time, the cash received is recognized as an asset on the balance sheet and a liability (deferred revenue) is recorded to reflect an obligation to deliver product. One revenue risk is that J. Jill could record the cash receipts as revenue, before the product is delivered, to boost current sales and profit. This risk is small however in that most shipments follow cash receipt by only a few days. Dr. Andreas Simon, ACCT 652 6 PROBLEM #5: Revenue recognition and Ethics: Biovail Inc. (15 points) Answer to 1) Answer to 2) There is a great book by Baruch Lev, Accounting Professor at NYU, \"Winning Investors Over\" and he says the best tactic is to warn investors of the impending shortfall as soon as practicable, share with them the corrective actions planned, report the financials honestly, and follow with detailed and credible progress reports. http://www.amazon.com/Winning-Investors-Over-SurprisingEarnings/dp/142211502X Dr. Andreas Simon, ACCT 652 7 \fACCT 652 Progress Test 2 Student name Problem 1 Problem 2 Problem 3 Problem 4 Problem 5 PROBLEM # 1: Statement of Cash Flow - (30 points) a. Fey Inc. Statement of Cash Flows (operating section) For the Year Ended December 31, 2014 Cash received from customers 1 Cash paid for merchandise purchased $1,855,000 2 Cash paid for selling and administrative expense Cash paid for income taxes (627,400) 3 (568,000) 4 (92,780) Net cash from operating activities $566,820 1 $1,890,000 - ($85,000 - $50,000) 2 $610,400 - (31,000 - $24,000) + ($189,000 - $165,000) 3 $574,000 - ($32,000 - $26,000) 4 $134,780 - ($114,000 - $72,000) b. Fey Inc. Statement of Cash Flows (Operating section) For the Year Ended December 31, 2014 Net income Depreciation Change in accounts receivable Change in inventory $517,820 53,000 (35,000) 7,000 Change in accounts payable (24,000) Change in accrued expenses 6,000 Change in taxes payable Net cash from operating activities Dr. Andreas Simon, ACCT 652 42,000 $566,820 2 PROBLEM #2: Interpreting the Statement of Cash Flow (40 Points) 1. What information is conveyed by the statement of cash flows? How does the statement convey that information? The statement of cash flows explains how the company's cash balance changed during the period (for example, during the fiscal year). The statement has three sections - operating, investing, and financing. The operating section details the net cash generated (or used) by operations. This provides information about how much cash came from (or was used by) the main operating activities of the company. The investing section reports cash used to purchase additional operating assets such as equipment and buildings. This section also includes any cash the company received from the disposals of operating assets. Any cash used or generated from investing in marketable securities or the stock of other companies, including cash to acquire subsidiaries, is also reported in the investing section. The last section, the financing section, reports funds for debt (cash inflows from new debt and cash outflow to repay debt) and stock (cash inflows from selling additional stock and cash outflows from repurchasing or retiring stock) as well as cash paid for dividends. 2. Does the composition of Verizons' cash flow present a \"healthy\" picture for 2010? Explain using the following matrix. Assume Verizon is a mature firm. Use this table for Part 2) What is your expectation (positive/ negative/ uncertain) of the cash flow item? Why do you expect it to be positive/ negative/ uncertain? Operating Cash Flow Positive and growing (major source of cash) Investing Cash Flow Negative due to investments in growth (capital expenditures and acquisitions). What is Verizon's actual performance? Does it differ from your expectation? Why? Please interpret each section. The company generated positive operating cash flows in the past year. However, the bulk of the cash came from adding back depreciation This does not bode well for cash flows in the future especially considering that new investments in PPE are just slightly higher than the depreciation of old ones. Its capital expenditures are significant as the company continues to upgrade its infrastructure to implement new technology to remain competitive with other telecom and cable companies. In general, we should expect capital expenditures (CAPEX) to exceed depreciation expense. This indicates that the company is growing its infrastructure as well as replacing the portion that is wearing out. Verizon's Dr. Andreas Simon, ACCT 652 3 CAPEX is only depreciation. slightly higher than Verizon also sold some of its PPE. \"Proceeds from Disposition\" it is a small amount, but could raise a red flag if cash is generated through the sale of investments. Financing Cash Flow Negative because firm is repaying debt, paying dividends and/or repurchasing shares Verizon's high debt load places severe demands on its operating cash flow. Cash that should be used to develop its infrastructure must be allocated to the payment of debt. This is particularly problematic for Verizon as it is facing stiff competition from rival Comcast and must make substantial capital investments to remain competitive. High capital outlays would, ordinarily, not be a problem (SEE CFI) were it not for the company's significant existing debt load. Verizon's debt repayment for 2010 was over $8 billion for long-term debt and an additional $1 billion for short-term debt. In addition, the company paid interest expense that is recorded in its income statement. Although the company is financially strong, balancing its debt level with the cash flow needs for capital expenditures to support its operating activities and dividends to support its stock price is a difficult challenge facing the company Dr. Andreas Simon, ACCT 652 4 PROBLEM # 3: Accounting Concepts and Articulation of Financial Statements (15 points, 3 points each) Match the following principles of financial accounting to their definitions: a. Financial statements are linked within and across time 1) Revenue recognition principle b. Revenue and expenses are recognized when a cash transaction is completed 2) Articulation of financial statements c. Revenue is recognized when earned 3) Cash basis accounting d. Recognizes revenue when earned and expenses when incurred, even if no cash is received or paid 4) Accrual accounting e. In order for revenue to be recognized on the income statement, the following applied 5) Earned & realized Answer: a. b. c. d. e. 2) 3) 1) 4) 5) Dr. Andreas Simon, ACCT 652 5 PROBLEM # 4: Revenue Recognition (28 points, 3.5 points each cell) Point of revenue Risks RealMoney: record revenue when cash is received The recognition of revenue is dependent upon Real Money providing updates. Thus, the company should recognize revenue ratably over the period of time that customers can access its Website, not when the cash is received .i.e. services have rendered Boeing: Record revenue using percentage-ofcompletion method (i.e. during production) Plane may never be finished, or substantial updates have to be made (kook at what Boing is going through right with their 777) that could hurt revenues. i.e. delivery has occurred concern http://online.wsj.com/article/SB100008723963904440 83304578014280710469660.html Wells Fargo: Interest is earned by the passage of time. If cash is not received, Wells Fargo accrues income on its loans and establishes an account receivable on its balance sheet. (i.e cash collection) Customers may default on their loan. Hence, interest charged may be too low to justify revenue. i.e. collectability issue Harley-Davidson: Retail revenue recorded when customer takes delivery of the motorcycle. Sales that are financed will yield interest revenue over the life of the note. This is similar to how banks earn revenue (i.e. point of sale) Harley will also set up a reserve for anticipated warranty costs and recognize the expected warranty cost expense when it recognizes the sales revenue. These costs may be understated. i.e. services (repairs) have been rendered Even though cash is received (credit cards are essentially cash), revenue should not be recognized until the product is shipped. Until that time, the cash received is recognized as an asset on the balance sheet and a liability (deferred revenue) is recorded to reflect an obligation to deliver product. One revenue risk is that J. Jill could record the cash receipts as revenue, before the product is delivered, to boost current sales and profit. This risk is small however in that most shipments follow cash receipt by only a few days. Dr. Andreas Simon, ACCT 652 6 PROBLEM #5: Revenue recognition and Ethics: Biovail Inc. (15 points) Answer to 1) Answer to 2) There is a great book by Baruch Lev, Accounting Professor at NYU, \"Winning Investors Over\" and he says the best tactic is to warn investors of the impending shortfall as soon as practicable, share with them the corrective actions planned, report the financials honestly, and follow with detailed and credible progress reports. http://www.amazon.com/Winning-Investors-Over-SurprisingEarnings/dp/142211502X Dr. Andreas Simon, ACCT 652 7 ACCT 652 OL Progress Test 3 Student name Problem 1 35 Problem 2 Part A 20 Part B 20 Problem 3 20 Problem 4 30 TOTAL 125 PROBLEM # 1: Accounts Receivable Turnover and Average Collection Period (35 points) Part A: Multiple Choice Questions 1) The 2013 financial statements of Leggett & Platt, Inc. include the following information in a footnote. What are the company's gross accounts and other receivables at the end of 2013? (in millions) 2013 2012 Allowance for doubtful accounts $15.2 $19.2 $467.4 $446.2 Total accounts and other receivables, net A) $467.4 million B) $471.4 million C) $452 million D) $482.6 million E) None of the above 2) The 2013 income statements of Leggett & Platt, Inc. reports net sales of $3,746.0 million. The balance sheet reports accounts receivable, gross of $482.6 million at December 31, 2013 and $465.4 million at December 31, 2012. The average collection period in 2013 was: A) B) C) D) E) 46 days 10 days 47 days 8 days None of the above 3) The 2013 annual report of Oracle Corporation included the following information relating to their allowance for doubtful accounts: Balance in allowance at the beginning of the year $323 million, accounts written off during the year of $145 million, balance in allowance at the end of the year $296 million. What did Oracle Corporation report as bad debt expense for the year? A) B) C) D) E) $27 million $178 million $118 million $151 million None of the above Dr. Andreas Simon, ACCT 652 OL 4) Cocoa Beach Surf Shop receives information that requires the company to increase its expectations of uncollectible accounts receivable. Which of the following does not occur on the company's financial statements? A) B) C) D) E) Bad debt expense is increased Accounts receivables (gross) is reduced Net income is reduced The allowance account is increased None of the above 5) The 2013 financial statements of BNSF Railway Company report total revenues of $22,014 million, accounts receivable of $1,298 million for 2013 and $1,168 million for 2012. The company's accounts receivable turnover for the year is: A) B) C) D) E) 17.0 days 8.9 times 18.8 days 17.9 times None of the above Part 2: True or False Please put in the empty cells whether the statement is True or False? Accounts receivables (net) reported in the current asset section of a company's balance sheet represents the total amount owed by customers within the next year. Overestimating the allowance for uncollectible accounts receivable can shift income from the current period into one or more future periods. The financial statement effects for uncollectible accounts occur when the company writes off the account because that is when all the uncertainty is resolved. In order to report accounts receivable, net, companies estimate the amount they do not expect to collect from their credit customers. Dr. Andreas Simon, ACCT 652 OL PROBLEM #2: Inventory Flow (40 Points) Part A: Cost of Goods Sold Using FIFO and LIFO Methods (20 Points) Fischer, Inc. had the following inventory in fiscal 2013. Compute the company's cost of goods sold for fiscal 2013 assuming the company used a) FIFO and b) LIFO methods of accounting for inventory: PLEASE SHOW YOUR WORKINGS IN EXCEL Beginning Inventory, January 1, 2013: 130 units @ $10.00 Purchase 200 units @ $12.00 Purchase 50 units @ $9.00 Purchase 110 units @ $10.50 Ending Inventory, December 31, 2013: 120 units Part B: Change of inventory method: (20 points) Please put in the empty cells whether the statement is True or False? LIFO inventory costing yields more accurate reporting of the inventory balance on the balance sheet. Companies using LIFO are required to disclose the amount at which inventory would have been reported had it used FIFO. Similarly, companies using FIFO are required to disclose what their inventory would have been if the company had used LIFO. In general, in a period of falling prices, LIFO produces higher gross profits than FIFO. Increasing inventory turnover rate will improve profitability. Dr. Andreas Simon, ACCT 652 OL PROBLEM# 3: Depreciation(20 points) Part A: Depreciation Expense Calculations (20 Points) The Rialto Theatre purchased a new projector costing $74,000 on January 1, 2012. Because of changing technologies, the projector is estimated to last five years after which it will be obsolete and have a salvage value of $2,000 as a collectors' item. Compute the depreciation expense for ALL YEARS using: a. The straight-line method b. Double-declining-balance method Please show your workings in Excel. Dr. Andreas Simon, ACCT 652 OL PROBLEM# 4: Computing and estimating useful life (30 points) Please show your workings in Excel. Following are selected disclosures from Cabela's (an outdoor adventure superstore): PROPERTY AND EQUIPMENT (in thousands) Depreciable Life in Years Land and improvements 2013 2012 Up to 20 $216,826 $185,916 Buildings and improvements 7 to 40 780,116 640,666 Furniture, fixtures and equipment 3 to 15 643,394 551,904 Up to 30 15,611 13,255 1,655,947 1,391,741 (550,101) (473,847) 1,105,846 917,894 181,699 103,762 $1,287,545 $1,021,656 Assets held under capital lease Property and equipment Less accumulated depreciation and amortization Construction in progress Required: a. Compute the PPE turnover for 2013 (Total revenue in 2013 is $3,205,632 thousand). Does the level of its PPE turnover suggest that Cabela's is capital intensive? (Hint: The median PPE turnover for all publicly traded companies is approximately 1.3.) b. Do you believe that Cabela's balance sheet reflects all of the company's operating assets? c. Cabela's reported depreciation expense of $93,407 thousand in 2013. How much of this related to Land and improvements? How much of this expense related to Construction in progress? Explain. d. Assuming that Cabela's uses straight-line depreciation, estimate the useful life of its depreciable PPE assets. e. By what percentage are Cabela's assets \"used up\" at year-end 2013? What implication does the assets-used-up ratio have for forecasting Cabela's cash flows? Dr. Andreas Simon, ACCT 652 OL \fACCT 652 Progress Test 2 Student name Problem 1 Problem 2 Problem 3 Problem 4 Problem 5 PROBLEM # 1: Statement of Cash Flow - (30 points) a. Fey Inc. Statement of Cash Flows (operating section) For the Year Ended December 31, 2014 Cash received from customers 1 Cash paid for merchandise purchased $1,855,000 2 Cash paid for selling and administrative expense Cash paid for income taxes (627,400) 3 (568,000) 4 (92,780) Net cash from operating activities $566,820 1 $1,890,000 - ($85,000 - $50,000) 2 $610,400 - (31,000 - $24,000) + ($189,000 - $165,000) 3 $574,000 - ($32,000 - $26,000) 4 $134,780 - ($114,000 - $72,000) b. Fey Inc. Statement of Cash Flows (Operating section) For the Year Ended December 31, 2014 Net income Depreciation Change in accounts receivable Change in inventory $517,820 53,000 (35,000) 7,000 Change in accounts payable (24,000) Change in accrued expenses 6,000 Change in taxes payable Net cash from operating activities Dr. Andreas Simon, ACCT 652 42,000 $566,820 2 PROBLEM #2: Interpreting the Statement of Cash Flow (40 Points) 1. What information is conveyed by the statement of cash flows? How does the statement convey that information? The statement of cash flows explains how the company's cash balance changed during the period (for example, during the fiscal year). The statement has three sections - operating, investing, and financing. The operating section details the net cash generated (or used) by operations. This provides information about how much cash came from (or was used by) the main operating activities of the company. The investing section reports cash used to purchase additional operating assets such as equipment and buildings. This section also includes any cash the company received from the disposals of operating assets. Any cash used or generated from investing in marketable securities or the stock of other companies, including cash to acquire subsidiaries, is also reported in the investing section. The last section, the financing section, reports funds for debt (cash inflows from new debt and cash outflow to repay debt) and stock (cash inflows from selling additional stock and cash outflows from repurchasing or retiring stock) as well as cash paid for dividends. 2. Does the composition of Verizons' cash flow present a \"healthy\" picture for 2010? Explain using the following matrix. Assume Verizon is a mature firm. Use this table for Part 2) What is your expectation (positive/ negative/ uncertain) of the cash flow item? Why do you expect it to be positive/ negative/ uncertain? Operating Cash Flow Positive and growing (major source of cash) Investing Cash Flow Negative due to investments in growth (capital expenditures and acquisitions). What is Verizon's actual performance? Does it differ from your expectation? Why? Please interpret each section. The company generated positive operating cash flows in the past year. However, the bulk of the cash came from adding back depreciation This does not bode well for cash flows in the future especially considering that new investments in PPE are just slightly higher than the depreciation of old ones. Its capital expenditures are significant as the company continues to upgrade its infrastructure to implement new technology to remain competitive with other telecom and cable companies. In general, we should expect capital expenditures (CAPEX) to exceed depreciation expense. This indicates that the company is growing its infrastructure as well as replacing the portion that is wearing out. Verizon's Dr. Andreas Simon, ACCT 652 3 CAPEX is only depreciation. slightly higher than Verizon also sold some of its PPE. \"Proceeds from Disposition\" it is a small amount, but could raise a red flag if cash is generated through the sale of investments. Financing Cash Flow Negative because firm is repaying debt, paying dividends and/or repurchasing shares Verizon's high debt load places severe demands on its operating cash flow. Cash that should be used to develop its infrastructure must be allocated to the payment of debt. This is particularly problematic for Verizon as it is facing stiff competition from rival Comcast and must make substantial capital investments to remain competitive. High capital outlays would, ordinarily, not be a problem (SEE CFI) were it not for the company's significant existing debt load. Verizon's debt repayment for 2010 was over $8 billion for long-term debt and an additional $1 billion for short-term debt. In addition, the company paid interest expense that is recorded in its income statement. Although the company is financially strong, balancing its debt level with the cash flow needs for capital expenditures to support its operating activities and dividends to support its stock price is a difficult challenge facing the company Dr. Andreas Simon, ACCT 652 4 PROBLEM # 3: Accounting Concepts and Articulation of Financial Statements (15 points, 3 points each) Match the following principles of financial accounting to their definitions: a. Financial statements are linked within and across time 1) Revenue recognition principle b. Revenue and expenses are recognized when a cash transaction is completed 2) Articulation of financial statements c. Revenue is recognized when earned 3) Cash basis accounting d. Recognizes revenue when earned and expenses when incurred, even if no cash is received or paid 4) Accrual accounting e. In order for revenue to be recognized on the income statement, the following applied 5) Earned & realized Answer: a. b. c. d. e. 2) 3) 1) 4) 5) Dr. Andreas Simon, ACCT 652 5 PROBLEM # 4: Revenue Recognition (28 points, 3.5 points each cell) Point of revenue Risks RealMoney: record revenue when cash is received The recognition of revenue is dependent upon Real Money providing updates. Thus, the company should recognize revenue ratably over the period of time that customers can access its Website, not when the cash is received .i.e. services have rendered Boeing: Record revenue using percentage-ofcompletion method (i.e. during production) Plane may never be finished, or substantial updates have to be made (kook at what Boing is going through right with their 777) that could hurt revenues. i.e. delivery has occurred concern http://online.wsj.com/article/SB100008723963904440 83304578014280710469660.html Wells Fargo: Interest is earned by the passage of time. If cash is not received, Wells Fargo accrues income on its loans and establishes an account receivable on its balance sheet. (i.e cash collection) Customers may default on their loan. Hence, interest charged may be too low to justify revenue. i.e. collectability issue Harley-Davidson: Retail revenue recorded when customer takes delivery of the motorcycle. Sales that are financed will yield interest revenue over the life of the note. This is similar to how banks earn revenue (i.e. point of sale) Harley will also set up a reserve for anticipated warranty costs and recognize the expected warranty cost expense when it recognizes the sales revenue. These costs may be understated. i.e. services (repairs) have been rendered Even though cash is received (credit cards are essentially cash), revenue should not be recognized until the product is shipped. Until that time, the cash received is recognized as an asset on the balance sheet and a liability (deferred revenue) is recorded to reflect an obligation to deliver product. One revenue risk is that J. Jill could record the cash receipts as revenue, before the product is delivered, to boost current sales and profit. This risk is small however in that most shipments follow cash receipt by only a few days. Dr. Andreas Simon, ACCT 652 6 PROBLEM #5: Revenue recognition and Ethics: Biovail Inc. (15 points) Answer to 1) Answer to 2) There is a great book by Baruch Lev, Accounting Professor at NYU, \"Winning Investors Over\" and he says the best tactic is to warn investors of the impending shortfall as soon as practicable, share with them the corrective actions planned, report the financials honestly, and follow with detailed and credible progress reports. http://www.amazon.com/Winning-Investors-Over-SurprisingEarnings/dp/142211502X Dr. Andreas Simon, ACCT 652 7