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WEEK 4 (HOME WORK) (2) Eddy Corporation began operations on April 1 by issuing 58,170 shares of $4 par value common stock for cash at $15 per share. Journalize the issuance. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit April 1 (3) Gibbs Corporation purchased 1,620 shares of its $12 par value common stock for $73,872 on August 1. It will hold these in the treasury until resold. Journalize the treasury stock transaction. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit Aug. 1 (5) Kosco CD Company has had 4 years of record earnings. Due to this success, the market price of its 402,800 shares of $4 par value common stock has increased from $12 per share to $53. During this period, paid-in capital remained the same at $4,833,600. Retained earnings increased from $3,625,200 to $24,168,000. CEO Al Dryer is considering either (1) a 14% stock dividend or (2) a 2-for-1 stock split. He asks you to show the before-and-after effects of each option on retained earnings and total stockholders' equity. Kosco CD Company Original Balance Paid-in capital $ After Dividend After Split $ $ $ $ Retained earnings Total stockholder's equity $ Shares outstanding (6) Foyle Corporation has issued 108,500 shares of $5 par value common stock. It was authorized 497,700 shares. The paid-in capital in excess of par value on the common stock is $264,000. The corporation has reacquired 7,500 shares at a cost of $54,810 and is currently holding those shares. The corporation also has 2,800 shares issued and outstanding of 8%, $102 par value preferred stock. It authorized 10,000 shares. The paid-in capital in excess of par value on the preferred stock is $23,600. Retained earnings is $376,900. Prepare the stockholders' equity section of the balance sheet. FOYLE CORPORATION Balance Sheet (Partial) (7) Marriott Corporation split into two companies: Host Marriott Corporation and Marriott International. Host Marriott retained ownership of the corporation's vast hotel and other properties, while Marriott International, rather than owning hotels, managed them. The purpose of this split was to free Marriott International from the \"baggage\" associated with Host Marriott, thus allowing it to be more aggressive in its pursuit of growth. The following information (in millions) is provided for each corporation for their first full year operating as independent companies. Host Marriot Sales revenue Marriot International $1,501 $8,415 Net income (25) 200 Total assets 3,822 3,207 Total liabilities 3,112 2,440 710 767 Common stockholders' equity Calculate the debt to assets ratio for each company. (Round answers to 1 decimal places, e.g. 15.2%.) Debt to assets ratio Host Marriot % Marriot International % Calculate the return on assets and return on common stockholders' equity for each company. (Round answers to 1 decimal places, e.g. 15.2%. Enter negative answers using either a negative sign preceding the number e.g. -15.2% or parentheses e.g. (15.2)%.) Return on assets Return on common stockholders' equity Host Marriot % % Marriot International % % (8) Purpose: Use the stockholders' equity section of an annual report and identify the major components. Address: www.annualreports.com, or go to www.wiley.com/college/kimmel Steps 1. Select a particular company. 2. Search by company name. 3. Follow instructions below. Answer the following questions. What is the company's name? What classes of capital stock has the company issued? For each class of stock: (1) How many shares are authorized, issued, and/or outstanding? (2) What is the par value? What are the company's retained earnings? Has the company acquired treasury stock? How many shares? (9) During a recent period, the fast-food chain Wendy's International purchased many treasury shares. This caused the number of shares outstanding to fall from 124 million to 105 million. The following information was drawn from the company's financial statements (in millions). Information for the year after purchase of Treasury Stock Information for the year before purchase of treasury stock Net income $193.6 $ 123.4 Total assets 2,076.0 1,837.9 Average total assets 2,016.9 1,889.8 Total common stockholders' equity 1,029.8 1,068.1 Average common stockholders' equity 1,078.0 1,126.2 Total liabilities 1,046.3 769.9 939.0 763.7 Average total liabilities Interest expense 30.2 19.8 Income taxes 113.7 84.3 Cash provided by operations 305.2 233.8 26.8 31.0 0 0 Cash dividends paid on common stock Preferred stock dividends Average number of common shares outstanding 109.7 119.9 Use the information provided to answer the following questions. (10) Ken Endicott, your uncle, is an inventor who has decided to incorporate. Uncle Ken knows that you are an accounting major at U.N.O. In a recent letter to you, he ends with the question, \"I'm filling out a state incorporation application. Can you tell me the difference among the following terms: (1) authorized stock, (2) issued stock, (3) outstanding stock, and (4) preferred stock?\" In a brief note, differentiate for Uncle Ken the four different stock terms. Write the leter to be friendly, yet professional. (11) The R&D division of Jobe Corp. has just developed a chemical for sterilizing the vicious Brazilian \"killer bees\" which are invading Mexico and the southern United States. The president of Jobe is anxious to get the chemical on the market because Jobe profits need a boostand his job is in jeopardy because of decreasing sales and profits. Jobe has an opportunity to sell this chemical in Central American countries, where the laws are much more relaxed than in the United States. The director of Jobe's R&D division strongly recommends further research in the laboratory to test the side effects of this chemical on other insects, birds, animals, plants, and even humans. He cautions the president, \"We could be sued from all sides if the chemical has tragic side effects that we didn't even test for in the lab.\" The president answers, \"We can't wait an additional year for your lab tests. We can avoid losses from such lawsuits by establishing a separate wholly owned corporation to shield Jobe Corp. from such lawsuits. We can't lose any more than our investment in the new corporation, and we'll invest just the patent covering this chemical. We'll reap the benefits if the chemical works and is safe, and avoid the losses from lawsuits if it's a disaster.\" The following week, Jobe creates a new wholly owned corporation called Windsor Inc., sells the chemical patent to it for $10, and watches the spraying begin. Who are the stakeholders in this situation? Are the president's motives and actions ethical? Can Jobe shield itself against losses of Windsor Inc.? (13) Morray Corporation had the following transactions. Classify each of these transactions by type of cash flow activity (operating, investing, or financing). 1. Issued $160,000 of bonds payable. 2. Paid utilities expense. 3. Issued 500 shares of preferred stock for $45,000. 4. Sold land and a building for $250,000. 5. Loaned $30,000 to Dead End Corporation, receiving Dead End's 1-year, 12% note. (14) RL Photography reported net income of $111,800 for 2014. Included in the income statement were depreciation expense of $7,043, patent amortization expense of $4,472, and a gain on disposal of plant assets of $4,025. RL's comparative balance sheets show the following balances. Accounts receivable Accounts payable 12/31/14 12/31/13 $23,478 $30,186 10,286 6,708 Calculate net cash provided by operating activities for RL Photography. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).) RL Photography Statement of Cash Flows For the Year 2014 Adjustments to reconcile net income to (15) Edelman Corporation issued the following statement of cash flows for 2014. EDELMAN CORPORATION Statement of Cash FlowsIndirect Method For the Year Ended December 31, 2014 Cash flows from operating activities Net income $72,511 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 11,184 Decrease in accounts receivable 11,676 Increase in inventory (6,145) Decrease in accounts payable (2,704) Loss on disposal of plant assets 4,056 ---------- Net cash provided by operating activities 18,067 ---------90,578 Cash flows from investing activities Sale of investments 3,810 Purchase of equipment (29,742) ------------ Net cash used by investing activities (25,932) Cash flows from financing activities Issuance of stock 24,580 Payment on long-term note payable (12,290) Payment for dividends (15,977) ------------- Net cash used by financing activities (3,687) ---------- Net increase in cash 60,959 Cash at beginning of year 15,977 ----------- Cash at end of year $76,936 (a) Compute free cash flow for Edelman Corporation. Free cash flow for Edelman Corporation $ (16) The incredible growth of Amazon.com has put fear into the hearts of traditional retailers. Its stock price has soared to amazing levels. However, in 2001 many investors were very concerned about whether Amazon would survive since it had never earned a profit and it was burning through cash. Some investors sold, but others decided to hold on to their investment in the company's stock. The following information is taken from the 2001 and 2004 financial statements of Amazon. ($ in millions) 2001 Current assets $1,207.9 $2,539.4 1,637.5 3,248.5 921.4 1,620.4 3,077.5 5,096.1 Total assets Current liabilities Total liabilities Cash provided by operations (119.8) 566.6 50.3 89.1 0 0 Capital expenditures Dividends paid Net income (loss) (567.3) 588.5 948.2 1,436.6 3,090.0 4,773.4 Average current liabilities Average total liabilities 2004 Calculate the current ratio and current cash debt coverage for Amazon for 2001 and 2004. (Round answers to 2 decimal places, e.g. 15.25. Enter negative answers using either a negative sign preceding the number e.g. -15.25 or parentheses e.g. (15.25).) 2001 Current ratio Current cash debt coverage 2004 :1 :1 times times Calculate the cash debt coverage and the debt to assets ratio for Amazon for 2001 and 2004. (Round answers to 2 decimal places, e.g. 15.25. Enter negative answers using either a negative sign preceding the number e.g. -15.25 or parentheses e.g. (15.25).) 2001 2004 Cash debt coverage times times Debt to assets ratio :1 :1 Amazon has avoided purchasing large warehouses. Instead, it has used those of others. In order to increase customer satisfaction, Amazon may have to build its own warehouses. Calculate free cash flow for Amazon for 2001 and 2004. (Round answers to 1 decimal place, e.g. 15.2. Enter negative answers using either a negative sign preceding the number e.g. -15.2 or parentheses e.g. (15.2).) 2001 Free cash flow (17) Use the Internet to view SEC filings. $ 2004 $ Address: biz.yahoo.com/i, or go to www.wiley.com/college/kimmel Steps 1. Enter a company's name. 2. Choose Quote. Answer questions (a) and (b). 3. Choose Profile; then choose SEC. Answer questions (c) and (d). Answer the following questions. What company did you select? What is its stock symbol? What is its selling price? What recent SEC filings are available for your viewing? Which filing is the most recent? What is the date? (18) Ken Pember and Robyn Mays are examining the following statement of cash flows for Gilbert Company for the year ended January 31, 2014. GILBERT COMPANY Statement of Cash Flows For the Year Ended January 31, 2014 Sources of cash From sales of merchandise From sale of capital stock $385,000 405,000 From sale of investment (purchased below) 80,000 From depreciation 55,000 From issuance of note for truck 20,000 From interest on investments Total sources of cash 6,000 951,000 ------------- Uses of cash For purchase of fixtures and equipment 320,000 For merchandise purchased for resale 258,000 For operating expenses (including depreciation) For purchase of investment 170,000 75,000 For purchase of truck by issuance of note 20,000 For purchase of treasury stock 10,000 For interest on note payable 3,000 ---------- Total uses of cash 856,000 ------------- Net increase in cash $95,000 ------------- Ken claims that Gilbert's statement of cash flows is an excellent portrayal of a superb first year with cash increasing $95,000. Robyn replies that it was not a superb first year. Rather, she says, the year was an operating failure, that the statement is presented incorrectly, and that $95,000 is not the actual increase in cash. The cash balance at the beginning of the year was $140,000. Using the data provided, prepare a statement of cash flows in proper form using the indirect method. The only noncash items in the income statement are depreciation and the gain from the sale of the investment. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) GILBERT COMPANY Statement of Cash Flows For the Year Ended January 31, 2014 (19) Jack Werth, the owner-president of Computer Services Company, is unfamiliar with the statement of cash flows that you, as his accountant, prepared. He asks for further explanation. Write him a brief memo explaining the form and content of the statement of cash flows. (20) Templeton Automotive Corp. is a medium-sized wholesaler of automotive parts. It has 10 stockholders who have been paid a total of $1 million in cash dividends for 8 consecutive years. The board's policy requires that, for this dividend to be declared, net cash provided by operating activities as reported in Templeton Automotive's current year's statement of cash flows must exceed $1 million. President and CEO Rick Hanigan's job is secure so long as he produces annual operating cash flows to support the usual dividend. At the end of the current year, controller Nick Korte presents president Rick Hanigan with some disappointing news. The net cash provided by operating activities is calculated by the indirect method to be only $970,000. The president says to Nick, \"We must get that amount above $1 million. Isn't there some way to increase operating cash flow by another $30,000?\" Nick answers, \"These figures were prepared by my assistant. I'll go back to my office and see what I can do.\" The president replies, \"I know you won't let me down, Nick.\" Upon close scrutiny of the statement of cash flows, Nick concludes that he can get the operating cash flows above $1 million by reclassifying a $60,000, 2-year note payable listed in the financing activities section as \"Proceeds from bank loan$60,000.\" He will report the note instead as \"Increase in payables $60,000\" and treat it as an adjustment of net income in the operating activities section. He returns to the president, saying, \"You can tell the board to declare their usual dividend. Our net cash flow provided by operating activities is $1,030,000.\" \"Good man, Nick! I knew I could count on you,\" exults the president. Who are the stakeholders in this situation? Was there anything unethical about the president's actions? Was there anything unethical about the controller's actions? Are the board members or anyone else likely to discover the misclassification? (21) In its draft 2014 income statement, Sunflower Corporation reports income before income taxes $461,700, extraordinary loss due to earthquake $180,900, income taxes $180,063 (not including irregular items), and loss on disposal of discontinued music division $24,900. The income tax rate is 39%. Prepare a correct income statement, beginning with income before income taxes. SUNFLOWER CORPORATION Income Statement (partial) Income before income taxes $ $ (22) Summary financial information for Paragon Company is as follows. Dec. 31, 2014 Dec. 31, 2013 Current assets $ 209,900 $ 250,900 Plant assets 1,357,000 832,300 Total assets $1,566,900 $1,083,200 Compute the amount and percentage changes in 2014 using horizontal analysis, assuming 2013 is the base year. (If amount and percentage are a decrease show the numbers as negative, e.g. -55,000, -20% or (55,000), (20%). Round percentages to 0 decimal places, e.g. 12%.) Amount Current assets Percent $ % Plant assets Total assets % $ % (23) State whether each of the following is an indicator of a company's liquidity, solvency, or profitability. (a) Price-earnings ratio. (b) Inventory turnover. (c) Debt to assets ratio. (d) Times interest earned. (e) Return on common stockholders' equity. (f) Current cash debt coverage. (24) Match each of the following terms with the phrase that best describes it. 1. A measure used to evaluate a company's liquidity. 2. Usually excludes items that a company thinks are unusual or non-recurring. 3. Indicates the level of full and transparent information provided to users of the financial statements. 4. The disposal of a significant component of a business. 5. Determines increases or decreases in a series of financial statement data. 6. Includes all changes in stockholders' equity during a period except those resulting from investments by stockholders and distributions to stockholders. (25) The Coca-Cola Company and PepsiCo, Inc. provide refreshments to every corner of the world. Suppose selected data from the 2014 consolidated financial statements for The Coca-Cola Company and for PepsiCo, Inc. are presented here (in millions). Total current assets Total current liabilities Coca-Cola PepsiCo $17,551 $12,571 13,721 8,756 Net sales 30,990 43,232 Cost of goods sold 11,088 20,099 Net income 6,824 5,946 Average (net) accounts receivable for the year 3,424 4,654 Average inventories for the year 2,271 2,570 Average total assets 44,595 37,921 Average common stockholders' equity 22,636 14,556 Average current liabilities 13,355 8,772 Average total liabilities 21,960 23,466 Total assets 48,671 39,848 Total liabilities 23,872 Income taxes 23,044 2,040 2,100 Interest expense 355 397 Net cash provided by operating activities 8,186 Capital expenditures 1,994 2,128 Cash dividends 3,800 2,732 6,796 Compute the following liquidity ratios for 2014 for Coca-Cola and for PepsiCo. (Round current ratio and current cash debt coverage ratio to 2 decimal places, e.g. 6.25 and all other answers to 1 decimal place, e.g. 15.1.) Coca-Cola (1) Current ratio (2) Accounts receivable turnover (3) Average collection period (4) Inventory turnover (5) Days in inventory PepsiCo :1 :1 times times days times days days times days (6) Current cash debt coverage Compute the following solvency ratios for the two companies. (Round times interest earned to 1 decimal place, e.g. 15.2, cash debt coverage to 2 decimal places, e.g. 15.25 and percentages to 0 decimal places, e.g. 15%.) Coca-Cola (1) Debt to assets ratio PepsiCo % % (2) Times interest earned times times (3) Cash debt coverage times times (4) Free cash flow $ $ Compute the following profitability ratios for the two companies. (Round percentages to 1 decimal place, e.g. 15.2% and all other answers to 2 decimal places, e.g. 15.25.) Coca-Cola (1) Profit margin (2) Asset turnover % PepsiCo % times times (3) Return on assets % % (4) Return on common stockholders' equity % % (26) Purpose: To employ comparative data and industry data to evaluate a company's performance and financial position. Address: htp://www.moneycentral.msn.com/investor/invsub/results/compare.asp, or go to www.wiley.com/college/kimmel Steps (1) Identify two competing companies. (2) Go to the above address. (3) Type in the first company's stock symbol. (Use \"symbol look-up.\"). (4) Choose Ratios. (5) Print out the results. (6) Repeat steps 3-5 for the competitor. Evaluate the company's liquidity relative to the industry averages and to the competitor that you chose. Evaluate the company's solvency relative to the industry averages and to the competitor that you chose. Evaluate the company's profitability relative to the industry averages and to the competitor that you chose. (27) You are a loan officer for Great Plains Bank of Davenport. Jason Putnam, president of J. Putnam Corporation, has just left your office. He is interested in an 8-year loan to expand the company's operations. The borrowed funds would be used to purchase new equipment. As evidence of the company's debt-worthiness, Putnam provided you with the following facts. 2014 2013 Current ratio 3.1 2.1 Asset turnover 2.8 2.2 .1 .2 Cash debt coverage Net income Up 32 % Down 8 % Earnings per share $3.30 $2.50 Putnam is a very insistent (some would say pushy) man. When you told him that you would need additional information before making your decision, he acted offended and said, \"What more could you possibly want to know?\" You responded that, at a minimum, you would need complete, audited financial statements. Answer the following. Explain why you would want the financial statements to be audited. Discuss the implications of the ratios provided for the lending decision you are to make. That is, does the information paint a favorable picture? Are these ratios relevant to the decision? List three other ratios that you would want to calculate for this company, and explain why you would use each. (28) David Lemay is the chief executive officer of Brenna Electronics. Lemay is an expert engineer but a novice in accounting. Lemay asks you, as an accounting student, to explain (a) the bases for comparison in analyzing Brenna's financial statements and (b) the limitations, if any, in financial statement analysis. Write a memo to David Lemay that explains the basis for comparison and the factors affecting quality of earnings. (29) Kelli Rice, president of LR Industries, wishes to issue a press release to bolster her company's image and maybe even its stock price, which has been gradually falling. As controller, you have been asked to provide a list of 20 financial ratios and other operating statistics for LR Industries' first-quarter financials and operations. Two days after you provide the data requested, Laurie Ellis, the public relations director of LR, asks you to prove the accuracy of the financial and operating data contained in the press release written by the president and edited by Laurie. In the news release, the president highlights the sales increase of 25% over last year's first quarter and the positive change in the current ratio from 1.5:1 last year to 3:1 this year. She also emphasizes that production was up 50% over the prior year's first quarter. You note that the release contains only positive or improved ratios and none of the negative or deteriorated ratios. For instance, no mention is made that the debt to assets ratio has increased from 35% to 55%, that inventories are up 89%, and that although the current ratio improved, the current cash debt coverage fell from .15 to .05. Nor is there any mention that the reported profit for the quarter would have been a loss had not the estimated lives of LR plant and machinery been increased by 30%. Laurie emphasized, \"The Pres wants this release by early this afternoon.\" Who are the stakeholders in this situation? Is there anything unethical in the president's actions? Should you as controller remain silent? Does Laurie have any responsibility