This assignment is based on the financial statements and notes for Alpha Corporation presented in the accompanying excel sheet and additional information as follows:
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Alphas competitors use FIFO for inventory costing.
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The market value of Alpha Corporation at December 31, 2019 was $3,000,000.
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Rental revenues were derived from a short-term lease of an unused portion of the
Building which will be put back to use after the end of the lease.
Using the financial statements, accounting policies and notes, and the additional information above, provide the following as a basis for a future comparison of Alpha Corporation to competitor ratios and industry benchmarks:
1. A decomposition of ROE using a 5-way DuPont Analysis showing all the components (e.g., interest burden, tax burden, etc.) (10 points)
2. A decomposition of ROE into operating return and nonoperating return and the components comprising each (e.g., NOPM, NOAT, FLEV etc.) (10 points)
3. Compute cash conversion cycle. What will be the change in cash if the company reduced its the cash conversion cycle by 1 day? (5 points)
4. Compute PPE turnover and percentage of PPE used up. Comment briefly. (5 points)
5. A summary of specific results from your analysis that you would be especially interested in comparing Alpha Corporation to its competitors in a future analysis. (5 points)
6. What is Alphas bad debt expense for 2019. Would you consider this significant? Explain briefly. (5 points)
$ 2019 $ 2018 278,000 141,000 1,509,600 1,525,315 32,000 3,485,915 240,000 125,000 1,431,200 1,257,261 28,000 3,081,461 87,000 135,000 298,000 520,000 92,000 120,000 215,000 427,000 Alpha Corporation Balance sheet as at Dec 31 ASSETS Current Assets Cash Marketable securities (Note 1) Accounts receivable - Net (Note 2) Inventories (Note 3) Prepayments Total current assets Investments (Equity Method) Investment in Thayer Corporation Investment in Hitchcock Corporation Investment in Davis Corporation Total Investments Property, Plant, and Equipment (Note 4) Land Building Equipment Leasehold Total Plant Assets at Cost Less Accumulated Depreciation and Amortization Total Plants Assets - Net Intangibles Goodwill - Net Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Note Payable (Note 5) Accounts Payable Rental Fees Received in Advance Estimated Warranty Liability Interest Payable on Notes Dividends Payable Income Taxes Payable - Current Mortgage Payable - Current Position Capitalized Lease Obligation - Current Portion Total Current Liabilities Noncurrent Liabilities Bonds Payable Mortgage Payable (Note 6) 82,000 843,000 1,848,418 106,036 2,879,454 (420,854) 2,458,600 82,000 843,000 497,818 106,036 1,528,854 (383,854) 1,145,000 36,000 6,500,515 36,000 4,689,461 200,000 723,700 58,000 78,600 2,000 30,000 160,000 37,383 10,000 1,299,683 100,000 666,100 46,000 75,200 1,500 25,000 140,000 37,383 10,000 1,101,183 1,931,143 243,560 1,104,650 262,564 Accounting Policies: * Basis of Consolidation: Consolidated its statements with those of Harvard Corporation (100% owned subsidiary, acquired January 2, 2017) Marketable Securities: The firm classifies marketable securities as avaialble for sale and measures them at fair value Accounts Receivable: Accounts for uncollectible accounts using the allowance method Inventories: The firm uses LIFO assumption for inventories ** Investments: Investments of less than 20% of the outstanding common stock of other companies as available for sale and measures them at fair value Investments of 20-50% of the outstanding common stock of affiliates are accounted for using the equity method Property Plant and Equipment: Depreciation for buildings, equipment, and leaseholds is calculated using the straight-line method and accelerated method for income tax reporting Measure interest expense on long-term debt using the effective interest method Provides for deferred income taxes arising from temporary differences between book and taxable income Notes: ** the balance sheet presents marketable equity securities, all classified as available for sale, at fair value, which is less than acquisition cost by $25,000 on December 31, 2018, and $21,000 on December 31, 2019. Alpha Corporation sold marketable equity securities costing $35,000 during 2019. [NOTE 1] ** the balance sheet presents accounts receivable net of an allowance for uncollectibles of $128,800 on December 31, 2018, and $210,400 on December 31, 2019. Alpha Corporation wrote off a total of $63,000 of accounts receivable as uncollectible during 2019. [NOTE 2] ** the valuation of inventories on a FIFO basis exceed the amounts on a LIFO basis by $430,000 on December 31, 2018, and $410,000 on Decemer 31, 2019. [NOTE 3] ** Alpha Corporation sold equipment with a cost of $23,000 and a carrying value of $4,000 during 2019. This was the only disposition of property, plant, and equipment during the year. [NOTE 4) ** Alpha Corporation paid at maturity a 90-day, 9% note with a face amount of $100,000 with interest on January 30, 2019. On December 1, 2019 Alpha Corporation borrowed $200,000 from its local bank, promising to repay the principal plus interest at 12% in six months. [NOTE 5] ** Mortgage payable represents a building mortgage requiring equal installment payments of $40,000 on December 31 of each year. The loan underlying the mortgage bears interest of 7%, compounded annually. (NOTE 6) ** The capitalized lease obligation represents a 20-year, non-cancelable lease on certain equipment. The lease requires annual payments, in advance of $10,000 on January 2 of each year. Alpha Corporation will make the last lease payment on January 2, 2026. Alpha Corporation capitalizes the lease at its borrowing rate of 8%. (NOTE 7) $ 2019 $ 2018 278,000 141,000 1,509,600 1,525,315 32,000 3,485,915 240,000 125,000 1,431,200 1,257,261 28,000 3,081,461 87,000 135,000 298,000 520,000 92,000 120,000 215,000 427,000 Alpha Corporation Balance sheet as at Dec 31 ASSETS Current Assets Cash Marketable securities (Note 1) Accounts receivable - Net (Note 2) Inventories (Note 3) Prepayments Total current assets Investments (Equity Method) Investment in Thayer Corporation Investment in Hitchcock Corporation Investment in Davis Corporation Total Investments Property, Plant, and Equipment (Note 4) Land Building Equipment Leasehold Total Plant Assets at Cost Less Accumulated Depreciation and Amortization Total Plants Assets - Net Intangibles Goodwill - Net Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Note Payable (Note 5) Accounts Payable Rental Fees Received in Advance Estimated Warranty Liability Interest Payable on Notes Dividends Payable Income Taxes Payable - Current Mortgage Payable - Current Position Capitalized Lease Obligation - Current Portion Total Current Liabilities Noncurrent Liabilities Bonds Payable Mortgage Payable (Note 6) 82,000 843,000 1,848,418 106,036 2,879,454 (420,854) 2,458,600 82,000 843,000 497,818 106,036 1,528,854 (383,854) 1,145,000 36,000 6,500,515 36,000 4,689,461 200,000 723,700 58,000 78,600 2,000 30,000 160,000 37,383 10,000 1,299,683 100,000 666,100 46,000 75,200 1,500 25,000 140,000 37,383 10,000 1,101,183 1,931,143 243,560 1,104,650 262,564 Accounting Policies: * Basis of Consolidation: Consolidated its statements with those of Harvard Corporation (100% owned subsidiary, acquired January 2, 2017) Marketable Securities: The firm classifies marketable securities as avaialble for sale and measures them at fair value Accounts Receivable: Accounts for uncollectible accounts using the allowance method Inventories: The firm uses LIFO assumption for inventories ** Investments: Investments of less than 20% of the outstanding common stock of other companies as available for sale and measures them at fair value Investments of 20-50% of the outstanding common stock of affiliates are accounted for using the equity method Property Plant and Equipment: Depreciation for buildings, equipment, and leaseholds is calculated using the straight-line method and accelerated method for income tax reporting Measure interest expense on long-term debt using the effective interest method Provides for deferred income taxes arising from temporary differences between book and taxable income Notes: ** the balance sheet presents marketable equity securities, all classified as available for sale, at fair value, which is less than acquisition cost by $25,000 on December 31, 2018, and $21,000 on December 31, 2019. Alpha Corporation sold marketable equity securities costing $35,000 during 2019. [NOTE 1] ** the balance sheet presents accounts receivable net of an allowance for uncollectibles of $128,800 on December 31, 2018, and $210,400 on December 31, 2019. Alpha Corporation wrote off a total of $63,000 of accounts receivable as uncollectible during 2019. [NOTE 2] ** the valuation of inventories on a FIFO basis exceed the amounts on a LIFO basis by $430,000 on December 31, 2018, and $410,000 on Decemer 31, 2019. [NOTE 3] ** Alpha Corporation sold equipment with a cost of $23,000 and a carrying value of $4,000 during 2019. This was the only disposition of property, plant, and equipment during the year. [NOTE 4) ** Alpha Corporation paid at maturity a 90-day, 9% note with a face amount of $100,000 with interest on January 30, 2019. On December 1, 2019 Alpha Corporation borrowed $200,000 from its local bank, promising to repay the principal plus interest at 12% in six months. [NOTE 5] ** Mortgage payable represents a building mortgage requiring equal installment payments of $40,000 on December 31 of each year. The loan underlying the mortgage bears interest of 7%, compounded annually. (NOTE 6) ** The capitalized lease obligation represents a 20-year, non-cancelable lease on certain equipment. The lease requires annual payments, in advance of $10,000 on January 2 of each year. Alpha Corporation will make the last lease payment on January 2, 2026. Alpha Corporation capitalizes the lease at its borrowing rate of 8%. (NOTE 7)
