BACC531 Week 7 Exercises

1.Hanna Company’s current asset and current liability account balances at the beginning and end of the year were as follows:

	December 31
	End of Year	Beginning of Year
Current assets:
Cash and cash equivalents	$ 65,000	$ 79,000
Accounts receivable	$ 164,000	$ 186,000
Inventory	$ 451,000	$ 361,000
Prepaid expenses	$ 11,000	$ 14,500
Current liabilities:
Accounts payable	$ 354,000	$ 380,000
Accrued liabilities	$ 8,500	$ 12,000
Income taxes payable	$ 36,000	$ 27,000

The Accumulated Depreciation account had total credits of $58,000. Hanna Company’s net income was $61,500 and it did not record any gains or losses on the sale of noncurrent assets.

Required:

Using the indirect method, calculate the net cash provided by operating activities for the year.

Note: Cash outflows and amounts to be deducted should be indicated with a minus sign.

2.Apex Company prepared the statement of cash flows shown below:

Apex Company
Statement of Cash Flows—Indirect Method
Operating activities:
Net income		$ 41,600
Adjustments to convert net income to cash basis:
Depreciation	$ 21,300
Increase in accounts receivable	(60,500)
Increase in inventory	(26,600)
Decrease in prepaid expenses	9,700
Increase in accounts payable	53,100
Decrease in accrued liabilities	(11,200)
Increase in income taxes payable	3,200	(11,000)
Net cash provided by (used in) operating activities		30,600
Investing activities:
Proceeds from the sale of equipment	14,900
Loan to Thomas Company	(41,500)
Additions to plant and equipment	(120,600)
Net cash provided by (used in) investing activities		(147,200)
Financing activities:
Increase in bonds payable	90,000
Increase in common stock	38,100
Cash dividends	(29,600)
Net cash provided by (used in) financing activities		98,500
Net decrease in cash and cash equivalents		(18,100)
Beginning cash and cash equivalents		27,500
Ending cash and cash equivalents		$ 9,400

Required:

Compute Apex Company’s free cash flow.

Note: Negative amount should be indicated by a minus sign.

3.The following changes took place last year in Pavolik Company’s balance sheet accounts:

Asset and Contra-asset Accounts			Liabilities and Stockholders’ Equity Accounts
Cash and cash equivalents	$ 35	D	Accounts payable	$ 107	I
Accounts receivable	$ 39	I	Accrued liabilities	$ 39	D
Inventory	$ 88	D	Income taxes payable	$ 44	I
Prepaid expenses	$ 34	I	Bonds payable	$ 324	I
Long-term investments	$ 36	D	Common stock	$ 156	D
Property, plant, and equipment	$ 620	I	Retained earnings	$ 127	I
Accumulated depreciation	$ 127	I

D = Decrease; I = Increase.

Long-term investments costing $36 were sold for $76 and land costing $75 was sold for $39. In addition, the company paid $33 in cash dividends. Besides the sale of land, no other sales or retirements of plant and equipment took place during the year. Pavolik did not retire any bonds or issue common stock.

The company’s income statement for the year follows:

Sales		$ 1,470
Cost of goods sold		656
Gross margin		814
Selling and administrative expenses		570
Net operating income		244
Nonoperating items:
Loss on sale of land	$ (36)
Gain on sale of investments	40	4
Income before taxes		248
Income taxes		88
Net income		$ 160

The company’s beginning cash balance was $158 and its ending balance was $123.

Required:

Prepare a statement of cash flows.

Use the indirect method to determine the net cash provided by operating activities.

4.Comparative financial statement data for Carmono Company follow:

	This Year	Last Year
Assets
Cash and cash equivalents	$ 14.50	$ 28.00
Accounts receivable	78.00	71.00
Inventory	127.50	115.60
Total current assets	220.00	214.60
Property, plant, and equipment	273.00	222.00
Less accumulated depreciation	56.80	42.60
Net property, plant, and equipment	216.20	179.40
Total assets	$ 436.20	$ 394.00
Liabilities and Stockholders’ Equity
Accounts payable	$ 76.50	$ 60.00
Common stock	174.00	133.00
Retained earnings	185.70	201.00
Total liabilities and stockholders’ equity	$ 436.20	$ 394.00

For this year, the company reported net income as follows:

Sales	$ 1,550.00
Cost of goods sold	930.00
Gross margin	620.00
Selling and administrative expenses	600.00
Net income	$ 20.00

This year Carmono paid a cash dividend but it did not sell any property, plant, and equipment or repurchase any of its own stock.

Required:

Compute Carmono’s free cash flow for this year.

Using the indirect method, prepare a statement of cash flows for this year.

5.A comparative income statement is given below for McKenzie Sales, Limited, of Toronto:

McKenzie Sales, Limited
Comparative Income Statement
	This Year	Last Year
Sales	$ 7,390,000	$ 5,616,400
Cost of goods sold	4,670,000	3,512,500
Gross margin	2,720,000	2,103,900
Selling and administrative expenses:
Selling expenses	1,387,000	1,081,000
Administrative expenses	711,000	617,000
Total expenses	2,098,000	1,698,000
Net operating income	622,000	405,900
Interest expense	102,000	92,000
Net income before taxes	$ 520,000	$ 313,900

The company’s board of directors is surprised to see net income increased by only $206,100 when sales increased by $1,773,600.

Required:

1. Express each year’s income statement in common-size percentages.

Note: Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).

6.Comparative financial statements for Weller Corporation, a merchandising company, for the year ending December 31 appear below. The company did not issue any common stock during the year. A total of 500,000 shares of common stock were outstanding. The interest rate on the bond payable was 10%, the income tax rate was 40%, and the dividend per share of common stock was $0.75 last year and $0.40 this year. The market value of the company’s common stock at the end of this year was $26. All of the company’s sales are on account.

Weller Corporation
Comparative Balance Sheet
(dollars in thousands)
	This Year	Last Year
Assets
Current assets:
Cash	$ 1,220	$ 1,350
Accounts receivable, net	10,100	8,400
Inventory	12,500	10,800
Prepaid expenses	770	600
Total current assets	24,590	21,150
Property and equipment:
Land	9,900	9,900
Buildings and equipment, net	44,311	37,028
Total property and equipment	54,211	46,928
Total assets	$ 78,801	$ 68,078
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$ 19,900	$ 17,900
Accrued liabilities	940	740
Notes payable, short term	220	220
Total current liabilities	21,060	18,860
Long-term liabilities:
Bonds payable	9,700	9,700
Total liabilities	30,760	28,560
Stockholders’ equity:
Common stock	500	500
Additional paid-in capital	4,000	4,000
Total paid-in capital	4,500	4,500
Retained earnings	43,541	35,018
Total stockholders’ equity	48,041	39,518
Total liabilities and stockholders’ equity	$ 78,801	$ 68,078

Weller Corporation
Comparative Income Statement and Reconciliation
(dollars in thousands)
	This Year	Last Year
Sales	$ 74,000	$ 65,000
Cost of goods sold	41,000	40,000
Gross margin	33,000	25,000
Selling and administrative expenses:
Selling expenses	10,800	10,000
Administrative expenses	6,400	6,900
Total selling and administrative expenses	17,200	16,900
Net operating income	15,800	8,100
Interest expense	970	970
Net income before taxes	14,830	7,130
Income taxes	5,932	2,852
Net income	8,898	4,278
Dividends to common stockholders	375	200
Net income added to retained earnings	8,523	4,078
Beginning retained earnings	35,018	30,940
Ending retained earnings	$ 43,541	$ 35,018

Required:

Compute the following financial data and ratios for this year:

Acid-test ratio.Note: Round your answer to 2 decimal places.

Working capital.Note: Enter your answer in thousands.

Current ratio.Note: Round your answer to 2 decimal places.

7.Comparative financial statements for Weller Corporation, a merchandising company, for the year ending December 31 appear below. The company did not issue any new common stock during the year. A total of 600,000 shares of common stock were outstanding. The interest rate on the bond payable was 10%, the income tax rate was 40%, and the dividend per share of common stock was $0.75 last year and $0.40 this year. The market value of the company’s common stock at the end of this year was $20. All of the company’s sales are on account.

Weller Corporation
Comparative Balance Sheet
(dollars in thousands)
	This Year	Last Year
Assets
Current assets:
Cash	$ 1,240	$ 1,390
Accounts receivable, net	9,100	7,700
Inventory	13,200	12,500
Prepaid expenses	620	680
Total current assets	24,160	22,270
Property and equipment:
Land	10,100	10,100
Buildings and equipment, net	52,130	42,274
Total property and equipment	62,230	52,374
Total assets	$ 86,390	$ 74,644
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$ 20,500	$ 18,500
Accrued liabilities	1,010	780
Notes payable, short term	180	180
Total current liabilities	21,690	19,460
Long-term liabilities:
Bonds payable	9,600	9,600
Total liabilities	31,290	29,060
Stockholders’ equity:
Common stock	600	600
Additional paid-in capital	4,000	4,000
Total paid-in capital	4,600	4,600
Retained earnings	50,500	40,984
Total stockholders’ equity	55,100	45,584
Total liabilities and stockholders’ equity	$ 86,390	$ 74,644

Weller Corporation
Comparative Income Statement and Reconciliation
(dollars in thousands)
	This Year	Last Year
Sales	$ 76,440	$ 66,000
Cost of goods sold	41,120	32,000
Gross margin	35,320	34,000
Selling and administrative expenses:
Selling expenses	10,800	10,300
Administrative expenses	7,300	6,500
Total selling and administrative expenses	18,100	16,800
Net operating income	17,220	17,200
Interest expense	960	960
Net income before taxes	16,260	16,240
Income taxes	6,504	6,496
Net income	9,756	9,744
Dividends to common stockholders	240	300
Net income added to retained earnings	9,516	9,444
Beginning retained earnings	40,984	31,540
Ending retained earnings	$ 50,500	$ 40,984

Required:

Compute the following financial data for this year:

Total asset turnover.Note: Round your answer to 2 decimal places.

Accounts receivable turnover. (Assume all sales are on account.)Note: Round your answer to 2 decimal places.

Average collection period.Note: Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal places.

Inventory turnover.Note: Round your answer to 2 decimal places.

Average sale period.Note: Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal places.

Operating cycle.Note: Round your intermediate calculations and final answer to 2 decimal places.

8.Comparative financial statements for Weller Corporation, a merchandising company, for the year ending December 31 appear below. The company did not issue any new common stock during the year. A total of 600,000 shares of common stock were outstanding. The interest rate on the bond payable was 10%, the income tax rate was 40%, and the dividend per share of common stock was $0.75 last year and $0.40 this year. The market value of the company’s common stock at the end of this year was $24. All of the company’s sales are on account.

Weller Corporation
Comparative Balance Sheet
(dollars in thousands)
	This Year	Last Year
Assets
Current assets:
Cash	$ 1,200	$ 1,370
Accounts receivable, net	9,700	7,800
Inventory	12,900	11,100
Prepaid expenses	760	580
Total current assets	24,560	20,850
Property and equipment:
Land	9,800	9,800
Buildings and equipment, net	48,122	42,346
Total property and equipment	57,922	52,146
Total assets	$ 82,482	$ 72,996
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$ 19,700	$ 17,500
Accrued liabilities	1,090	840
Notes payable, short term	0	260
Total current liabilities	20,790	18,600
Long-term liabilities:
Bonds payable	9,400	9,400
Total liabilities	30,190	28,000
Stockholders’ equity:
Common stock	2,000	2,000
Additional paid-in capital	4,000	4,000
Total paid-in capital	6,000	6,000
Retained earnings	46,292	38,996
Total stockholders’ equity	52,292	44,996
Total liabilities and stockholders’ equity	$ 82,482	$ 72,996

Weller Corporation
Comparative Income Statement and Reconciliation
(dollars in thousands)
	This Year	Last Year
Sales	$ 71,000	$ 65,000
Cost of goods sold	40,000	32,000
Gross margin	31,000	33,000
Selling and administrative expenses:
Selling expenses	11,100	10,500
Administrative expenses	6,400	6,800
Total selling and administrative expenses	17,500	17,300
Net operating income	13,500	15,700
Interest expense	940	940
Net income before taxes	12,560	14,760
Income taxes	5,024	5,904
Net income	7,536	8,856
Dividends to common stockholders	240	600
Net income added to retained earnings	7,296	8,256
Beginning retained earnings	38,996	30,740
Ending retained earnings	$ 46,292	$ 38,996

Required:

Compute the following financial ratios for this year:

Equity multiplier.Note: For all requirements, round your answers to 2 decimal places.

Times interest earned ratio.

Debt-to-equity ratio.

9.Comparative financial statements for Weller Corporation, a merchandising company, for the year ending December 31 appear below. The company did not issue any new common stock during the year. A total of 990,000 shares of common stock were outstanding. The interest rate on the bond payable was 12%, the income tax rate was 40%, and the dividend per share of common stock was $0.75 last year and $0.40 this year. The market value of the company’s common stock at the end of this year was $28. All of the company’s sales are on account.

Weller Corporation
Comparative Balance Sheet
(dollars in thousands)
	This Year	Last Year
Assets
Current assets:
Cash	$ 5,834	$ 6,650
Accounts receivable, net	16,300	9,200
Inventory	10,650	8,960
Prepaid expenses	1,990	2,480
Total current assets	34,774	27,290
Property and equipment:
Land	7,900	7,900
Buildings and equipment, net	21,100	20,900
Total property and equipment	29,000	28,800
Total assets	$ 63,774	$ 56,090
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$ 11,400	$ 9,250
Accrued liabilities	980	1,650
Notes payable, short term	490	490
Total current liabilities	12,870	11,390
Long-term liabilities:
Bonds payable	10,000	10,000
Total liabilities	22,870	21,390
Stockholders’ equity:
Common stock	990	990
Additional paid-in capital	5,150	5,150
Total paid-in capital	6,140	6,140
Retained earnings	34,764	28,560
Total stockholders’ equity	40,904	34,700
Total liabilities and stockholders’ equity	$ 63,774	$ 56,090

Weller Corporation
Comparative Income Statement and Reconciliation
(dollars in thousands)
	This Year	Last Year
Sales	$ 98,000	$ 93,000
Cost of goods sold	61,500	57,500
Gross margin	36,500	35,500
Selling and administrative expenses:
Selling expenses	10,400	9,900
Administrative expenses	13,900	12,900
Total selling and administrative expenses	24,300	22,800
Net operating income	12,200	12,700
Interest expense	1,200	1,200
Net income before taxes	11,000	11,500
Income taxes	4,400	4,600
Net income	6,600	6,900
Dividends to common stockholders	396	792
Net income added to retained earnings	6,204	6,108
Beginning retained earnings	28,560	22,452
Ending retained earnings	$ 34,764	$ 28,560

Required:

Compute the following financial data for this year:

Return on equity.Note: Round your percentage answer to 2 decimal places (i.e., 0.1234 should be entered as 12.34).

Gross margin percentage.Note: Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).

Net profit margin percentage.Note: Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).

Return on total assets.Note: Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).

10.Comparative financial statements for Weller Corporation, a merchandising company, for the year ending December 31 appear below. The company did not issue any new common stock during the year. A total of 960,000 shares of common stock were outstanding. The interest rate on the bond payable was 12%, the income tax rate was 40%, and the dividend per share of common stock was $0.75 last year and $0.40 this year. The market value of the company’s common stock at the end of this year was $26.00. All of the company’s sales are on account.

Weller Corporation
Comparative Balance Sheet
(dollars in thousands)
	This Year	Last Year
Assets
Current assets:
Cash	$ 2,036	$ 3,020
Accounts receivable, net	16,000	9,050
Inventory	10,500	8,840
Prepaid expenses	1,960	2,420
Total current assets	30,496	23,330
Property and equipment:
Land	7,600	7,600
Buildings and equipment, net	20,800	20,600
Total property and equipment	28,400	28,200
Total assets	$ 58,896	$ 51,530
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$ 11,100	$ 9,100
Accrued liabilities	920	1,500
Notes payable, short term	460	460
Total current liabilities	12,480	11,060
Long-term liabilities:
Bonds payable	6,250	6,250
Total liabilities	18,730	17,310
Stockholders’ equity:
Common stock	960	960
Additional paid-in capital	5,000	5,000
Total paid-in capital	5,960	5,960
Retained earnings	34,206	28,260
Total stockholders’ equity	40,166	34,220
Total liabilities and stockholders’ equity	$ 58,896	$ 51,530

Weller Corporation
Comparative Income Statement and Reconciliation
(dollars in thousands)
	This Year	Last Year
Sales	$ 95,000	$ 90,000
Cost of goods sold	60,000	56,000
Gross margin	35,000	34,000
Selling and administrative expenses:
Selling expenses	10,100	9,600
Administrative expenses	13,600	12,600
Total selling and administrative expenses	23,700	22,200
Net operating income	11,300	11,800
Interest expense	750	750
Net income before taxes	10,550	11,050
Income taxes	4,220	4,420
Net income	6,330	6,630
Dividends to common stockholders	384	768
Net income added to retained earnings	5,946	5,862
Beginning retained earnings	28,260	22,398
Ending retained earnings	$ 34,206	$ 28,260

Required:

Compute the following financial data for this year:

Book value per share.Note: Round your answer to 2 decimal places.

Earnings per share.Note: Round your answer to 2 decimal places.

Price-earnings ratio.Note: Round your intermediate calculations and final answer to 2 decimal places.

Dividend payout ratio.Note: Round your intermediate calculations and final answer to 2 decimal places.

Dividend yield ratio.Note: Round your intermediate calculations and final answer to 2 decimal places.

11.Norsk Optronics had a current ratio of 2 on June 30 of the current year. On that date, the company’s assets were:

Cash	$ 63,000
Accounts receivable, net	400,000
Inventory	650,000
Prepaid expenses	10,000
Plant and equipment, net	1,870,000
Total assets	$ 2,993,000

Required:

What effect did this transaction have on the current ratio?Note: Round your intermediate calculations to 1 decimal place.

What was the company’s working capital on June 30?

What was the company’s acid-test ratio on June 30?Note: Round your answer to 2 decimal places.

The company paid an account payable of $48,000 immediately after June 30.

What effect did this transaction have on working capital?