A common problem facing any business entity is the debt versus equity decision. When funds are required to obtain assets, should debt or equity financing be used? This decision also is faced when a company is initially formed. What will be the mix of debt versus equity in the initial capital structure? The characteristics of debt are very different from those of equity as are the financial implications of using one method of financing as opposed to the other. Cherokee Plastics Corporation is formed by a group of investors to manufacture household plastic products. Their initial capitalization goal is $50,000,000. That is, the incorporators have decided to raise $50,000,000 to acquire the initial assets of the company. They have narrowed down the financing mix alternatives to two: 1. All equity financing 2. $20,000,000 in debt financing and $30,000,000 in equity financing No matter which financing alternative is chosen, the corporation expects to be able to generate a 10% annual return, before payment of interest and income taxes, on the $50,000,000 in assets acquired. The interest rate on debt would be 8%. The effective income tax rate will be approximately 50%. Alternative 2 will require specified interest and principal payments to be made to the creditors at specific dates. The interest portion of these payments (interest expense) will reduce the taxable income of the corporation and hence the amount of income tax the corporation will pay. The all-equity alternative requires no specified payments to be made to suppliers of capital. The corporation is not legally liable to make distributions to its owners. If the board of directors does decide to make a distribution, it is not an expense of the corporation and does not reduce taxable income and hence the taxes the corporation pays. Required: 1. Prepare abbreviated income statements that compare first-year profitability for each of the two alternatives. 2. Which alternative would be expected to achieve the highest first-year profits? Why? 3. Which alternative would provide the highest rate of return on shareholders’ equity? Why? 4. What other related implications of the decision should be considered?
> The following is the ending balances of accounts at December 31, 2018 for the Vosburgh Electronics Corporation. Additional Information: 1. The common stock represents 1 million shares of no par stock authorized, 500,000 shares issued and outstanding. 2.
> Every annual report of a public company includes an extensive discussion and analysis provided by the company’s management. Specifically, which aspects of the company must this discussion address? Isn’t management’s perspective too biased to be of use to
> The following is the ending balances of accounts at June 30, 2018 for Excell Company. Additional Information: 1. The short-term investments account includes $18,000 in U.S. treasury bills purchased in May. The bills mature in July. 2. The accounts receiv
> The following is the ending balances of accounts at December 31, 2018, for the Weismuller Publishing Company. /\ Additional Information: 1. Prepaid expenses include $120,000 paid on December 31, 2018, for a two-year lease on the building that houses both
> The following is a December 31, 2018, post-closing trial balance for Almway Corporation. Additional Information: 1. The investment account includes an investment in common stock of another corporation of $30,000 which management intends to hold for at le
> The data listed below are taken from a balance sheet of Trident Corporation at December 31, 2018. Some amounts, indicated by question marks, have been intentionally omitted. Required: 1. Determine the missing amounts. 2. Prepare Trident’
> Refer to the trial balance information in BE 3–5. Calculate the (a) current ratio, (b) acid-test ratio, and (c) debt to equity ratio. Information from B3-5: The following is a December 31, 2018, post-closing trial balance for Culver Ci
> Presented below is a list of balance sheet accounts. Required: Prepare a classified balance sheet ignoring monetary amounts. Accounts payable Cash Accounts receivable Common stock Accumulated depreciation-buildings Accumulated depreciation-equipment
> Melody Lane Music Company was started by John Ross early in 2018. Initial capital was acquired by issuing shares of common stock to various investors and by obtaining a bank loan. The company operates a retail store that sells records, tapes, and compact
> Presented below is the balance sheet for HHD, Inc., at December 31, 2018. The captions shown in the summarized statement above include the following: a. Current assets: cash, $150,000; accounts receivable, $200,000; inventories, $225,000; and prepaid ins
> The following incomplete balance sheet for the Sanderson Manufacturing Company was prepared by the company’s controller. As accounting manager for Sanderson, you are attempting to reconstruct and revise the balance sheet. Additional Inf
> The following balance sheet for the Hubbard Corporation was prepared by the company: Additional Information: 1. The buildings, land, and machinery are all stated at cost except for a parcel of land that the company is holding for future sale. The land or
> Target Corporation prepares its financial statements according to U.S. GAAP. Target’s financial statements and disclosure notes for the year ended January 30, 2016, are available in the Connect library. This material also is available under the Investor
> Presented next are the ending balances of accounts for the Kansas Instruments Corporation at December 31, 2018. Additional Information: 1. The note receivable, along with any accrued interest, is due on November 22, 2019. 2. The note payable is due in 20
> The following are the ending balances of accounts at December 31, 2018, for the Valley Pump Corporation. Additional Information: 1. The $120,000 balance in the land account consists of $100,000 for the cost of land where the plant and office buildings ar
> The following is a December 31, 2018, post-closing trial balance for the Jackson Corporation. Required: Prepare a classified balance sheet for Jackson Corporation at December 31, 2018. Account Title Debits Credits $ 40,000 34,000 75,000 16,000 10,000
> The following are the typical classifications used in a balance sheet: a. Current assets b. Investments and funds c. Property, plant, and equipment d. Intangible assets e. Other assets f. Current liabilities g. Long-term liabilities h. Paid-in-capital i.
> The following are the typical classifications used in a balance sheet: a. Current assets b. Investments and funds c. Property, plant, and equipment d. Intangible assets e. Other assets f. Current liabilities g. Long-term liabilities h. Paid-in-capital i.
> Distinguish between property, plant, and equipment and intangible assets.
> The following December 31, 2018, fiscal year-end account balance information is available for the Stonebridge Corporation: The only asset not listed is short-term investments. The only liabilities not listed are a $30,000 note payable due in two years an
> Refer to E 3–21. Information from E3-21 The Canton Corporation operates in four distinct business segments. The segments, along with 2018 information on revenues, assets, and net income, are listed below ($ in thousands): Required: H
> The Canton Corporation operates in four distinct business segments. The segments, along with 2018 information on revenues, assets, and net income, are listed below ($ in thousands): Required: 1. For which segments must Canton report supplementary informa
> Most decisions made by management impact the ratios analysts use to evaluate performance. Indicate (by letter) whether each of the actions listed below will immediately increase (I), decrease (D), or have no effect (N) on the ratios shown. Assume each ra
> Define a subsequent event.
> The current asset section of Guardian Consultant’s balance sheet consists of cash, accounts receivable, and prepaid expenses. The 2018 balance sheet reported the following: cash, $1,300,000; prepaid expenses, $360,000; long term assets, $2,400,000; and s
> The current asset section of the Excalibur Tire Company’s balance sheet consists of cash, marketable securities, accounts receivable, and inventories. The December 31, 2018, balance sheet revealed the following: Inventories ……………………………… $ 840, 000 Total
> Best Buy Co, Inc., is a leading retailer specializing in consumer electronics. A condensed income statement and balance sheet for the fiscal year ended January 30, 2016, are shown next. Liquidity and solvency ratios for the industry are as follows:
> The 2018 balance sheet for Hallbrook Industries, Inc., is shown below. The company’s 2018 income statement reported the following amounts ($ in thousands): Net sales ………â
> Listed below are several terms and phrases associated with the balance sheet and financial disclosures. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it. List A List B 1. Balance sheet a. W
> Access the FASB Accounting Standards Codification at the FASB website (www.fasb.org). Determine the specific citation for each of the following items: 1. What is the balance sheet classification for a note payable due in six months that was used to purch
> The fiscal year-end for the Northwest Distribution Corporation is December 31. The company’s 2018 financial statements were issued on March 15, 2019. The following events occurred between December 31, 2018, and March 15, 2019. 1. On January 22, 2019, th
> The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles. Required: 1. Obtain the relevant authoritative literature on the disclosure of accounting policies using the FASB Acc
> Parkman Sporting Goods is preparing its annual report for its 2018 fiscal year. The company’s controller has asked for your help in determining how best to disclose information about the following items: 1. A related-party transaction 2. Depreciation met
> Hallergan Company produces car and truck batteries that it sells primarily to auto manufacturers. Dorothy Hawkins, the company’s controller, is preparing the financial statements for the year ended December 31, 2018. Hawkins asks for your advice concerni
> The balance sheet and disclosure of significant accounting policies taken from the 2016 annual report of Wal- Mart Stores, Inc., appear below. Use this information to answer the following questions: 1. What are the asset classifications contained in Walm
> The following are typical disclosures that would appear in the notes accompanying financial statements. For each of the items listed, indicate where the disclosure would likely appear either in (A) the significant accounting policies note or (B) a sepa
> The following is the balance sheet of Korver Supply Company at December 31, 2017. Transactions during 2018 were as follows: 1. Sales to customers on account $800,000 2. Cash collected from customers 780,000 3. Purchase of merchandise on account 550,
> Cone Corporation is in the process of preparing its December 31, 2018, balance sheet. There are some questions as to the proper classification of the following items: a. $50,000 in cash restricted in a savings account to pay bonds payable. The bonds matu
> The following balance sheet for the Los Gatos Corporation was prepared by a recently hired accountant. In reviewing the statement you notice several errors. Additional Information: 1. Cash includes a $20,000 restricted amount to be used for repayment of
> You recently joined the internal auditing department of Marcus Clothing Corporation. As one of your first assignments, you are examining a balance sheet prepared by a staff accountant. In the course of your examination you uncover the following informati
> (Based on Appendix 3) Describe any differences in segment disclosure requirements between U.S. GAAP and IFRS.
> Vodafone Group, Plc., a U.K. company, is the largest mobile telecommunications network company in the world. The company prepares its financial statements in accordance with International Financial Reporting Standards. Below are partial company balance s
> Describe the common characteristics of assets classified as property, plant, and equipment and identify some assets included in this classification.
> For segment reporting purposes, what amounts are reported by each operating segment? (Based on Appendix 3)
> The Red Hen Company produces, processes, and sells fresh eggs. The company is in the process of preparing financial statements at the end of its first year of operations and has asked for your help in determining the appropriate treatment of the cost of
> A summary of the company’s significant accounting policies is a required disclosure. Why is this disclosure important to external financial statement users?
> Segment reporting facilitates the financial statement analysis of diversified companies. What determines whether an operating segment is a reportable segment for this purpose?
> The usefulness of the balance sheet is enhanced when assets and liabilities are grouped according to common characteristics. The broad distinction made in the balance sheet is the current versus long-term classification of both assets and liabilities. R
> Describe at least two differences between U.S. GAAP and IFRS in balance sheet presentation.
> Enron Corporation was a darling in the energy-provider arena, and in January 2001 its stock price rose above $100 per share. A collapse of investor confidence in 2001 and revelations of accounting fraud led to one of the largest bankruptcies in U.S. hist
> Show the calculation of the following solvency ratios: (1) the debt to equity ratio, and (2) the times interest earned ratio.
> Air France-KLM (AF), a Franco-Dutch company, prepares its financial statements according to International Financial Reporting Standards. AF’s financial statements and disclosure notes for the year ended December 31, 2015, are provided in Connect. This ma
> Target Corporation prepares its financial statements according to U.S. GAAP. Target’s financial statements and disclosure notes for the year ended January 30, 2016, are provided in available in Connect. This material is also available under the Investor
> The following information is taken from the balance sheet of Raineer Plumbing: cash and cash equivalents, $40,000; accounts receivable, $120,000; inventories,?; total current assets, $235,000; property, plant, and equipment (net), ?; total assets, $400,0
> The auditors’ report provides the analyst with an independent and professional opinion about the fairness of the representations in the financial statements. What are the four main types of opinion an auditor of a public company might issue? Describe eac
> You recently joined the auditing staff of Best, Best, and Krug, CPAs. You have been assigned to the audit of Clearview, Inc., and have been asked by the audit senior to examine the balance sheet prepared by Clearview’s accountant. Requi
> Explain the difference(s) between investments in equity securities classified as current assets versus those classified as long-term (noncurrent) assets.
> Refer to Exhibit 14–4. Is the return on this investment proposal exactly 14%, more than 14%, or less than 14%? Explain. Exhibit 14-4: Sales revenues Less cost of goods sold. Less out-of-pocket costs for salaries, advertising, etc.
> Explain how the cost of capital serves as a screening tool when using (a) the net present value method and (b) the internal rate of return method
> A business executive once stated, “Depreciation is one of our biggest sources of cash.” Doyou agree that depreciation is a source of cash? Explain.
> If a stock’s market value exceeds its book value, then the stock is overpriced. Do you agree? Explain.
> The president of a plastics company was quoted in a business journal as stating, “We haven’t had a dollar of interest-paying debt in over 10 years. Not many companies can say that.” As a stockholder in this company, how would you feel about its policy of
> What is meant by the term financial leverage?
> What is meant by the dividend yield on a common stock investment?
> Would you expect a company in a rapidly growing technological industry to have a high or low dividend payout ratio?
> What is the basic purpose for examining trends in a company’s financial ratios and other data? What other kinds of comparisons might an analyst make?
> Distinguish between horizontal and vertical analysis of financial statement data.
> A company seeking a line of credit at a bank was turned down. Among other things, the bank stated that the company’s 2 to 1 current ratio was not adequate. Give reasons why a 2 to 1 current ratio might not be adequate.
> Would a sale of equipment for cash be considered a financing activity or an investing activity?Why?
> What is the major criticism of the payback and simple rate of return methods of making capital budgeting decisions?
> What is meant by the term payback period? How is the payback period determined? How can the payback method be useful?
> How is the project profitability index computed, and what does it measure?
> Assume that two companies in the same industry have equal earnings. Why might these companies have different price-earnings ratios? If a company has a price-earnings ratio of 20 and reports earnings per share for the current year of $4, at what price wou
> As the discount rate increases, the present value of a given future cash flow also increases.Do you agree? Explain.
> Meiji Isetan Corp. of Japan has two regional divisions with headquarters in Osaka and Yokohama. Selected data on the two divisions follow (in millions of yen, denoted by ¥): Required: 1. For each division, compute the return on investment (RO
> For many years Futura Company has purchased the starters that it installs in its standard line of farmtractors. Due to a reduction in output, the company has idle capacity that could be used to producethe starters. The chief engineer has recommended agai
> Mason Paper Company (MPC) manufactures commodity grade papers for use in computer printers and photocopiers. MPC has reported net operating losses for the last two years due to intense price pressure from much larger competitors. The MPC management team—
> Juniper Design Ltd. of Manchester, England, is a company specializing in providing design services to residential developers. Last year the company had net operating income of £600,000on sales of £3,000,000. The company’s average operating assets for the
> Why aren’t common costs allocated to segments under the contribution approach?
> Explain how the segment margin differs from the contribution margin.
> Selected information relating to Yost Company’s operations for the most recent year is given below: The company applies overhead cost to products on the basis of standard machine-hours. Required: 1. What were the standard machine-hour
> “I know headquarters wants us to add that new product line,” said Dell Havasi, manager of Billings Company’s Office Products Division. “But I want to see the numbers before I make any move. Ourdivision’s return on investment (ROI) has led the company for
> Comparative data on three companies in the same service industry are given below: Required: 1. What advantages are there to breaking down the ROI computation into two separate elements,margin and turnover? 2. Fill in the missing information above, and c
> Imperial Jewelers is considering a special order for 20 handcrafted gold bracelets to be given asgifts to members of a wedding party. The normal selling price of a gold bracelet is $189.95 and itsunit product cost is $149.00 as shown below: Direct mater
> Provide the missing data in the following table for a distributor of martial arts products: Division Alpha Bravo Charlie $ ? $ ? Sales... $ ? $11,500,000 $ 920,000 Net operating income Average operating assets Margin.. $210,000 $800,000 ? $ ? 4% ? 7%
> Selected operating data for two divisions of Outback Brewing, Ltd., of Australia are given below (the currency is the Australian dollar, denoted here as $): Required: 1. Compute the rate of return for each division using the return on investment (ROI) f
> There is often more than one way to improve a performance measure. Unfortunately, some of the actions taken by managers to make their performance look better may actually harm the organization. For example, suppose the marketing department is held respon
> Royal Lawncare Company produces and sells two packaged products, Weedban and Greengrow. Revenue and cost information relating to the products follow: Common fixed expenses in the company total $33,000 annually. Last year the company produced and sold 15,
> Posters.com is a small Internet retailer of high-quality posters. The company has $1,000,000 in operating assets and fixed expenses of $150,000 per year. With this level of operating assets and fixed expenses, the company can support sales of up to $3,00
> The standard cost card for the single product manufactured by Cutter, Inc., is given below: Manufacturing overhead is applied to production on the basis of standard direct labor-hours. During the year, the company worked 37,000 hours and manufactured 9,
> Wingate Company, a wholesale distributor of videotapes, has been experiencing losses for sometime, as shown by its most recent monthly contribution format income statement, which follows: Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> Refer to the data in Exercise 12–13. Data from Exercise 12-13: Raner, Harris, & Chan is a consulting firm that specializes in information systems for medical anddental clinics. The firm has two offices—one in Chi
> Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor
> Raner, Harris, & Chan is a consulting firm that specializes in information systems for medical anddental clinics. The firm has two offices—one in Chicago and one in Minneapolis. The firm classifies the direct costs of consulting job
> A family friend has asked your help in analyzing the operations of three anonymous companiesoperating in the same service sector industry. Supply the missing data in the table below: Company A B C Sales ... $9,000,000 $7,000,000 $4,500,000 Net operat
> Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company’smost recent monthly contribution format income statement follows: A study indicates that $340,000 of the fixed expenses being charged to Linens
> Ariel Tax Services prepares tax returns for individual and corporate clients. As the company has gradually expanded to 10 offices, the founder Max Jacobs has begun to feel as though he is losing controlof operations. In response to this concern, he has d
> CommercialServices.com Corporation provides business-to-business services on the Internet. Data concerning the most recent year appear below: Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,000,000 Net opera
> Pecs Alley is a regional chain of health clubs. The managers of the clubs, who have authority tomake investments as needed, are evaluated based largely on return on investment (ROI). TheSpringfield Club reported the following results for the past year: S
> Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Required: 1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. 2. Comp
