Question: Montgomery Ward operates a retail department store
Montgomery Ward operates a retail department store chain. It filed for bankruptcy during the first quarter of Year 12. Exhibit 3.22 presents a statement of cash flows for Montgomery Ward for Year 7 to Year 11. Exhibit 3.22: 
The firm acquired Lechmere, a discount retailer of sporting goods and electronic products, during Year 9. It acquired Amoco Enterprises, an automobile club, during Year 11. During Year 10, it issued a new series of preferred stock and used part of the cash proceeds to repurchase a series of outstanding preferred stock. The ‘‘other subtractions’’ in the operating section for Year 10 and Year 11 represent reversals of deferred tax liabilities. REQUIRED: Discuss the relations between net income and cash flow from operations and among cash flows from operating, investing, and financing activities for the firm over the five-year period. Identify signals of Montgomery Ward’s difficulties that might have led to its filing for bankruptcy.
Transcribed Image Text:
Exhibit 3.22 Montgomery Ward Statement of Cash Flows (amounts in millions) (Problem 3.24) Year 11 Year 10 Year 9 Year 8 Year 7 OPERATIONS $ (9) $ 109 $ 101 98 Net income $(237) $ 100 Depreciation Other addbacks Other subtractions 122 115 109 97 24 (29) 13 8 25 32 (197) (119) (Increase) Decrease in accounts receivable (32) (54) (38) (9) 9. (Increase) Decrease in inventories 225 (112) (229) (204) (38) (32) (Increase) Decrease in prepayments Increase (Decrease) in accounts payable Increase (Decrease) in other current liabilities 27 (39) 291 (58) 36 (222) (55) 85 148 (17) (64) (45) 28 (64) Cash Flow from Operations $(356) S(182) $ 153 $ 129 $ 155 INVESTING $ 75) 20 $(122) (14) S(142) S(146) Fixed assets acquired Change in marketable securities Other investing transactions Cash Flow froifi InvestingAll Rights Reserved. May not bag48)annes109)ated, S(301 pans(163) S(184) (4) (27) 137 (93) 27 (113) 6 6. Exhibit 3.22 (Continued) FINANCING $ 588 $ 16 $ 144 $ - Increase in short-term borrowing Increase in long-term borrowing Issue of capital stock Decrease in short-term borrowing Decrease in long-term borrowing 205 168 100 3 193 78 1 (63) (17) (275) (18) (403) Acquisition of capital stock (20) (98) (9) (11) (97) Dividends (9) (4) (24) (23) (19) Other 2 $ 51 $ 17 2 Cash Flow from Financing $ 499 $ 295 $ 83 $(516) S (65) Change in Cash Cash-Beginning of year $ 5) 37 $ 32 $(361) 33 98 81 442 Cash-End of Year $ 37 $ 33 $ 98 $ 81 Change in sales from previous year (10.0% (0.5)% +17.2% +3.7% +2.0%
> Since the early 1990s, woodstove sales have declined from 1,200,000 units per year to approximately 100,000 units per year. The decline has occurred because of (1) stringent new federal EPA regulations, which set maximum limits on stove emissions beginn
> Walmart Stores, Inc. (Walmart) is the largest retailing firm in the world. Building on a base of discount stores, Walmart has expanded into warehouse clubs and Supercenters, which sell traditional discount store items and grocery products. Exhibits 10.10
> Integrative Case 10.1 involves projecting financial statements for Walmart for Years þ1 through þ5. The following data for Walmart include the actual amounts for 2015 and the projected amounts for Years þ1 thr
> A sales-based ranking of software companies provided by Yahoo! Finance on November 5, 2008, places Oracle Corporation third behind sales leaders Microsoft Corporation and IBM Software. Typical of high-tech companies in the software industry, Oracle Corpo
> In its December 31, 2008, Consolidated Financial Statements, The Cola-Cola Company (Coca-Cola) reports a substantial shift in its net pension liability ($1,328 million) relative to December 31, 2007 ($85 million). REQUIRED: a. Given a portion of Coca-Co
> Exhibits 1.26–1.28 of Integrative Case 1.1 (Chapter 1) present the financial statements for Walmart for 2012–2015. In addition, the website for this text contains Walmart’s December 31, 2015, Form 10-
> In August 2009, The Walt Disney Company announced that it would acquire Marvel Entertainment, Inc., in a $4 billion cash and common stock deal. On a per-share basis, the consideration given by Disney to Marvel shareholders represents a 29% premium over M
> Walmart makes significant investments in operating capacity, primarily via investments in property, plant, and equipment, but also via investments in wholly and partially owned subsidiaries. Walmart also has significant non-U.S. operations in its Walmart
> The first decade of the 21st century witnessed a flurry of losses, bankruptcies, acquisitions, and strategic partnerships in the airline industry. The heavily levered firms in the industry are particularly susceptible to increases in fuel prices, economi
> It is common practice for retail outlets to lease their store locations and distribution centers. Walmart is no exception. Note 11 to Walmart’s consolidated financial statements for the fiscal year ending January 31, 2016 (found online at the text websit
> Assume Boeing sold a 767 aircraft to American Airlines on January 1, 2016. The sales agreement required American Airlines to pay $10 million immediately and $10 million on December 31 of each year for 20 years, beginning on December 31, 2016. Boeing and
> Explain the implications of a value to-book ratio that is greater than the market-to-book ratio. Explain the implications of a value to-book ratio that is less than the market-to-book ratio.
> Using the evidence presented in Exhibit 14.8, describe the extent to which the market is efficient with respect to quarterly earnings surprises during the 60 trading days prior to quarterly earnings announcements. Using the evidence presented in Exhibit
> Identify three economic factors that will drive a firm’s value-to-book ratio to be higher than that of other firms in the same industry. Identify three accounting factors that will drive a firm’s value-to-book ratio to be higher than that of other firms
> Explain the implications of a value to-book ratio that is exactly equal to 1. Compare the implications of a value-to-book ratio that is greater than 1 to those of a value-to-book ratio that is less than 1.
> Explain the theory behind the residual income valuation approach. Why is residual income value relevant to common equity shareholders?
> Explain residual income. How is it measured? What does residual income represent?
> Arbortech, a designer, manufacturer, and marketer of PC cards for computers, printers, telecommunications equipment, and equipment diagnostic systems, was the darling of Wall Street during Year 6. Its common stock price was the leading gainer for the yea
> Conceptually, why should you expect a valuation based on dividends, a valuation based on the free cash flows for common equity shareholders, and a valuation based on residual income to yield equivalent value estimates for a given firm?
> Explain the theory behind the free-cash-flows valuation approaches. Why are free cash flows value-relevant to common equity shareholders when they are not cash flows to those shareholders but rather are cash flows into the firm?
> The chapter describes how firms must use flexible financial accounts to maintain equality between assets and claims on assets from liabilities and equities. Chapter 1 describes how some firms progress through different life-cycle stages—from introduction
> Use the following hypothetical data for Walgreens in 2014 and 2015 to project revenues, cost of goods sold, and inventory for Year þ1. Assume that Walgreens’s Year þ1 revenue growth rate, gross profit margi
> The chapter describes how the dividends-based valuation approach measures dividends to encompass various transactions between the firm and the common shareholders. What transactions should you include in measuring dividends for the purposes of implementi
> The chapter asserts that dividends are value relevant even though the firm’s dividend policy is irrelevant. How can that be true? What is the key assumption in the theory of dividend policy irrelevance?
> Why is the dividends based valuation approach applicable to firms that do not pay periodic (quarterly or annual) dividends?
> Explain why analysts and investors use risk adjusted expected rates of return as discount rates in valuation. Why do investors expect rates of return to increase with risk?
> The notes to a firm’s financial statements reveal that the obligations for postretirement health care benefits at the end of 2017 total $2.1 billion. The fair value of plan assets for these benefits at the end of 2017 is reported at zero, with an unrecog
> Given the following information, compute December 31, 2017, projected benefit obligation (PBO) and fair market value (FMV) of plan assets for Lee Company. What amount of asset or liability will be reported on the balance sheet at December 31, 2017? Prio
> Citigroup Inc. (Citi) is a leading global financial services company with over 200 million customer accounts and operations in more than 140 countries. Its operating units Citicorp and Citi Holdings provide a broad range of financial products and service
> HeavyEQ produces large conveyor belt systems for heavy manufacturing. HeavyEQ signs a $2 million fixed-price contract under which it makes three promises: ● Install a conveyor belt system: fair value $1.6 million ● Service the system over a five-year per
> Bookman Co. develops digital accounting systems and provides accounting-related consulting services. a. On January 1, 2017, Bookman signs a contract with Brock Florists to install a system and provide consulting services over a two-year period ending in
> Financial reporting classifies derivatives as (a) speculative investments, (b) fair value hedges, or (c) cash flow hedges. However, firms revalue all derivatives to market value each period regardless of the firm’s reason for acquiring the derivatives
> New lease standards become effective January 1, 2019. These standards affect the accounting for operating leases. Assume Swift Company acquires a machine with a fair value of $100,000 on January 1 of Year 1 by signing a five-year lease. Swift must make p
> Assume that Circuit City owes Synovus Bank $1,000,000 on a four-year, 7% note originally issued at par. After one year of making scheduled payments, Circuit City faces financial difficulty. At the end of the second year, Circuit City owes Synovus $1,000,
> Assume that on December 31, 2017, The Coca-Cola Company borrows money from a consortium of banks by issuing a $900 million promissory note. The note matures in four years on December 31, 2021, and pays 3% interest once a year on December 31. The consorti
> Nestle ´ Group, a multinational food products firm based in Switzerland, recently issued its financial statements. The auditor’s opinion attached to the financial statements stated the following: ‘‘In our opinion, the financial statements for the year en
> Checkpoint Systems, a leading provider of source tagging, handheld labeling systems, retail merchandising systems, and bar-code labeling systems, stated the following in a press release: GAAP reported net loss for the fourth quarter of 2004 was $29.3 mil
> Rock of Ages, Inc., a large North American integrated granite quarrier, manufacturer, and retailer of finished granite memorials, reported a net loss for 2004 of $3.2 million. In 2004, the firm reported a pretax litigation settlement loss of $6.5 million
> Valero Energy, a petroleum company, reported net income (amounts in millions) of $1,803.8 on revenues of $54,618.6 for Year 4. Interest expense totaled $359.7, and preferred dividends totaled $12.5. Average total assets for Year 4 were $17,527.9. The inc
> Exhibits 1.26–1.28 of Integrative Case 1.1 (Chapter 1) present the financial statements for Walmart for 2012 to 2015. In addition, the website for this text contains Walmart’s December 31, 2015, Form 10-K. You should r
> Firms often provide supplemental disclosures that report and discuss income figures that do not necessarily equal bottom-line net income from the income statement. For example, in Twitter’s initial public offering filings with the SEC, the company report
> iRobot designs and manufactures robots for consumer, commercial, and military use. For the fiscal year ended January 2, 2016, the company reported the following on its balance sheet and income statement (amounts in thousands): ● Accounts receivable, net
> ‘‘The ordering of the three sections of the statement of cash flows is ‘backwards’ for start-up firms, but it is more appropriate for businesses once they are up and running.’’ Explain.
> The chapter demonstrates how to prepare a statement of cash flows from information on the balance sheet and income statement. If this is possible, why are managers required to provide a statement of cash flows?
> A firm’s income tax return shows income taxes for 2017 of $35,000. The firm reports deferred tax assets before any valuation allowance of $24,600 at the beginning of 2017 and $27,200 at the end of 2017. It reports deferred tax liabilities of $18,900 at t
> A firm’s income tax return shows $50,000 of income taxes owed for 2017. For financial reporting, the firm reports deferred tax assets of $42,900 at the beginning of 2017 and $38,700 at the end of 2017. It reports deferred tax liabilities of $28,600 at th
> Apply the economic attributes framework discussed in the chapter to the specialty retailing apparel industry, which includes such firms as Gap, Limited Brands, and Abercrombie & Fitch.
> Aer Lingus is an international airline based in Ireland. Exhibit 3.24 provides the statement of cash flows for Year 1 and Year 2, which includes a footnote from the financial statements. Year 2 was characterized by weakening consumer demand for air trave
> The Apollo Group is one of the largest providers of private education and runs numerous programs and services, including the University of Phoenix. Exhibit 3.23 provides statements of cash flows for 2010 through 2012. REQUIRED: Discuss the relations bet
> Douglas C. Mather, founder, chair, and chief executive of Fly-by-Night International Group (FBN), lived the fast-paced, risk-seeking life that he tried to inject into his company. Flying the company’s Learjets, he logged 28 world speed
> The first case at the end of this chapter and numerous subsequent chapters is a series of integrative cases involving Wal-Mart Stores, Inc. (Walmart). The series of cases applies the concepts and analytical tools discussed in each chapter to Walmart&acir
> Jeff, a single individual, receives $5,000 interest income from Treasury bills and $18,000 in Social Security benefits. What is Jeff’s gross income?
> Julie wins $15 million in the lottery payable over 30 years. In years 1 through 4, she receives annual installments of $500,000. At the beginning of year 5, Julie sells her right to receive the remaining 26 payments to a third party for a lump-sum paymen
> The Board of Directors of CYZ Corporation votes to issue two shares of stock for each share held as a stock dividend to shareholders. Just prior to the dividend, Cheryl owns 100 shares of CYZ Corporation stock that she purchased for $10 per share. She re
> Carl paid $40,000 to the City of Hollywood for general revenue bonds. During the current year, he received $2,300 interest income from the bonds. Market interest rates drop, causing the value of the bonds to increase so Carl sells the bonds for $43,000.
> Jose (SSN 150-45-6789) and Rosanna (SSN 123-45-7890) Martinez are a married couple who reside at 1234 University Drive in Coral Gables, FL 33146. They have two children: Carmen, age 19 (SSN 234-65-4321), and Greg, age 10 (SSN 234-65-5432). Carmen is a fu
> Janice Morgan is 17 and in her senior year of high school. She lives with her parents at 7829 Dowry Lane, Boston, MA 02112, and they are her primary source of support and claim her as a dependent on their tax return. She is covered under their health ins
> Go to the IRS Web site (www.irs.gov) and print Form 1040 and Schedule A. Using the information in problem 70, complete these forms to the extent possible.
> George owns 1,000 shares of ABC common stock and 3,000 shares of Brightstar mutual fund. George elects to participate in Brightstar’s dividend reinvestment plan, reinvesting his annual dividends and capital gains distributions in additional Brightstar sh
> Go to the IRS Web site (www.irs.gov) and print Form 1040 and Schedule A. Using the information in problem 69, complete these forms to the extent possible.
> In January, Susan’s employer transferred her from Chicago to Houston (where she continues to work for the remainder of the year). Her expenses were: Transportation for household goods………….$2,300 Airfare from Chicago to Houston……………………200 Pre-move house-h
> Go to the IRS Web site (www.irs.gov) and print Schedule A: Itemized Deductions. Using the following information, complete this form for Simon and Ellen, both age 48 and married filing jointly, who have adjusted gross income of $60,000. They paid the foll
> Go to www.irs.gov (the IRS Web site) and click on Careers under Work at IRS. Look under Resources, then under Job Descriptions, and finally look under Accounting, Budget & Finance to learn more about Internal Revenue Agent positions. a. If you are a rec
> Go to the IRS Web site (www.irs.gov). Print the first page of Form 1040 and compute Pierre Lappin’s adjusted gross income by entering the following information: $60,000 salary, $5,000 qualified dividend income, $3,000 interest income from corporate bonds
> Go to the IRS Web site (www.irs.gov) and print Form 2106: Employee Business Expenses. Use the following information to complete this form. Carl is an employee of Intelligent Devices, Inc. in San Jose. In a typical week, Carl spends the majority of his
> Jordan (SSN 150-66-7788) and Diana (SSN 15067-4321) Diego are a married couple who reside at 111 Coral Drive in Miami, FL 33156. They have one dependent daughter, Emily (SSN 155-88-4321), age 18, who lives at home. Jordan is a manager at Big Box Corpor
> Go to the IRS Web site (www.irs.gov) and print Schedule C: Profit or Loss for Business (Sole Proprietorship), Schedule SE: Self-Employment Tax, and Form 8829: Expenses for Business Use of Your Home. Use the information in problem 47 to complete these for
> Go to the IRS Web site (www.irs.gov) and print the page of Form 1120: U.S. Corporate Income Tax Return that includes Schedule M-1. Use the information in example 6.42 to complete Schedule M-1.
> Go to the IRS Web site (www.irs.gov) and print Schedule E: Supplemental Income and Loss. Use the following information to complete this form. Gillian Martin rented her vacation home in Telluride, Colorado for 60 days during the year receiving $6,900 in
> Carolyn has a 50 percent interest in a general partnership that has a $14,000 loss for the year. She materially participates in the partnership. Her basis in the partnership is $10,000. She also has salary from other employment of $46,000. If she is sing
> Go to www.irs.gov and print Form 1040 and Schedule SE. Complete the first page of Form 1040 and Schedule SE for Angelina Carlyle who is single. She reports $195,000 of net profit on her Schedule C from her sole proprietorship and $2,000 of taxable intere
> Kondex, a cash-basis corporation, is considering paying $50,000 of expenses at the end of this year rather than waiting until next year. Kondex’s marginal tax rate for the current year is 25 percent but it expects to be in the 34 percent marginal tax bra
> On December 1, year 1, Peak Advertising (a calendar-year, accrual-basis taxpayer) received a $24,000 retainer fee for a two-year service contract. a. How much income should Peak report in year 1 for tax and financial accounting? b. How much income shoul
> Sorbon Corporation pays federal income tax at a 34 percent rate. In year 1, Sorbon deducts $80,000 as bad debt expense in computing its book income but deducts only $70,000 for bad debt expense on its tax return. a. What is the difference between Sorbon
> Noah, a single parent, estimated his income tax liability would be $8,000. He made estimated tax payments of $6,900 during the year. Noah also determined that he is entitled to claim a child tax credit of $1,000. What is Noah’s tax due?
> Diana, a single individual, has regular taxable income of $220,000 and alternative minimum taxable income of $350,000. a. What is Diana’s tentative minimum tax? b. What is Diana’s AMT?
> Lenora and Sam are married and file a joint tax return. Lenora has $180,000 in salary and Sam has $190,000 in self-employment income in 2017. How much must they pay for their additional Medicare surtax?
> Andrew, a single individual, has $220,000 in salary and $60,000 in self-employment income in 2017. How much must he pay for his additional Medicare surtax?
> Roland worked for Sorbonne Company for the first four months of 2017 and earned $40,000 from which his employer withheld $3,060 for payroll taxes. In May, Roland accepted a job with Lyon Company. During the last eight months of the year, Roland earned $9
> June is a single individual with AGI of $45,000 for the year. June has a five-year-old son in day care while she works. a. What is her dependent care credit if she spends $5,000 for child care during the year? b. What is her dependent care credit if sh
> Hunter Corporation has $250,000 in gross income, $125,000 in deductible business expenses, and a $12,000 business tax credit. Determine the corporation’s net tax liability.
> Doris is a single individual with modified AGI of $57,000. During the year, she paid $11,000 tuition for a master’s in taxation program. How much can Doris claim for the lifetime learning credit?
> Greg and Barbara, a married couple with an AGI of $80,000, have three children who are full-time college students. They pay $6,000 for tuition annually for each child. One son is a sophomore in college and the other son is a senior. Their daughter is a
> Cindy files as head of household and has three dependent children ages 12, 14, and 16. Her AGI is $80,000. How much can Cindy claim for the child tax credit?
> Kevin is an employee of One Hour Dry Cleaners, Inc. All employees of One Hour are eligible for a 40 percent discount on their dry cleaning. During the year, Kevin paid $300 for cleaning that normally would have cost $500. Does Kevin have any taxable inco
> Elena is single but her mother, Maria, lives with her. Maria’s sole income is $7,000 in Social Security (which she saves for unexpected medical expenses) and $500 of interest income on that account. Elena provided a room in her home for Maria that could
> Scott is 15 years old and qualifies as a dependent on his parents’ tax return. During 2017 he earns $2,500 from a part-time job and also receives $800 of dividend income on stock given to him by his aunt. What is Scott’s taxable income?
> Michael’s adjusted gross income for 2017 is $90,000. He is age 30 and single with no dependents. What is Michael’s taxable income?
> Joseph provides $12,000 of support for his mother, Miriam, who lives with him. Miriam is single and a U.S. citizen. Her only income is Social Security of $5,000 and taxable pension income of $4,200. Miriam uses the Social Security income for support but
> Suzanne, who is a head of household, has the following deductions before considering any phaseouts: Interest on qualified acquisition debt………$9,800 Real property taxes…………………………………..3,000 State income taxes……………………………………5,000 Charitable contributions………
> Pablo and Adriana, a married couple who file a joint return, purchased a $190,000 home making a $38,000 cash down payment and taking out a mortgage for the balance of the purchase price. They also paid the mortgage company $3,000 in points for originatin
> Priscilla, an employee of Choice Corporation, has an annual salary of $70,000. Choice has a cafeteria plan that allows all employees to choose an amount equal to 8 percent of their annual salary from a menu of nontaxable fringe benefits or to take cash.
> Rebecca and Gregory, a married couple filing a joint return, reported adjusted gross income of $70,000 and total allowable itemized deductions of $13,000, including $3,100 for state income taxes, in 2017. They received a $900 refund of state income taxes
> Daniel’s adjusted gross income is $90,000. During the year he incurred $14,000 of medical expenses and was reimbursed for $3,000 of these expenses. What is his allowable medical expense deduction if he is age 45, single, and itemizes? If this is Daniel’s
> Lynn, age 66, is an unmarried individual who has a dependent grandchild who lives with her. What is Lynn’s standard deduction for 2017?
> Harry and Silvia, a married couple, are both age 67 and legally blind. What is their standard deduction for 2017?
> Clark works all year at the front desk of the Dew Drop Inn and earns a salary of $30,000. He is offered the option of a $400-per-month living allowance or rent-free use of a room at the inn. Clark chooses to live at the inn in a room that normally rents
> Cecilia is married and files a joint return with her husband, Steve. They have modified adjusted gross income of $140,000. Cecilia paid $2,700 in student loan interest this year. How much of this interest is deductible?
> Mark works in a foreign country for the entire calendar year. His salary is $120,000 and he pays $18,000 in tax to the foreign government. His other taxable income (from U.S. sources) after all deductions is $30,000. If he claims the foreign earned incom
> Alexander works as an electrician at a small company that provides no retirement benefits. He receives a salary of $45,000. In addition, Alexander operates a small roof repair service as a sole proprietorship; this business has a net loss of $2,500. In a
