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ACC600 Midterm Exam Spring 2014

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Question;ACC 600 Spring 2014 Midterm;Refer to the financial statement data for the company ABC;Financial Statements;INCOME STATEMENT (in;millions);Fiscal year end;2013;2012;2011;Sales;$2,696;$ 3,139;$ 2,816;Cost of Goods Sold;(1,252);(1,288);(1,099);Selling, General & Admin.;Exp.;Advertising;(387);(364);(297);Research and Development;(157);(143);(154);Royalty Expense;(223);(248);(296);Other Selling and;Administrative;(385);(799);(788);Interest expense;(32);(53);(78);Income tax expense;(64);(69);(29);Net income;$ 196;$ 175;$ 75;Balance Sheet;Fiscal year end;2013;2012;2011;2010;ASSETS (in millions);Cash;$ 625;$421;$ 496;$233;Accounts;Receivable;579;607;555;572;Inventories;195;169;190;217;Prepayments;219;212;191;346;Total;current assets;$1,618;$1,409;$1,432;$1,368;Property;plant & equipment;207;200;213;236;Other;Assets;1,416;1,554;1,498;1,765;Total;assets;$3,241;$3,163;$3,143;$3,369;LIABILITIES;Accounts;payable;$ 168;$ 159;$ 166;$ 123;Short-term;borrowing;342;24;223;36;Other;current liabilities;584;756;578;599;Total;current liabilities;$1,094;$ 939;$ 967;$ 758;Long;term debt;303;687;857;1,166;Other;noncurrent liabilities;149;141;128;92;Total;liabilities;$1,546;$1,767;$1,952;$2,016;Common;stock;$;105;$ 105;$ 105;$ 105;Additional;Paid-in Capital;381;398;458;455;Retained;earnings;1,776;1,558;1,430;1,622;Accumulated;Other Comprehensive Income;82;30;(47);(68);Treasury;Stock;(649);(695);(755);(761);Total;Shareholders' equity;$1,695;$1,396;$1,191;$1,353;Total;Liabilities & Shareholders? Equity;$3,241;$3,163;$3,143;$3,369;Requirement 1: Based on the above;information, finish the Cash flow from operations part;Statement of Cash Flows;Operations;2013;2012;2011;Net Income;$;196;$175;$75;Depreciation & Amortization;$;145;164;184;(Increase) Decrease Accounts Receivables;28;-52;17;(Increase) Decrease Inventories;-26;21;27;(Increase) Decrease Prepayments;-7;-21;155;(Decrease) Increase Accounts Payable & Other;9;-7;43;Cash flows from operations;4;-59;426;Investing;Property Plant and Equipment acquired;($79);($63);($59);Other Investing Transactions;-6;-2;-3;Cash Flows from Investing;($85);($65);($62);Financing;Increase in Common Stock;0;0;0;Increase (Decrease) in Short-term Borrowing;318;-199;187;Increase (Decrease) in Long-term Borrowing;-384;-170;-309;Acquisition of Common Stock;-46;60;-6;Dividends;-37;-21;-21;Other Financing Transactions;879;243;-250;730;-87;-399;Required 2: You will find the company is growing;each year. Evaluate if the growth is sustainable.;Solution;The growth of the;company is sustainable, the company has been able to reduce its expenses and;increase its profitability despite seeing a decrease in sales. The company?s;investment in the plant and property has increased in 2013 as compared to the;previous year. Apart from investing activities, the company has increased its;short-term borrowings. The company has paid off its long-term borrowings, with;which its long-term debt has decreased.;Apart from this, the;solvency ratio of the firm has decreased which can be a risk to its credibility;and solvency. On the other hand, the company has tried maintaining its;liquidity ratios and profitability ratios.;Required 3;Please finish the following ratio chart for;2013.;2013;2012;2011;Days Revenues Held in Cash;52.122;48.953;47;Current Ratio;1.479;1.501;1.5;Quick Ratio;1.301;1.095;1.1;Days Accounts Receivable;78.388;67.558;73;Days Inventory;56.849;50.868;68;Days Accounts Payable;48.978;46.813;49;Liabilities to Assets Ratio;0.477;0.559;0.621;Liabilities to Shareholders? Equity Ratio;0.912;1.266;1.639;Long-Term Debt to Long-Term Capital Ratio;0.278;0.33;0.418;Long-Term Debt to Shareholders? Equity Ratio;0.267;0.492;0.72;Required 4: Suppose the inventory balance for;2013 is under stated by 60 (the correct amount should be 255). How does the;correction of the inventory affect your answers in Required 3? Please;recalculate ratios you presented.;Solution;Recalculating the;ratios;2013;2012;2011;Days Revenues Held in Cash;52.122;48.953;47;Current Ratio;1.534;1.501;1.5;Quick Ratio;1.246;1.095;1.1;Days Accounts Receivable;78.388;67.558;73;Days Inventory;74.341;50.868;68;Days Accounts Payable;48.978;46.813;49;Liabilities to Assets Ratio;0.468;0.559;0.621;Liabilities to Shareholders? Equity Ratio;0.912;1.266;1.639;Long-Term Debt to Long-Term Capital Ratio;0.278;0.33;0.418;Long-Term Debt to Shareholders? Equity Ratio;0.267;0.492;0.72;Required 5: Compare your;profitability assessments based on your answers on 3 and 4.;Comparing the profitability based on the ratio calculation of answers;3 and 4, we can say that with the increase in the inventory, the profitability;of the company has increased a bit. With the increase in the inventory, the;current ratio has increased whereas there is a slight decrease in the quick;ratio. The days in inventory has increased in 4 as compared to 3.;In terms of the profitability of the company, we can see that the;profitability of the company has increased to 7.27% in 2013 as compared to;5.57% in 2012. The profitability of the company has been increasing over the;year. The company is trying to emphasize sustainable growth, the only problem that;the company is likely to face is the issue in respect to the solvency as the;liabilities of the company is increasing as compared to its shareholder?s;equity.

 

Paper#41461 | Written in 18-Jul-2015

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