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ADM 1340 Lecture Notes - Lecture 3: Deferred Income, Faithful Representation, Historical Cost

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jadealpaca625
20 Jan 2015
School
University of Ottawa
Department
Administration
Course
ADM 1340
Professor
Lamia Chourou

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ADM 1340 Full Course Notes
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ADM 1340 Full Course Notes
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Document Summary

Learning objectives: identify the sections of a classified statement of financial position, identify and calculate rations for analyzing a company"s liquidity, solvency, and profitability, describe the framework for preparation and presentation of financial statements. Assets are usually classified into: current, non-current. Intangible assets- does not have any physical substance, ex. trademark but is still. Liabilities: a liability is, a present obligation of the company, arising from past event, the settlement of which is expected to result in an outflow from the company of resources embodying economic benefits, usually classified as current/non-current. Non-current liabilities: obligation expected to be paid or settled after one year, known as long-term debt, includes, notes payable (bank loan payable, bonds payable, mortgages payable, lease liabilities, pension and benefit obligations, deferred income tax. Shareholders" equity: is the residual interest in the assets of an entity after deducting all its liabilities, assets = liabilities + shareholders equity, se=a-l, it is composed of, share capital.

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Related Questions

The financial statements for Armstrong and Blair companies are summarized here:
Armstrong
Company		 Blair
Company
Balance Sheet
Cash $ 27,000 $ 14,000
Accounts Receivable, Net 32,000 22,000
Inventory 84,000 24,000
Equipment, Net 164,000 284,000
Other Assets 37,000 400,000
Total Assets $ 344,000 $ 744,000
Current Liabilities $ 84,000 $ 34,000
Note Payable (long-term) 44,000 354,000
Total Liabilities 128,000 388,000
Common Stock (par $10) 142,000 192,000
Additional Paid-in Capital 22,000 102,000
Retained Earnings 52,000 62,000
Total Liabilities and Stockholders’ Equity $ 344,000 $ 744,000
Income Statement
Sales Revenue $ 426,000 $ 786,000
Cost of Goods Sold 237,000 397,000
Other Expenses 152,000 307,000
Net Income $ 37,000 $ 82,000
Other Data
Estimated value of each share at end of year $ 18 $ 27
Selected Data from Previous Year
Accounts Receivable, Net $ 12,000 $ 30,000
Inventory 84,000 37,000
Equipment, Net 164,000 284,000
Note Payable (long-term) 44,000 62,000
Total Stockholders’ Equity 223,000 432,000

The companies are in the same line of business and are direct competitors in a large metropolitan area. Both have been in business approximately 10 years and each has had steady growth. Despite these similarities, the management of each has a different viewpoint in many respects. Blair is more conservative, and as its president said, “We avoid what we consider to be undue risk.” Both companies use straight-line depreciation, but Blair estimates slightly shorter useful lives than Armstrong. No shares were issued in the current year and neither company is publicly held. Blair Company has an annual audit by a CPA, but Armstrong Company does not. Assume the end-of-year total assets and net equipment balances approximate the year’s average and all sales are on account.
Required:
1.

Calculate the following ratios.

TIP: To calculate EPS, use the balance in Common Stock to determine the number of shares outstanding. Common Stock equals the par value per share times the number of shares. (Use 365 days in a year. Round your intermediate calculations and your final answers to 2 decimal places.)
Ratio Armstrong Company Blair Company
Tests of Profitability:
1. Net Profit Margin 8.69 % 10.43 %
2. Gross Profit Percentage % %
3. Fixed Asset Turnover
4. Return on Equity % %
5. Earnings per Share
6. Price/Earnings Ratio
Tests of Liquidity:
7. Receivables Turnover
Days to Collect
8. Inventory Turnover
Days to Sell
9. Current Ratio
Tests of Solvency:
10. Debt-to-Assets

Page 1
Chapter 4: Measuring Corporate Performance
Case Study: Corporate Lending Group: The Hobby Horse
Company, Inc. (HH)
Burchetts Green had enjoyed the bank training course, but it was good to
be starting his first real job in the corporate lending group. Earlier that
morning the boss had handed him a set of financial statements for The
Hobby Horse Company, Inc. (HH). "Hobby Horse," she said, "has a $45
million loan from us due at the end of September, and it is likely to ask us
to roll it over. The company seems to have run into some rough weather
recently, and I have asked Furze Platt to go down there this afternoon and
see what is happening. It might do you good to go along with her. Before
you go, take a look at these financial statements and see what you think
the problems are. Here's a chance for you to use some of that stuff they
taught you in the training course."
Mr. Green was familiar with the HH story. Founded in 1990, it had rapidly
built up a chain of discount stores selling materials for crafts and hobbies.
However, last year a number of new store openings coinciding with a poor
Christmas season had pushed the company into loss. Management had
halted all new construction and put 15 of its existing stores up for sale.
Mr. Green decided to start with the 6-year summary of HH's balance sheet
and income statement (Table 4-1). Then he turned to examine in more
detail the latest position (Tables 4-2 and 4-3).
Source: Brealey, R.A.; Myers, S.C.; Marcus, A.J. (2009): Fundamentals of
Corporate Finance, 6th ed., New York: McGraw Hill, p. 107.
Questions:
What appear to be the problem areas in HH? Do the financial ratios
suggest questions that Ms. Platt and Mr. Green need to address?
1. Calculate financial ratios to interpret HH’s profitability, efficiency,
leverage, and liquidity. Use flow measures for the calculation of the
profitability and efficiency ratios (averages of the year).
2. For the preparation of the meeting with the bank, calculate also the
development of the leverage and liquidity ratios over the past years.
3. Interpret the calculated ratios and give suggestions for the management
how to proceed or how to (possibly) solve the problems.
Fachbereich Elektrische
Energietechnik
Prof. Dr. Valerie Wulfhorst
Betriebswirtschaftslehre,
insb. Controlling
Telefon
02921 378-451
Telefax
02921 378-409
E-Mail
[email protected]
Standort Soest
Lübecker Ring 2
59494 Soest
Fachhochschule
Südwestfalen
Sitz: Iserlohn
Hagen
Iserlohn
Meschede
Soest
www.fh-swf.de
Page 2
Tables:
Table 4- 1: Finance highlights for The Hobby Horse Company, Inc., year
ending March 31
Table 4- 2:
2008 2007 2006 2005 2004 2003
Net sales 3,351 3,314 2,845 2,796 2,493 2,160
EBIT -9 312 256 243 212 156
Interest 37 63 65 58 48 46
Taxes 3 60 46 43 39 34
Net profit -49 189 145 142 125 76
Earning per share -0.15 0.55 0.44 0.42 0.37 0.25
Current assets 669 469 491 435 392 423
Net fixed assets 923 780 753 680 610 536
Total assets 1,592 1,249 1,244 1,115 1,002 595
Current liabilities 680 365 348 302 276 320
Long-term debt 236 159 297 311 319 315
Stockholder’s equity 676 725 599 502 407 324
Number of stores 240 221 211 184 170 157
Employees 13,057 11,835 9,810 9,790 9,075 7,825
INCOME STATEMENT FOR
THE HOBBY HORSE COMPANY, INC.,
FOR YEAR ENDING MARCH 31, 2008
(all items in millions of dollars)
Net sales 3,351
Cost of goods sold 1,990
Selling, general, and administrative expenses 1,211
Depreciation expense 159
Earnings before interest and taxes (EBIT) -9
Net interest expense 37
Taxable income -46
Income taxes 3
Net income -49
Allocation of net income
Addition to retained earnings -49
Dividends 0
Page 3
Table 4- 3:
CONSOLIDATED BALANCE SHEET FOR THE HOBBY HORSE COMPANY, INC.
(figures in millions of dollars)
Assets Mar. 31, 2008 Mar. 31, 2007
Current assets
Cash and marketable securities 14 72
Receivables 176 194
Inventories 479 203
Total current assets 669 469
Fixed assets
Property, plant, and equipment (net of depreciation) 1,077 910
Less accumulated depreciation 154 130
Net fixed assets 923 780
Total assets 1,592 1,249
Liabilities and Shareholders' Equity Mar. 31, 2008 Mar. 31, 2007
Current liabilities
Debt due for repayment 484 222
Accounts payable 94 58
Other current liabilities 102 85
Total current liabilities 680 365
Long-term debt 236 159
Stockholders' equity
Common stock and other paid-in capital 155 155
Retained earnings 521 570
Total stockholders' equity 676 725
Total liabilities and stockholders' equity 1,592 1,249

PROBLEM 1:


The 2018 and 2019 comparative balance sheets and 2019 income statement for Edmond & Edmond Company appear below:

EDMOND & EDMOND COMPANY

Comparative Balance Sheet

December 31

2019 2018

Assets

Cash $ 26,000 $ 23,000

Accounts receivable 25,000 34,000

Merchandise inventory 32,000 15,000

Property, plant, and equipment 60,000 78,000

Accumulated depreciation (21,000) (24,000)

Total $122,000 $126,000

Liabilities and Stockholders' Equity

Accounts payable $ 18,000 $ 23,000

Income taxes payable 9,000 8,000

Notes payable (long-term) 8,000 33,000

Common stock 28,000 24,000

Retained earnings 59,000 38,000

Total $122,000 $126,000

EDMOND & EDMOND COMPANY

Income Statement

For the Year Ended December 31, 2019

Sales $400,000

Cost of goods sold 270,000

Gross profit 130,000

Operating expenses 45,000

Income from operations 85,000

Interest expense 5,000

Income before income taxes 80,000

Income tax expense 24,000

Net income $ 56,000

The following additional data were provided:

1. Dividends declared and paid were $35,000.

2. During the year, equipment was sold for $17,000 cash. This equipment cost $28,000 originally and had a book value of $17,000 at the time of sale.

3. Purchased a used delivery truck for $10,000

4. All depreciation expense is included the operating expenses.

5. All sales and purchases are on account.

6. Accounts payable pertain to merchandise suppliers.

REQUIREMENTS: Prepare 1 WORD document (WD1) and 1 EXCEL document (ED1):

1. (WD1)>>Write a brief, yet clear, paragraph about the purpose of a statement of cash flow .

Be specific.

2. (ED1)>>Prepare a statement of cash flows for Edmond & Edmond Company using the indirect

method. Be sure your statement is complete in form, includes all needed line-items, and is
accurate.

3. (WD1)>>Write a brief, yet thorough, email to Cisslee Williams (the Controller for Edmond and
Edmond) stating the overall conclusion you have drawn from the completed statement of cash
flows.

PROBLEM 2:

Find the official website for ONE of the following companies:

Coca-cola

Walmart

Tyson Foods

Once you find an official website for the company you select, perform the following tasks:

Find the “Investor Relations” link and click. Once in “investor relations,”

Find the 2017 annual report OR 10-K Report to the SEC

After locating one of the documents, locate the financial statements included in the document.

Copy and paste the (1) comparative balance sheet, (2) income statement, and (3) statement of cash flows and include ALL three (3) in a separate file. Do not be concerned with the formatting once you have pasted. Just be sure the name of the company, name of the statement, and the years are clearly shown as proof that you have provided the required statements.

Now that you have access to the financial statements, compute the following ratios FOR TWO YEARS. Be sure to show ALL computations, equations, formulas, etc.:

Any two liquidity ratios

One solvency ratio

Any two profitability ratios

REQUIRED1: Write and submit a 1st document that:

>>>Identifies the name of the company on which you performed research

>>> Presents the ratios (e.g., a table) you have computed. Keep computations separate from final ratio answers. Be sure to clearly classify and identify all ratios. Show the computations. Neatness, order, and clarity are a MUST. Be sure your presentation is neat, orderly, and can be clearly followed.

>>>States YOUR conclusion about each of the three groups of ratios. Hint: A cover page is expected.

REQUIRED2: Write and submit a 2nd document that includes the financial statements you copied and pasted (as required in “d” above. IF you can easily include your financial statements as pages in the 1st document, that will absolutely acceptable, and preferred.