ACCT 002 Lecture Notes - Lecture 21: Decision-Making

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blackpig616

19 Aug 2020

School

College of The Sequoias

Department

Accounting (ACCT)

Course

ACCT 002

Professor

cooper

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Document Summary

Long-term creditors are concerned with a company"s ability to repay its loans over the long run: times interest earned ratio, debt-to-equity ratio. The times interest earned ratio is a widely used measure of the ability of a company"s operations to provide protection for long-term creditors. The debt-to-equity ratio measures the amount of assets being provided by creditors for each dollar of assets being provided by owners. There is no right amount of debt for a company to carry. Since different industries face different risks, the level of debt that is appropriate will vary from industry to industry. Financial service information, business publications, newspapers, periodicals, internet. Limitations of financial statement analysis: comparison of financial data. Differences in accounting methods between companies sometimes make comparisons difficult. Fifo method vs. lifo method to value inventory. Different segments: need to look beyond ratios. Competence: maintain professional competence, follow laws, regulations, and standards, prepare complete and clear reports and recommendations after appropriate analysis.

Related Questions

Debt Management Ratios

Financial statements for Remington Inc. follow.

RemingtonInc.
ConsolidatedStatements of Income
(In thousands exceptper share amounts)
	2013	2012	2011
Net sales	$ 7,245,088	$ 6,944,296	$ 6,149,218
Cost of goods sold	(5,286,253)	(4,953,556)	(4,355,675)
Gross margin	$ 1,958,835	$ 1,990,740	$ 1,793,543
General and administrativeexpenses	(1,259,896)	(1,202,042)	(1,080,843)
Special and nonrecurring items	2,617	-	-
Operating income	$ 701,556	$ 788,698	$ 712,700
Interest expense	(63,685)	(62,398)	(63,927)
Other income	7,308	10,080	11,529
Gain on sale of investments	-	9,117	-
Income before income taxes	$ 645,179	$ 745,497	$ 660,302
Provision for income taxes	254,000	290,000	257,000
Net income	$ 391,179	$ 455,497	$ 403,302
Net income per share	$1.08	$1.25	$1.11

RemingtonInc.
ConsolidatedBalance Sheets
(In thousands)
ASSETS	Dec. 31,2013		Dec. 31,2012
Current assets:
Cashand equivalents		$ 320,558		$ 41,235
Accounts receivable		1,056,911		837,377
Inventories		733,700		803,707
Other		109,456		101,811
Total current assets		$2,220,625		$1,784,130
Property and equipment, net		1,666,588		1,813,948
Other assets		205,342		248,372
Total assets		$4,092,555		$3,846,450
LIABILITIES ANDSTOCKHOLDERS' EQUITY
Currentliabilities:
Accounts payable		$ 250,363		$ 309,092
Accrued expenses		347,892		274,220
Other current liabilities		15,700		-
Income taxes		93,489		137,466
Total current liabilities		$ 707,444		$ 720,778
Long-term debt		$ 650,000		$ 541,639
Deferred income taxes		275,101		274,844
Other long-term liabilities		61,267		41,572
Total liabilities		$1,693,812		$1,578,833
Stockholders'equity:
Common and preferred stock		$ 189,727		$ 189,727
Additional paid-in capital		128,906		127,776
Retained earnings		2,397,112		2,136,794
		$2,715,745		$2,454,297
Less: Treasury stock, at cost		(317,002)		(186,680)
Total stockholders' equity		2,398,743		$2,267,617
Total liabilities and stockholders'equity		4,092,555		$3,846,450

Required:

Using Remington's financial statements as shown above, respondto the following requirements.

1. Compute the five debt management ratios for2012 and 2013. Round your answers to two decimal places.

	2013	2012
Times interest earned
Debt to equity ratio
Debt to total assets ratio
Long-term debt to equity ratio
Long-term debt to total assetsratio

2. Conceptual Connection: Indicate whether theratios have changed significantly from 2012 to 2013.

Select All the ratios decreased,Times interest earned ratiodecreased, other ratios did not change by much., Debt to equityratio decreased, other ratios did not change by much., Debt tototal assets ratio decreased, other ratios did not change by much,Long-term-debt to equity ratio decreased, other ratios did notchange by much, Long-term-debt to total assets ratio decreased,other ratios did not change by much.

B. Do the ratios suggest that Remington is more or less riskyfor long-term creditors at December 31, 2013, than at December 31,2012? Explain.

SelectMore risky for long-term creditors Less risky forlong-term creditors

bronzetiger591

Ratio	2010	2009	2008	2010 Industry Average
Long-term debt	0.45	0.40	0.35	0.35
Inventory turnover	62.65	42.42	32.25	53.25
Depreciation/total assets	0.25	0.014	0.018	0.015
Daysâ sales in receivables	113	98	94	130.25
Debt to equity	0.75	0.85	0.90	0.88
Profit margin	0.082	0.07	0.06	0.075
Total asset turnover	0.54	0.65	0.70	0.40
Quick ratio	1.028	1.03	1.029	1.031
Current ratio	1.33	1.21	1.15	1.25
Times interest earned	0.9	4.375	4.45	4.65
Equity multiplier	1.75	1.85	1.90	1.88

Referring to the given data, the CEO of WQY Inc. wrote, "2008was a good year for the firm with respect to our ability to meetour short-term obligations. We had higher liquidity largely due toan increase in highly liquid current assets (cash, accountreceivables, and short-term marketable securities)."

Do you think the CEO is correct in making this statement?Explain your stand and use only the given data for youranalysis.

Submission Requirements:

Submit the completed assessment as a Word document.

(Liquidity analysis and interpretation)

Refere to Simon Company information below. The companys incomestatements for the year ended December 31, 2015 and 2014, follow.Assume that all sales are on credit and the compte: (1) day's salesuncollected, (2) accounts receivable turnover, (3) inventoryturnover, and (4) days's sales in inventory. Comment on the changesin the ratios from 2014 a to 2015. (round amounts to onedecimal)

2. (Risk and capital structure analysis) Compare the company'slong-term risk and capital structure positions at the end of 2015and 2014 by computing ratios: (1) debt and equity ratios-percentrounded to one decimal, (2) debt-to equity ratio - rounded to twodecimals and (3) times interest earned-rounded to one decimal.Comment on these ratio results.

For Year ended December 31		2015		2014
sales		$673,500		$532,000
Cost of goods sold	$411,225		$345,500
Other operating expenses	209,550		134,980
Interest expense	12,100		13,300
Income taxes	9,525		8,845
Total cost and expenses		642,400		502,625
Net income		31,100		29,375
Earnings per share		1.90		1.80

Simon Companys information: At December 31	2015	2014	2013
Assets
Cash	$31,800	$35,625	$37,800
Accounts receivable,net	89,500	62,500	50,200
Merchandise inventory	112,500	82,500	54,000
Prepaid expenses	10,700	9,375	5,000
Plant assets,net	278,500	255,000	230,500
Total assets	$523,000	$445,000	$377,500
Liabilities and Equity
Accounts payable	$129,900	$75,250	$51,250
Long-term notes payable secured by mortgage on plant assets	98,500	101,500	83,500
Common Stock, $10 par value	163,500	163,500	163,500
Retained earnings	131,100	104,750	79,250
Total Liabilities and equity	$523,000	$445,000	$377,500

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ACCT 002 Lecture Notes - Lecture 21: Decision-Making

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