ACC 600 Spring 2014 Midterm

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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.

 

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