Accounting Problems - Assignment
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doc_3__assignment_5.docxAccounting 202 - Assignment 5
Problem 1
Use the following selected financial information to compare these two companies at December 31, 2010,
and to answer the questions that follow.
Sweet Co. Sour Co.
Cash $ 1,100 $ 300
Short-term investments 100 900
Accounts and notes receivable 11,700 12,400
Inventories 1,200 1,000
Prepaid expenses 1,400 600
Total current assets 15,500 15,200
Total current liabilities 5,000 4,000
Long-term liabilities 2,300 12,000
Stockholders' equity 5,300 7,300
A) Compute the current ratios for the two companies.
B) Compute the quick ratios for the two companies.
C) Which company appears to be more liquid?
D) What other ratios would help to more fully assess the liquidity of these two
companies?
Problem 2
Bathing Beauties Swimwear Company (BBSC) is a retailer of specialty swimwear. During 2010, BBSC
expanded its retail business by adding 30 new retail stores. The following information is obtained from
the comparative financial statements included in the company's 2010 Form 10-K (all amounts in $
thousands).
January 31, 2010 January 31, 2009
Current liabilities $ 6,000 $ 8,000
Total liabilities 26,000 18,000
Total stockholders' equity 34,000 38,000
Total assets 60,000 56,000
For the fiscal years ended January 31
2010 2009
Depreciation expense $ 2,000 $ 6,000
Interest expense 3,400 3,200
Income tax expense 12,600 18,100
Net income 6,000 15,000
Net cash flows from operations 41,000 (400)
Total dividends paid 2,000 12,000 Using the information provided, address the following questions for each fiscal year-end:
A) What is BBSC's debt-to-equity ratio?
B) What is BBSC's times interest earned ratio?
C) What is BBSC's debt-to-total assets ratio?
D) Comment briefly on the company's debt management position.
Problem 3
The comparative financial statements for Dervish Industries, Inc. are provided below. All
amounts are in thousands except for per share amounts.
Statements of Income and Retained Earnings for the Fiscal Years Ended:
June 30,
2010
June 30,
2009
June 30,
2008
Net Sales $2,004,719 $1,937,021 $1,835,987
Other Income 18,636 17,153 14,614
Total Revenues 2,023,355 1,954,174 1,850,601
Cost of Goods Sold 848,363 847,366 814,483
Selling, General, & Administrative
Expenses
733,498 711,610 666,909
Interest Expense 615 958 1,097
Total Costs and Expenses 1,582,476 1,559,934 1,482,489
Income Before Taxes 440,879 394,240 368,112
Income Taxes 136,378 122,614 128,840
Net Income 304,501 271,626 239,272
Retained Earnings at Beginning of Year 1,032,139 898,512 497,481
Dividends Declared (152,023) (137,999) (87,301)
Retained Earnings at End of Year $1,184,617 $1,032,139 $ 649,452
Per Average Share Amounts:
Net income per share of common stock $2.63 $2.34 $1.99
Dividends per share of common stock $1.30 $1.17 $1.02
Balance Sheets
June 30,
2010
June 30,
2009
Cash $ 214,572 $ 206,627
Short-term Investments 137,112 120,728
Accounts Receivable 194,877 175,967
Inventory 256,108 247,392
Other Current Assets 40,403 46,959
Total Current Assets 843,072 797,673 Long-term Investments 39,888 26,375
Other Non-current Assets 92,183 59,566
Note Receivable 25,522 29,038
Land 36,013 26,298
Buildings and Building Equipment 310,212 277,808
Machinery and Equipment 642,656 566,766
Less: Accumulated Depreciation (468,691) (440,398)
Total Assets $1,520,855 $1,343,126
Accounts Payable $ 76,691 $ 71,001
Accrued Expenses 67,848 78,378
Dividend Payable 23,222 22,034
Income and Other Taxes Payable 50,865 54,403
Total Current Liabilities 218,626 225,816
Bonds Payable 104,885 101,057
Other Non-current Liabilities 40,312 30,874
Total Liabilities 363,823 357,747
Preferred Stock, no par 3,157 3,157
Common Stock, $1 par 12,339 2,339
Additional Paid-in-Capital 272 226
Retained Earnings 1,147,976 993,020
Treasury Stock (common shares at cost) (6,712) (13,363)
Total Stockholders' Equity 1,157,032 985,379
Total Liabilities and Stockholders' Equity $1,520,855 $1,343,126
(a) Calculate the current ratio and quick ratio for Dervish Industries for 2010. If you were a banker,
would you lend money to Dervish under a short-term note payable?
(b) Evaluate Dervish's asset efficiency ratios, including receivable turnover and inventory turnover.
(c) Evaluate Dervish's profitability ratios for 2010 and 2009, including the net profit margin ratio,
return on assets, and return on equity. Assume that total assets and total stockholders' equity at
June 30, 2008 were $1,250,000 and 930,000 (in thousands), respectively. Also assume that the
tax rate is 30% for all periods presented.
(d) Perform DuPont analysis for 2010 and 2009, showing all three components. Assume that total
assets and total stockholders' equity at June 30, 2008, were $1,250,000 and 930,000 (in
thousands), respectively.
Problem 4
Drucker Dynamics, Inc.
The current assets section of the balance sheets of Drucker Dynamics as of December 31, 2010 and 2009,
is presented below.2010 2009
Cash $ 75,000 $ 58,800
Accounts receivable, net 157,500 193,200
Inventory 208,200 253,400
Other current assets 18,400 15,500
Total current assets 459,100 520,900
Total Assets $2,650,000 $3,430,000
a. Refer to the information provided for Drucker Dynamics. Complete a common size horizontal analysis of
the current assets section of Drucker's balance sheet for 2010. Your answers should be expressed as
percentages and rounded to one decimal place. Provide a short explanation of this analysis.
Problem 5
Harbinger Enterprises, Inc.
The balance sheet taken from the 2010 10-K of Harbinger Enterprises is provided below.
December 31
Assets: 2010 2009
Current Assets:
Cash $ 122,200 $108,000
Accounts Receivable 45,000 35,000
Inventory 17,000 14,000
Other Current Assets 13,000 11,000
Total Current Assets 197,200 168,000
Long-term Assets:
Property, Plant & Equipment, net 1,489,800 50,000
Intangible Assets 422,500 450,000
Total Assets $2,109,500 $668,000
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts Payable $ 11,000 $ 9,000
Interest Payable 1,000 1,000
Current Portion of Long-Term Debt 30,000 0
Income Tax Payable 37,000 46,000
Total Current Liabilities $ 79,000 56,000
Long-term Liabilities:
Notes Payable 492,500 30,000
Total Liabilities 571,500 86,000
Stockholders' Equity
Common Stock 120,000 70,000
Additional Paid-in Capital 1,308,000 372,000
Retained Earnings 185,000 140,000
Treasury Stock (75,000) 0
Total Stockholders' Equity 1,538,000 582,000Total Liabilities and Stockholders' Equity $2,109,500 $668,000
a. Refer to the balance sheet for Harbinger Enterprises. Prepare Harbinger's common size balance sheet to
be used in vertical analysis.
ANS:
b. Calculate Harbinger's debt management ratios for 2010 and 2009, including the Times Interest Earned
Ratio, Debt-to-Equity Ratio, and Debt-to-Assets Ratio. Harbinger's income from operations were
$130,000 and $98,000 and interest expense was $52,000 and $3,500 for 2010 and 2009, respectively.
Round your answers to two decimal places, then comment on Harbinger's debt management.
c. Calculate Harbinger's profitability ratios for 2010 and 2009, including the Profit Margin Percentage,
Return on Assets, and Return on Equity. Express each ratio as a percentage and round your answers to
two decimal places, then comment on Harbinger's performance in terms of profitability.
Harbinger's income statements are available below. At December 31, 2008, Harbinger's total assets and
total stockholders' equity were $650,000 and $575,000, respectively.
For the Years Ended
2010 2009
Net Sales $950,000 $775,000
Cost of Goods Sold 480,000 400,000
Gross Profit 470,000 375,000
Operating Expenses 340,000 277,000
Income from Operations 130,000 98,000
Interest Expense 52,000 3,500Income before Taxes 78,000 94,500
Income Taxes 30,000 37,000
Net Income $ 48,000 $ 57,500
d. Refer to the balance sheet for Harbinger Enterprises. Perform DuPont Analysis for Harbinger for 2010
and 2009, including the three components of Return on Equity (ROE). Round your answers to two
decimal places, then comment on Harbinger's relative ROE from 2009 to 2010.
Additional information for Harbinger is available below.
2010 2009
Total Sales $ 1,000,000 $ 820,000
Net Income $ 48,000 $ 57,500
At December 31, 2008, Harbinger's total assets and total stockholders' equity were $650,000 and
$575,000, respectively.
