Acc-04

Analysis and Interpretation of Profitability Balance sheets and income statements for Target Corporation follow.

(a) Apply the basic DuPont model and compute the component measures for profit margin, asset turnover, and financial leverage. (Do not round until your final answer. Round your answers to two decimal places.) Net profit margin =Answer% Asset turnover =Answer Financial leverage =Answer (b) Compute ROE using financial information provided in the balance sheet and income statement. Do not use ROE = PM x AT x FL. (Do not round until your final answer. Round your answer to two decimal places.)  ROE =Answer% (c) Compute adjusted ROA. Assume a tax rate of: 38.3%. (Do not round until your final answer. Round your answer to two decimal places.) Adjusted ROA =Answer%

Question 3.

Interpreting Accounts Receivable and Its Footnote Disclosure Following is the current asset section from the W.W. Grainger, Inc., balance sheet.

Grainger reports the following footnote relating to its receivables. Allowance for Doubtful Accounts: The following table shows the activity in the allowance for doubtful accounts.

(a) What amount do customers owe Grainger at each of the year-ends 2010 through 2012?

(b) What percentage of its total accounts receivable does Grainger deem uncollectible? Hint: Percentage of uncollectible accounts = Allowance for uncollectible accounts/Gross accounts receivable. Round your answers to two decimal places.

(c) What amount of bad debts expense did Grainger report in its income statement for each of the years 2010 through 2012?

(d) Which of the following statements most closely describes what we observe in our answer to part (b)?

The allowance for uncollectible accounts has decreased as a percentage of gross accounts receivable in 2012. The allowance decreased because the gross accounts receivable has increased and the  allowance account has decreased.

The allowance for uncollectible accounts has decreased as a percentage of gross accounts receivable in 2012. This means that Grainger is over-stating its bad debt expense in the current year.

The allowance for uncollectible accounts has increased as a percentage of gross accounts receivable in 2012. The allowance is increasing appropriately because write-offs of uncollectible accounts are also increasing.

The allowance for uncollectible accounts has increased as a percentage of gross accounts receivable in 2012. This means that the allowance was too low in prior years.

(e) If Grainger had kept its 2012 allowance for uncollectible accounts at the same percentage of gross accounts receivable as it was in 2010, by what amount would its profit have changed (ignore taxes)? Answer($ 000s) (f) Which of the following statements about Grainger's allowance for uncollectible accounts and the related bad debts expense is false?

Since 2010, Grainger has decreased its allowance for uncollectible accounts as a percentage of gross receivables.

Grainger's current allowance account appears adequate since it is two times the level of current-year write-offs.

Since 2010 Grainger has decreased it allowance for uncollectible accounts by increasing its write-offs.

Grainger's bad debt expense decreased from 2010 to 2011, but then increased again in 2012.

Question 4

Interpreting and Applying Disclosures on Property and Equipment Following are selected disclosures from the Evett and Sternard Company (a specialty chemical company) 2007 10-K.

The principal lives (in years) used in determining depreciation rates of various assets are: buildings and improvement (10-50); machinery and equipment (5-20); automobiles, trucks and tank cars (3-10); furniture and fixtures, laboratory equipment and other assets (5-10); capitalized software (5-7). The principal life used in determining the depreciation rate for leasehold improvements is the years remaining in the lease term or the useful life (in years) of the asset, whichever is shorter. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, other than investments, goodwill and indefinite-lived intangible assets, are depreciated over their estimated useful lives, and are reviewed for impairment whenever changes in circumstances indicate the carrying value of the asset may not be recoverable. Such circumstances would include items such as a significant decrease in the market price of a long-lived asset, a significant adverse change in the manner the asset is being used or planned to be used or in its physical condition or a history of operating or cash flow losses associated with the use of the asset ... When such events or changes occur, we assess the recoverability of the asset by comparing the carrying value of the asset to the expected future cash flows associated with the asset's planned future use and eventual disposition of the asset, if applicable ... We utilize marketplace assumptions to calculate the discounted cash flows used in determining the asset's fair value ... For the year ended December 31, 2007, we recognized approximately $24 million of fixed asset impairment charges. (a) Compute the PPE (land, buildings and equipment) turnover for 2007 (Sales in 2007 are $8,897 million). (Round your answer to two decimal places.)  Answer If the median PPE turnover rate for all publicly traded companies is approximately 5.03 in 2007, what does Evett and Sternard's turnover rate tell us about the company?

Evett and Sternard is less capital intensive than the median publicly traded company.

Evett and Sternard is the same capital intensive as the median publicly traded company.

The PPE turnover rate does not tell us anything about how capital intensive Evett and Sternard is.

Evett and Sternard is more capital intensive than the median publicly traded company.

(b) Evett and Sternard reported depreciation expense of $412 million in 2007. Estimate the useful life, on average, for its depreciable PPE assets. (Round your answer to two decimal places.) Answeryears (c) By what percentage are Evett and Sternard's assets "used up" at year-end 2007? (Round your answer to two decimal places.) Answer% Which of the following statements best captures the implication that the assets "used up" computation has for forecasting cash flows?

Evett and Sternard's assets are not particularly "used up" according to this computation. We, therefore, do not expect adverse implication for future cash flow.

A percentage "used up" substantially above 50% indicates that the assets are closer to the end of their useful lives. This means that the depreciation expense will decrease and this in turn will have a positive impact on future cash flows.

The assets "used up" computation can not tell us anything about future cash flows.

A percentage "used up" substantially above 50% indicates that the assets are closer to the end of their useful lives and will require replacement. Such a situation would negatively impact future cash flows.

(d) Evett and Sternard reports an asset impairment charge in 2007. Which of the following statements best captures the implications of asset impairment charges (write-offs)?

Plant assets are deemed to be impaired if their market value is less than their book value, even if temporary. We should treat these write-downs as recurring (operating) items because future write-downs are inevitable.

Plant assets are deemed to be impaired if the undiscounted expected future cash flows from those assets are not sufficient to recover their net book value. We should treat these write-downs as recurring (operating) items because future write-downs are inevitable.

Plant assets are deemed to be impaired if the undiscounted expected future cash flows from those assets are not sufficient to recover their net book value. Because assets impairment charges are arguably nonrecurring, one might use this to justify treating them as transitory items for analysis purposes.

Plant assets are deemed to be impaired if their market value is less than their book value, even if temporary. We should treat these write-downs as transitory.

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