Question: The 2012 financial statements for the Price
The 2012 financial statements for the Price and Waterhouse companies are summarized here:
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. The management of each has a different viewpoint in many respects. Waterhouse is more conservative, and as its president has said, “We avoid what we consider to be undue risk.†Neither company is publicly held. Price Company has an annual audit by a CPA but Waterhouse Company does not.
Required:
1. Complete a schedule that reflects a ratio analysis of each company. Compute the ratios discussed in the chapter.
2. A client of yours has the opportunity to buy 10 percent of the shares in one or the other company at the per share prices given and has decided to invest in one of the companies. Based on the data given, prepare a comparative written evaluation of the ratio analyses (and any other available information) and give your recommended choice with the supporting explanation.
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Price Company Waterhouse Company Balance Sheet S 41,000 $ 21,000 Cash Accounts receivable (net) Inventory Operational assets (net) 38,000 31,000 99,000 40,000 140,000 401,000 Other assets 84,000 305,000 Total assets $402.000 $798,000 Current liabilities $99,000 $49,000 Long-term debt (10%) Capital stock (par $10) Contributed capital in excess of par Retained earnings 65,000 60,000 148,000 512,000 29,000 106,000 61,000 $402,000 71,000 $798,000 Total liabilities and stockholders' equity сontinued Price Company Waterhouse Company Income Statement Sales revenue (1/3 on credit) Cost of goods sold Expenses (including interest and income tax) $447,000 $802,000 (241,000) (398,000) (311,000) (161,000) $ 45,000 $ 93,000 Net income Selected data from the 2011 statements $ 18,000 $ 38,000 Accounts receivable (net) Inventory Long-term debt Other data 94,000 44,000 60,000 48,000 15 Per share price at end of 2012 (offering price) Average income tax rate Dividends declared and paid in 2012 17 30% 30% $ 33,000 $148,000
> Barnett Corporation sold a $500,000, 7 percent bond issue on January 1, 2011. The bonds pay interest each June 30 and December 31 and mature 10 years from January 1, 2011. For comparative study and analysis, assume three separate cases. Use straight-line
> On January 1, 2011, Nowell Company issued $300,000 in bonds that mature in five years. The bondshave a stated interest rate of 8 percent and pay interest on June 30 and December 31 each year. When thebonds were sold, the market rate of interest was 8 per
> Arbor Corporation’s financial statements for 2011 showed the following: Income Statement Revenues .................................................................$300,000 Expenses ......................................................
> DirectTV is the largest provider of direct-to-home digital television services and the second largest provider in the multichannel video programming distribution industry in the United States. It provides over 16 million subscribers with access to hundre
> MBTA Corporation issued bonds and received cash in full for the issue price. The bonds were dated and issued on January 1, 2011. The stated interest rate was payable at the end of each year. The bonds mature at the end of four years. The following schedu
> Commonwealth Company issued bonds with the following provisions: Maturity value: $300,000 Interest: 11 percent per annum payable annually each December 31 Terms: Bonds dated January 1, 2011, due five years from that date The annual accounting period en
> On January 1, 2011, Cron Corporation issued $700,000 in bonds that mature in five years. The bonds have a stated interest rate of 13 percent and pay interest on June 30 and December 31 each year. Whenthe bonds were sold, the market rate of interest was 1
> On January 1, 2011, Vigeland Corporation issued $2,000,000 in bonds that mature in 10 years. The bonds havea stated interest rate of 10 percent and pay interest on June 30 and December 31 each year. When the bondswere sold, the market rate of interest wa
> Electrolux Corporation manufactures electrical test equipment. The company’s board of directors authorizeda bond issue on January 1, 2011, with the following terms: Maturity (par) value: $800,000 Interest: 8 percent per annum payable each December 31 Mat
> On January 1, 2011, TCU Utilities issued $1,000,000 in bonds that mature in 10 years. The bonds have a stated interest rate of 10 percent and pay interest on June 30 and December 31 each year. When thebonds were sold, the market rate of interest was 12 p
> On January 1, 2011, Thomas Insurance Corporation issued $4,000,000 in bonds that mature in five years. The bonds have a stated interest rate of 9 percent and pay interest on December 31 each year. When the bonds were sold, the market rate of interest was
> A bond with a maturity value of $100,000 has a stated interest rate of 8 percent. The bond matures in 10 years. When the bond is issued, the market rate of interest is 10 percent. What amount should be reported when the bond is issued? a. $100,000 b. $8
> Which of the following is not an advantage of issuing bonds when compared to issuing additionalshares of stock in order to obtain additional capital? a. Stockholders maintain proportionate ownership percentages. b. Interest expense reduces taxable income
> Annual interest expense for a single bond issue continues to increase over the life of the bonds. Which of the following explains this? a. The market rate of interest has increased since the bonds were sold. b. The coupon rate of interest has increased s
> When using the effective-interest method of amortization, the book value of the bonds changes by what amount on each interest payment date? a. Interest expense b. Cash interest payment c. Amortization d. None of the above
> A bond with a face value of $100,000 is sold on January 1. The bond has a stated interest rate of 10 percent and matures in 10 years. When the bond was issued the market rate of interest was 10 percent. On December 31, the market rate of interest increas
> When using the effective-interest method of amortization, interest expense reported in the income statement is impacted by the a. Par value of the bonds. b. Coupon rate of interest stated in the bond certificate. c. Market rate of interest on the date th
> To determine whether a bond will be sold at a premium, discount, or at face value, one must know which of the following pairs of information? a. Par value and the coupon rate on the date the bond was issued. b. Par value and the market rate on the date t
> A bond with a face value of $100,000 was issued for $93,500 on January 1, 2011. The stated rate of interest was 8 percent and the market rate of interest was 10 percent when the bond was sold. Interestis paid annually. How much interest will be paid on D
> Which of the following is false when a bond is issued at a premium? a. The bond will issue for an amount above its par value. b. Bonds payable will be credited for the par value of the bond. c. Interest expense will exceed the cash interest payments. d.
> Which account would not be included in the debt-to-equity ratio calculation? a. Unearned Revenue. b. Retained Earnings. c. Income Taxes Payable. d. All of the above are included.
> On January 1, 2011, Grand Isle Corporation issued $900,000 in bonds that mature in five years. The bonds have a stated interest rate of 10 percent and pay interest on December 31 each year. When the bonds were sold, the market rate of interest was 9 perc
> For each of the following items, specify whether the information would be found in the balance sheet, the income statement, the statement of cash flows, the notes to the statements, or not at all. 1. The amount of a bond liability. 2. Interest expense fo
> In what section of the statement of cash flows would you find cash paid to retire bonds? In what section would you find cash paid for interest?
> If interest rates fell after the issuance of a bond and the company decided to retire the debt, would you expect the company to report a gain or loss on debt retirement? Describe the financial statement effects of a debt retirement under these circumstan
> Wefald Company issued $600,000, 10-year, 10 percent bonds on January 1, 2011. The bonds sold for $580,000. Interest is payable semiannually each June 30 and December 31. Record the sale of the bonds on January 1, 2011, and the payment of interest on June
> Coffman Company issued $1,000,000, 10-year, 10 percent bonds on January 1, 2011. The bonds sold for $940,000. Interest is payable semiannually each June 30 and December 31. Record the sale of the bonds on January 1, 2011, and the payment of interest on J
> Trew Company plans to issue $900,000, 10-year, 6 percent bonds. Interest is payable semiannually on June 30 and December 31. All of the bonds will be sold on January 1, 2011. Determine the issuance price of the bonds assuming a market yield of 8.5 percen
> Willams Company plans to issue $600,000, 10-year bonds that pay 8 percent payable semiannually on June 30 and December 31. All of the bonds will be sold on January 1, 2011. Determine the issuance priceof the bonds assuming a market yield of 8 percent.
> If a company issues a bond at a discount, will interest expense each period be more or less than the cash payment for interest? If another company issues a bond at a premium, will interest expense be more or less than the cash payment for interest? Is yo
> The debt-to-equity and times interest earned ratios were discussed in this chapter. Which is a better indicator of a company’s ability to meet its required interest payment? Explain.
> RKO Company issued $850,000, 10-year, 8 percent bonds on January 1, 2011. The bonds sold for $910,000. Interest is payable annually each December 31. Record the sale of the bonds on January 1, 2011, and the payment of interest on December 31, 2011, using
> On January 1, 2011, Avaya Corporation issued $2,000,000 in bonds that mature in five years. The bonds have a stated interest rate of 6 percent and pay interest on December 31 each year. When the bonds were sold, the market rate of interest was 7 percent.
> Ernst Company issued $600,000, 10-year, 9 percent bonds on January 1, 2011. The bonds sold for $620,000. Interest is payable annually each December 31. Record the sale of the bonds on January 1, 2011, and the payment of interest on December 31, 2011, usi
> Waterhouse Company plans to issue $500,000, 10-year, 10 percent bonds. Interest is paid semiannually on June 30 and December 31. All of the bonds will be sold on January 1, 2011. Determine the issuance price of the bonds, assuming a market yield of 8 per
> What are some of the primary items on financial statements about which creditors usually are concerned?
> What is ratio analysis? Why is it useful?
> Why are statement users interested in financial summaries covering several years? What is the primary limitation of long-term summaries?
> What is the primary purpose of comparative financial statements?
> Why are the notes to the financial statements important to decision makers?
> Identify two factors that limit the effectiveness of ratio analysis.
> What are market tests?
> A number of events over the life of a bond have effects that are reported on the statement of cash flows. For each of the following events, determine whether the event affects the statement of cash flows. If so, describe the impact and specify where on t
> What does the debt-to-equity ratio reflect?
> Compare and contrast the current ratio and the quick ratio.
> Is profit margin a useful measure of profitability? Explain.
> What is financial leverage? How is it measured as a percentage?
> Explain the two concepts of return on investment.
> What are component percentages? Why are they useful?
> Sears, Roebuck and JCPenney are two giants of the retail industry. Both offer full lines of moderately priced merchandise. Annual sales for Sears total $53 billion. JCPenney is smaller, with $20 billion in revenues. Compare the two companies as a potenti
> The price/earnings ratio provides important information concerning the stock market’s assessment of the growth potential of a business. The following are price/earnings ratios for selected companies as of the date this book was written. Match the company
> You have the opportunity to invest $10,000 in one of two companies from a single industry. The only information you have is shown here. The word high refers to the top third of the industry; average is the middle third; low is the bottom third. Which com
> 1. The ____________ is the amount (a) payable at the maturity of the bond and (b) on which the periodiccash interest payments are computed. 2. ____________ is another name for bond principal, or the maturity amount of a bond. 3. ____________ is another n
> You have the opportunity to invest $10,000 in one of two companies from a single industry. The only information you have follows. The word high refers to the top third of the industry; average is the middle third; low is the bottom third. Which company w
> Hershey’s is a familiar name in snacks. There’s a good chance you have recently enjoyed one of itsproducts. The company manufactures confectionery products in a variety of packaged forms and marketsthem under more than
> Company A uses the FIFO method to cost inventory, and Company B uses the LIFO method. The two companies are exactly alike except for the difference in inventory costing methods. Costs of inventory items for both companies have been rising steadily in rec
> Use the 2012 data in P14-6 for Prince Company. Assume a stock price of $28 per share. Compute the appropriate ratios. Data from P14-6 The comparative financial statements prepared at December 31, 2012, for Prince Company showed the following summarized
> Use the data given in P14-6 for Prince Company. Required: 1. Present component percentages for 2012 only. 2. Respond to the following for 2012: a. What was the average percentage markup on sales? b. What was the average income tax rate? c. Compute the p
> The comparative financial statements prepared at December 31, 2012, for Prince Company showed the following summarized data: *One-third was credit sales. †During 2012, cash dividends amounting to $3,000 were declared and paid. Requi
> Positive financial leverage indicates a. Positive cash flow from financing activities. b. A debt-to-equity ratio higher than 1. c. A rate of return on assets exceeding the interest rate on debt. d. A profit margin in one year exceeding the previous year’
> Which of the following ratios is used to analyze liquidity? a. Earnings per share. b. Debt-to-equity ratio. c. Current ratio. d. Both (a) and (c).
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> A company has total assets of $500,000 and noncurrent assets of $400,000. Current liabilities are $40,000. What is the current ratio? a. 12.5 b. 10.0 c. 2.5 d. Cannot be determined without additional information.
> On January 1, 2011, Clearwater Corporation sold a $750,000, 8 percent bond issue (9 percent market rate). The bonds were dated January 1, 2011, pay interest each December 31, and mature in 10 years. Required: 1. Give the journal entry to record the issu
> A creditor is least likely to use what ratio when analyzing a company that has borrowed funds on a long-term basis? a. Cash coverage ratio. b. Debt-to-equity ratio. c. Times interest earned ratio. d. Profit margin.
> A decrease in selling and administrative expenses would impact what ratio? a. Fixed asset turnover ratio. b. Times interest earned ratio. c. Debt-to-equity ratio. d. Current ratio.
> Given the following ratios for four companies, which company is least likely to experience problems paying its current liabilities promptly? Quick Ratio Receivable Turnover Ratio a. 1.2 58 b. 1.2 45 C. 1.0 55 d. .5 60
> The average days’ supply in inventory for Natural Foods Stores is 14.6 days. The company reportedcost of goods sold in the amount of $1,500,000 and total sales of $2,500,000. What is the averageamount of inventory for Natural Foods? a. $102,740 b. $171,
> A company has quick assets of $300,000 and current liabilities of $150,000. The company purchased $50,000 in inventory on credit. After the purchase, the quick ratio would be a. 2.0 b. 2.3 c. 1.5 d. 1.75
> If a potential investor is analyzing three companies in the same industry and wishes to invest in onlyone, which ratio is least likely to affect the investor’s decision? a. Quick ratio. b. Earnings per share. c. Price to earnings ratio. d. Dividend yie
> A large retailer reported revenue of $1,665,000. The company’s gross profit percentage was 44 percent. What amount of cost of goods sold did the company report?
> Youngstown Corporation is considering changing its inventory method from FIFO to LIFO and wants to determine the impact on selected accounting ratios. In general, what impact would you expect on the following ratios: profit margin, fixed asset turnover r
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> GMAC Corporation issued a $100,000 bond that matures in five years. The bond has a stated interest rate of 6 percent. On January 1, 2011, when the bond was issued, the market rate was 8 percent. The bond pays interest twice per year, on June 30 and Decem
> A manufacturer reported an inventory turnover ratio of 8.6 during 2011. During 2012, management introduced a new inventory control system that was expected to reduce average inventory levels by 25 percent without affecting sales volume. Given these circu
> Compute the financial leverage percentage for 2012 given the following data: 2012 2011 Return on equity 21% 26% Return on assets 6. 8 Profit margin 12 12
> Compute the return on equity ratio for 2012 given the following data: 2012 2011 Net income S 183,000 $ 159,000 Stockholders' equity 1,100,000 1,250,000 Total assets 2,460,000 2,630,000 Interest expense 42,000 32,000
> An Internet company earned $6.50 per share and paid dividends of $3.50 per share. The company reported a dividend yield of 5 percent. What was the price of the stock?
> In 2011, Pringle Company reported earnings per share of $9.50 when its stock was selling for $228. In 2012, its earnings increased by 13 percent. If all other relationships remain constant, what is the price of the stock?
> Tiana Company reported total assets of $1,400,000 and noncurrent assets of $480,000. The company also reported a current ratio of 3.5. What amount of current liabilities did the company report?
> The following selected financial data pertain to four unidentified companies: This financial information pertains to the following companies: a. Cable TV company b. Grocery store c. Accounting firm d. Retail jewelry store Required: Match each company
> The following selected financial data pertain to four unidentified companies: This financial information pertains to the following companies: a. Travel agency b. Hotel c. Meat packer d. Drug company Required: Match each company with its financial info
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> You have just started your first job as a financial analyst for a large stock brokerage company. Your boss, a senior analyst, has finished a detailed report evaluating bonds issued by two different companies. She stopped by your desk and asked for help:
> The following selected financial data pertain to four unidentified companies: This financial information pertains to the following companies: a. Full-line department store b. Wholesale fish company c. Automobile dealer (both new and used cars) d. Resta
> Lowe’s is a leading retailer in the home improvement field. Complete the component percentage analysison the company’s income statement that follows. Discuss any insights provided by this analysis. Consolidated St
> Match each ratio or percentage with its computation. Ratios or Percentages Definitions 1. Profit margin 2. Inventory turnover ratio 3. Average collection period 4. Dividend yield ratio 5. Return on equity A. Net Income (before extraordinary items) +
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> Current assets for London Corporation totaled $410,000 and the current ratio was 2.0. Assume thatthe following transactions were completed: (1) sold $11,000 in merchandise on short-term credit,(2) declared but did not pay dividends of $50,000, (3) paid p
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> Texas Instruments is a global leader in the semiconductor business, providing products to the world’s most innovative electronics companies. Its financial statements reported the following at year-end (in millions): Total assets ........................
> Procter & Gamble is a multinational corporation that manufactures and markets many products that are probably in your home. Last year, sales for the company were $76,476 (all amounts in millions). The annual report did not disclose the amount of cred
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> James Corporation is planning to issue $500,000 worth of bonds that mature in 10 years and pay 6 percent interest each June 30 and December 31. All of the bonds will be sold on January 1, 2011. Required: Compute the issue (sale) price on January 1, 2011
> Current assets totaled $54,000 and the current ratio was 1.5. Assume that the following transactions were completed: (1) purchased merchandise for $7,000 on short-term credit and (2) purchased a delivery truck for $12,000, paid $3,000 cash, and signed a
> In this chapter, we discussed the ROE profit driver (or DuPont model). Using that framework, find the missing amount in each case that follows: Case 1: ROE is 10 percent; net income is $200,000; asset turnover ratio is 5; and net sales are $1,000,000. Wh
> In this chapter, we discussed the importance of analyzing financial results based on an understanding of the company’s business strategy. Using the ROE model, we illustrated how different strategies could earn high returns for investors. Assume that two
