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Chapter 14: Financial Statement Analysis
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
CHAPTER 14
Performance MeasurementASSIGNMENT CLASSIFICATION TABLE
Study ObjectivesQuestionsBriefExercisesExercisesAProblemsBProblems
1.Understand the con-
cept of sustainable earnings and indicate how irregular items are presented.1, 2, 3, 41, 2, 31, 2
2.Discuss the need for comparative analysis
and identify the tools
of financial statement analysis.5
3.Explain and apply
horizontal analysis.6, 7 4, 53, 5, 61A1B
4.Explain and apply
vertical analysis.6, 76, 7, 84, 62A 2B
5.Identify and calculate
ratios used to analyse liquidity, solvency,
and profitability.8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 199, 10, 11, 12, 13, 142, 7, 8, 9, 10, 11, 12, 13, 142A, 3A, 4A, 5A, 6A, 7A, 8A, 9A, 10A, 11A, 12A2B, 3B, 4B, 5B, 6B, 7B, 8B, 9B, 10B, 11B, 12B
6.Understand the concept of quality of earnings.20, 21, 22151510A, 11A, 12A10B, 11B, 12B
ASSIGNMENT CHARACTERISTICS TABLE
ProblemNumberDescriptionDifficultyLevelTimeAllotted (min.)
1APerform horizontal analysis and comment.Simple20-30
2APrepare vertical analysis, calculate selected ratios, and comment.Moderate20-30
3ACalculate ratios.Simple20-30
4ACalculate ratio and comment.Moderate30-40
5ACalculate ratios.Moderate50-60
6ACalculate ratios, and compare liquidity, profitability, and solvency for two companies.Moderate50-60
7ACalculate ratios and compare two companies, one on the verge of bankruptcy.Moderate50-60
8AAnalyse ratios.Moderate30-40
9ACalculate missing information using ratios.Moderate50-60
10ADetermine effect of transactions on ratios.Moderate30-40
11AAnalyse ratios.Moderate50-60
12AAssess effect of alternate accounting principles on ratios.Complex50-60
1BPrepare horizontal analysis and comment.Simple20-30
2BPrepare vertical analysis, calculate selected ratios, and comment.Moderate20-30
3BCalculate ratios.Simple20-30
4BCalculate ratio and comment.Moderate30-40
5BCalculate ratios.Moderate50-60
6BCalculate ratios, and compare liquidity, profitability, and solvency for two companies.Moderate50-60
7BCalculate ratios and compare two companies, one on the verge of bankruptcy.Moderate50-60
8BAnalyse ratios.Moderate30-40
9BCalculate missing information using ratios.Moderate50-60
10BDetermine effect of transactions on ratios.Moderate30-40
11BAnalyse ratios.Moderate50-60
12BAssess effect of alternate accounting principles on ratios.Complex50-60
ANSWERS TO QUESTIONS
1.The concept of sustainable earnings is defined as the normal level of earnings to be obtained in the future. It is the amount of regular earnings that a company can expect to earn from its normal operations. In order to distinguish a companys net earnings from its earning power, irregular items, such as discontinued operations and extraordinary items, are reported separately on the statement of earnings.
2.Item (f) would be reported as an extraordinary loss. Item (g) is debatable, depending on whether or not earthquakes are frequent in the location in question.
3.This would not be considered a favourable trend for Ingots Inc. The relevant earnings per share figures are the $3.26 in 2004 and the $2.99 in 2005. These figures indicate that, unless there was a sale of common shares, the earnings from the continuing operations of the company decreased during 2005. This should give the companys management some concern because they will not always be able to count on revenue or gains from irregular items.
4.(a)The effect will be negative for Robotics Inc., in that retained earnings is reduced. The change to an accelerated method of amortization means that there will be an increase in the amount of accumulated amortization. The journal entry will show a credit to Accumulated Amortization and a debit to Retained Earnings for the increased amortization expense (Cumulative Effect of Change in Accounting Principle).
(b)Changes in accounting principles are reported as an adjustment of opening retained earnings (net of income tax). The accelerated amortization method should be used in reporting the operating results for the current year and any previous periods reported for comparative purposes.
5.(a)Comparison of financial information can be made on an intracompany basis, an intercompany basis, and an industry average basis (or predetermined norms).
1.An intracompany basis compares the same item with prior periods, or with other financial items in the same period.
2.An intercompany basis compares the same item with other companies published reports.
3.The industry average and predetermined norm compare the item with the industry average as compiled by Dun & Bradstreet or by trade associations.
(b)1.The intracompany basis of comparison is useful in detecting changes in financial relationships and significant trends within a company.
2.The intercompany basis of comparison provides insight into a companys competitive position.
3.The industry average basis provides information as to a companys relative performance within the industry.
Questions (Continued)
6.Horizontal analysis (also called trend analysis) measures the dollar and percentage increase or decrease of an item over a period of time. In this approach, the amount of the item on one statement is compared with the amount of that same item on one or more earlier statements. Vertical analysis expresses each item within a financial statement in terms of a percent of a relevant total or other common basis within the same statement.
7.(a)$540,000 X 1.05 = $567,000, 2005 net earnings
(b)$540,000 6% = $9,000,000, 2004 revenue
8.(a)Liquidity ratios measure the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash.
(b)Solvency ratios measure the companys ability to survive over a long period of time.
(c)Profitability ratios measure the earnings or operating success of an enterprise for a given period of time.
9.A high current ratio might be hiding liquidity problems with regards inventory or accounts receivable. For example, a high level of inventory will cause the current ratio to increase. Increases in inventory can be due to the fact that inventory is not selling and may be obsolete. Increases in the current ratio will also occur if the companys accounts receivable increase. An increase in accounts receivable could indicate the company is having trouble collecting its overdue accounts, which again would mean liquidity problems for the business.
10.The current ratio relates current assets to current liabilities. The acid-test ratio relates cash, short-term investments, and net receivables to current liabilities. The acid-test ratio provides additional information about short-term liquidity and is an important complement to the current ratio. The cash current debt coverage ratio assesses the ability of the entity to meet its current obligations and is a measure of the companys liquidity. The cash total debt coverage ratio is a measure of the companys ability to repay all its liabilities and is a measure of the companys solvency.
11.Bullock Ltd. likely has a collection problem with its receivables. However, the receivables turnover needs to be reviewed in light of other liquidity measures for the company. In addition, sometimes the receivables turnover for the industry can be misleading in that some companies encourage credit and revolving charge sales and slow collections in order to earn a healthy return on the outstanding receivables in the form of high rates of interest.
12.Joan is correct. A single ratio by itself may not be very meaningful and is best interpreted by comparison with (1) past ratios of the same enterprise, (2) ratios of other enterprises, or (3) industry norms or predetermined standards. In addition, other ratios of the enterprise are necessary to determine overall financial well-being.
Questions (Continued)
13.The price earnings (P-E) ratio is a reflection of investors assessments of a companys future earnings. The P-E ratio takes into account such factors as relative risk, stability of earnings, trends in earnings, and the markets perception of the companys growth potential. In this question, investors favour the Bank of Montreal because it has the higher P-E ratio. The investors feel that the Bank of Montreal will be able to generate even higher future earnings and so the investors are willing to pay more for the shares.
14.The explanation for the difference relates to the fact that the company must be using some debt to finance their assets. The cost of debt is lower than the return being generated by the related assets. The extra return then accrues to the shareholders of the business thereby increasing their return on common shareholders equity. This concept is referred to as financial leverage.
15.In a growth company, the payout ratio is often low because the company is reinvesting earnings in the business.
16.(a)Asset turnover
(b)Inventory turnover, days in inventory
(c)Return on common shareholders equity
(d)Times interest earned
17.(a)The increase in profit margin is good news because it means that a greater percentage of net sales is going towards earnings.
(b)The decrease in inventory turnover signals bad news because it is taking the company longer to sell the inventory and consequently there is a greater chance of inventory obsolescence.
(c)An increase in the current ratio signals good news because the company improved its ability to meet maturing short-term obligations.
(d)The earnings per share ratio is a deceptive ratio. The decrease might be bad news to the company because it could mean a decrease in net earnings. Or the decrease might be good news to the company because of an increase in shareholders investment.
(e)The increase in the price earnings ratio is generally good news because it means that the market price per share has increased and investors are willing to pay that higher price for the shares.
(f)The increase in debt to total assets ratio is bad news because it means that the company has increased its obligations to creditors and has lowered its equity buffer.
(g)The decrease in the times interest earned is bad news because it means that the companys ability to meet interest payments as they come due has weakened.
Questions (Continued)
18.(a)The times interest earned ratio (not cash interest coverage ratio), which is an indication of the companys ability to meet interest charges, and the debt to total assets ratio, which indicates the companys ability to withstand losses without impairing the interests of creditors.
(b)The current ratio and the acid-test ratio, which indicate a companys liquidity and short-term debt-paying ability.
(c)The earnings per share and the return on common shareholders equity, both of which indicate the earning power of the investment.
19.The cash current debt coverage ratio, cash total debt coverage ratio and the free cash flow all depend on cash based data rather than accrual based data.
20.If management wanted to increase earnings, it could decrease the amortization expense by increasing the estimated useful life of the asset used in the calculation of amortization.
21.Management of earnings through, for example, the changing of accounting estimates may lead to reported earnings that are confusing and misleading to users. For example, if a company changes its estimate of an assets useful life, amortization expense will change. The clarity and thoroughness of the earnings may be reduced which would lead to a lower quality of earnings.
22.(a)During a period of inflation, net earnings will be less under the average inventory cost flow assumption than it will be using the FIFO cost flow assumption because average costing results in the larger cost of goods sold amount.
(b)Inflation does not affect the amount of amortization taken (except through its effect on salvage) since the amortizable amount is based on the acquisition cost. A six-year life produces greater amortization for the first six years (thus, less net earnings) and less amortization in years 7, 8, 9 (thus, more net earnings in those years) than a nine-year life.
(c)Inflation does not affect the amount of amortization taken. Use of the straight-line method results in less amortization in the earlier years than the accelerated declining balance method but more amortization in the later years.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 14-1
OSBORN CORPORATION
Statement of Earnings (Partial)
Year Ended December 31, 2004
Discontinued operations
Loss from operations of Mexico facility, net
of $105,000 ($300,000 X 35%) income tax savings
$195,000
Loss on disposal of Mexico facility, net of
$56,000 ($160,000 X 35%) income tax savings
104,000($299,000)
BRIEF EXERCISE 14-2
LIMA CORPORATION
Statement of Earnings (Partial)
Year Ended November 30, 2004
Earnings before income taxes
$300,000
Income tax expense ($300,000 X 25%)
75,000
Earnings before extraordinary item
225,000
Extraordinary loss from flood, net of $15,000
($60,000 X 25%) income tax savings
(45,000)
Net earnings
$180,000
BRIEF EXERCISE 14-3
SHIRLI INC.
Statement of Retained Earnings (Partial)
For the Year Ended June 30, 2005
Retained earnings, July 1, 2004
$350,000
Deduct: Cumulative effect on prior years of change in amortization
method, net of $16,000 ($40,000 X 40%) income tax savings
24,000Retained earnings, July 1, 2004, as adjusted
$326,000
BRIEF EXERCISE 14-4
Horizontal analysis:
Dec. 31, 2004Dec. 31, 2003
Cash
Accounts receivable
Inventory
Noncurrent assets $150,000
85.7%*
$600,000
150%**
$780,000
130%***
$3,220,000
115%****$175,000
100%
$400,000
100%
$600,000
100%
$2,800,000
100%
* = 85.7%
** = 150% *** = 130%**** = 115%
BRIEF EXERCISE 14-5
Comparing the percentages presented results in the following conclusions: The net earnings for Tilden increased in 2004 because of the combination of an increase in sales and a decrease in both cost of goods sold and expenses. However, the reverse was true in 2005 as sales decreased, while both cost of goods sold and expenses increased. This resulted in a decrease in net earnings.
BRIEF EXERCISE 14-6
Vertical analysis20042003
AmountPercentage*AmountPercentage**
Cash
Accounts receivable
Inventory
Noncurrent assets
Total assets$ 150,000
600,000
780,000
3,220,000
$4,750,0003.2%
12.6%
16.4%
67.8%
100.0%$ 175,000
400,000
600,000
2,800,000
$3,975,0004.4%
10.0%
15.1%
70.4%
100.0%
* = 3.2%
** = 4.4%
= 12.6% = 10.0%
* =16.4%** = 15.1%
* = 67.8%** = 70.4%
BRIEF EXERCISE 14-7
200520042003
Sales
Less: Cost of goods sold
Operating expenses
Net earnings100.0%
59.2%
25.0%15.8%100.0%
62.4%
26.6%11.0%100.0%
64.5%
27.5%8.0%
Net earnings as a percent of sales for Waubons increased over the three-year period because cost of goods sold and operating expenses both decreased as a percent of sales every year.
BRIEF EXERCISE 14-8
(a)Working capital = Current assets current liabilities
= $845,683 $448,606
= $397,077
(b)Current ratio:
Current assets
Current liabilities
=
= 1.89:1
(b)Acid-test ratio:
Cash + Short-term investments
+ Accounts receivable
Current liabilities
=
= 0.51:1
BRIEF EXERCISE 14-9
Holyshs liquidity is likely deteriorating. The increase in the current ratio is likely caused by the increase in receivables due to the decline in the receivables turnover. This may mean that the company is not collecting its accounts receivable as effectively as in the past, or that some balances may be uncollectible. Further investigation into the cause for the slowdown in collections will have to be made before it is possible to assess the companys liquidity.
BRIEF EXERCISE 14-10
20022001
(a)Receivables turnover
= Net credit salesAverage accounts receivable
=
= 4.8 times
= 4.8 times
(b)Average collection period
= 365 days
Receivables turnover
= = 76 days= = 76 days
Management has maintained a similar pattern of collections over the past year. The company is taking 76 on the average to collect its accounts receivable, which is considerably longer than the credit terms of 60 days. The company probably needs to focus more effort on accounts receivable collection.
BRIEF EXERCISE 14-11
(a)Inventory turnover =
20042003
= 4.6 times
= 5.1 times
(b) Days in Inventory =
365
Inventory turnover
= 79 days EMBED Equation.3
= 72 days
Management should be concerned with the fact that inventory is moving slower in 2004 than it did in 2003. The decrease in the inventory turnover could be because of poor pricing decisions or because the company is stuck with obsolete inventory.
BRIEF EXERCISE 14-12
(a)Asset turnover =
=
= 2.37 times(b)Return on assets =
=
=
9%
(c)Profit margin =
=
= 3.8%BRIEF EXERCISE 14-13
Cash dividends
Payout ratio=
0.20=
X= ADVANCE \r 2 $56,000 x 0.20
= ADVANCE \r 2 $11,200
Average total assets
Return on assets=
0.16=
0.16X= ADVANCE \r 2 $56,000
X=
= ADVANCE \r 2 $350,000
BRIEF EXERCISE 14-14
(a)
= 0.14 times
(b)
= 0.10 times
(c) $6,200 $3,807 = $2,393
BRIEF EXERCISE 14-15
Increasing the estimated useful life will result in lower amortization expense and accumulated amortization and higher net earnings and total assets.
(a)Increase
(b)Decrease
(c)Decrease
SOLUTIONS TO EXERCISES
EXERCISE 14-1
(a)
DAVIS LTD.
Statement of Earnings (Partial)
Year Ended December 31, 2004
Earnings from continuing operations
$270,000
Discontinued operations
Gain from operations of division, net of
$44,000 income taxes$66,000
Loss from disposal of division, net of
$28,000 income tax savings
(42,000)24,000
Earnings before extraordinary item
294,000
Extraordinary fire loss, net of $24,000 tax savings
(36,000)Net earnings
$258,000
(b)The effect of the cumulative change in accounting principle (item 3) would be presented directly in the Statement of Retained Earnings as an adjustment to opening retained earnings.
EXERCISE 14-2
(a)These items are listed separately so that the reader can evaluate the companys results on the basis of normal operations and also see the impact of irregular items. If only the net income figure was disclosed, the reader would not be able to evaluate what portion of the earnings came from operations and what portion came from irregular items.
(b) Revenue (in thousands):
Net income (in thousands):
(c) The profit margin should be based on the companys net income from its normal and continuous operations. The net income figure should be a more conservative amount and should not include any irregular items.
Profit margin (in thousands):
2002: (($10,317) + 8,100) $41,408 = -5.4%
2001: $1,111 $29,113 = 3.8%
These two figures are comparable because they are the end result of the companys operations and do not include any irregular items which only affect the year of their occurrence.
(d) Average number of shares = Net income EPS
2002: $(10,317,000) $(0.23) = 44,856,000 shares
2001: $1,111,000 $0.02 = 55,550,000 shares
Decrease in the average number of shares: 10,694,000 shares
EXERCISE 14-3
MERCHANDISE.COM INC.
Condensed Balance Sheet
December 31
Increase or
(Decrease)
20042003Amount%
Assets
Current assets
Noncurrent assets (net)
Total assets$120,000
400,000$520,000$ 80,000
350,000$430,000$40,000) 50,000)$90,000)(50.0%)(14.3%)(20.9%)
Liabilities
Current liabilities
Long-term liabilities
Total liabilities$91,000
144,000235,000$70,000
95,000165,000$21,000
49,000 70,000(30.0%)(51.6%)(42.4%)
Shareholders Equity
Common shares
Retained earnings
Total shareholders equity
Total liabilities and share-
holders equity
150,000
135,000285,000$520,000115,000
150,000265,000$430,00035,000
(15,000)
20,000)($90,000)(30.4%)(10.0%)
(7.5%)(20.9%)
EXERCISE 14-4
FLEETWOOD CORPORATION
Condensed Statement of Earnings
20042003
AmountPercentAmountPercent
Sales
Cost of goods sold
Gross profit
Operating expenses
Earnings before income taxes
Income tax expense
Net earnings$800,000
500,000300,000
200,000
100,000 25,000$ 75,000100.0%
62.5%37.5%
25.0%
12.5%
3.1% 9.4%$600,000
390,000210,000156,000
54,000
13,500$40,500100.0%
65.0%35.0%
26.0%
9.0%
2.3%6.7%
EXERCISE 14-5
(a)OLYMPIC CORPORATION
Statement of Earnings
Year Ended December 31
Increase or (Decrease)
20042003AmountPercentage
Net sales
Cost of goods sold
Gross profit
Operating expenses
Earnings before income tax
Income tax
Net earnings$550,000
440,000110,000
58,000
52,000
20,800
$ 31,200$550,000
450,000100,000
55,000
45,000
18,000
$27,000
$(10,000)
(10,000 3,000
7,000
2,800
$ 4,200)
(2.2%)
(10.0%)
(5.5%
15.6%
15.6%
15.6%
(b)OLYMPIC CORPORATION
Statement of Earnings
Year Ended December 31
20042003
AmountPercentAmountPercent
Net sales
Cost of goods sold
Gross profit
Operating expenses
Earnings before income tax
Income tax
Net earnings$550,000
440,000110,000
58,000
52,000
20,800
$31,200100.0%
80.0%20.0%
10.5%
9.5%
3.8%
5.7%
$550,000
450,000100,000
55,000
45,000
18,000
$27,000100.0%
81.8%18.2%
10.0%
8.2%
3.3%
4.9%
EXERCISE 14-6
(a)MOUNTAIN EQUIPMENT CO-OPERATIVE
Balance Sheet
December 31
(in thousands)
20022001Increase
(Decrease)Percentage
Change
from 2001
Assets
Current assets
Deferred store pre-opening costs
Property, plant and equipment
Total assets$40,927
417
38,197
$79,541
$38,729
39,015
$77,744$2,198
417
(818)
$1,7975.7%
(2.1%)
2.3%
Liabilities and members equity
Current liabilities
Long-term liabilities
Total liabilities
Members equity
Total liabilities and
members equity$23,560
34823,908
55,633$79,541$25,110
399
25,509
52,235$77,744($1,550)
(51)
(1,601)
3,398$1,797(6.2%)
(12.8%)
(6.3%)
6.5%
2.3%
EXERCISE 14-6 (Continued)
MOUNTAIN EQUIPMENT CO-OPERATIVE
Balance Sheet
December 31
(in thousands)
20022001
Assets
Current assets
Deferred store pre-opening costs
Property, plant and equipment
Total assets$40,927
417 38,197
$79,541
51.5%
0.5%
48.0%
100.0%$38,729
39,015
$77,74449.8%
0.0%
50.2%
100.0%
Liabilities and
members equity
Current liabilities
Long-term liabilities
Total liabilities
Members equity
Total liabilities and
members equity$23,560
34823,908
55,633$79,54129.6%
0.4%
30.0%
70.0%
100.0%$25,110
399
25,509
52,235$77,74432.3%
0.5%
32.8%
67.2%
100.0%
(b) Current liabilities and long-term liabilities have decreased slightly and more assets are now being financed through members equity.
EXERCISE 14-7
(in thousands)
(a) Current ratio = 0.99:1 =
Acid-test ratio = 0.97:1 =
Cash current debt coverage = 0.11 times =
Receivables turnover = 17.7 times =
Average collection period = 20.6 days =
(b) Carlton University appears to be in a healthy position with regard to its liquidity. Both current and quick ratios are just under 1:1. Cash current debt coverage is perhaps a little low at 0.11 times. Receivables turnover and average collection period are good.
EXERCISE 14-8
(a)Current ratio as of February 1, 2005 = 3.25:1 ($130,000 $40,000).
Feb.33.25:1No change in total current assets or liabilities
72.63:1($105,000 $40,000)
112.63:1No change in total current assets or liabilities
143.50:1($91,000 $26,000)
183.27:1($85,000 $26,000)
243.34:1($86,800 $26,000)
(b)Acid-test ratio as of February 1, 2005 = 2.75:1 ($110,000 $40,000).
Feb.32.75:1No change in total quick assets or current liabilities
72.13:1($85,000 $40,000)
112.05:1($82,000 $40,000)
142.62:1($68,000 $26,000)
182.38:1($62,000 $26,000)
242.56:1($66,500 $26,000)EXERCISE 14-9
(a)The companys collection of its accounts receivables has deteriorated over the past several years as it is taking the company longer to collect as evidenced by the decrease in the accounts receivable turnover.
(b)The company is selling its inventory slower as the inventory turnover is declining.
(c)Overall, the companys liquidity has deteriorated. The increase in the current ratio is caused by the increase in inventory and receivables due to the slowdown in the movement of these assets. Even though the companys current ratio is higher, if the underlying assets cannot be converted to cash to repay current liabilities, then liquidity has deteriorated.
EXERCISE 14-10
(a)Current
= 2.9:1
(b)Acid-test
= 1.7:1
(c)Receivables turnover
= 5.6 times
(d)Average collection period ADVANCE \r 2 365 days 5.6 = 65.2 days
(e)Inventory turnover
= 3.6 times
(f) Days in inventory
365 = 101.4 days
3.6
(g)Cash current debt coverage
= 0.75 times
(h)Cash total debt coverage
= 0.26 times
(i)Debt to total assets
= 43.5%
(j)Return on common shareholders equity
= 8.5%
EXERCISE 14-11
(a)Profit margin
= 5.2%
(b)Asset turnover
= 1.30 times
(c)Return on assets
= 6.8%
(d)Return on common shareholders equity = 14.7%
(e)Times interest earned
= 5.36 times
(f)Earnings per share
= $1.06
EXERCISE 14-12
(a)Earnings per share
= $1.33
(b)Price-earnings
= 11.3 times
(c)Payout
= 47%
(d)Times interest earned
= = 6.4 times
(e)Gross profit margin
= 46%
(f)Profit margin
= 10.6%
EXERCISE 14-13
TransactionCurrent
ratio
(1.5:1)Cash current debt coverage
(0.4 times)Debt to total assets
(30%)Return on assets
(20%)
(a)Purchased merchandise inventory on account from supplier (perpetual inventory system).
DDDD
(b)Paid cash on account.IDII
(c)Sold merchandise on account to customers.INEII
(d)Customer paid its accountNEINENE
(e)Purchased equipment issuing long-term note payable in payment.NENEDD
(f)Paid interest expense and a portion of principle on the note payableDDDNE
EXERCISE 14-14
(a)Inventory turnover = 3.6 =
3.6 X $190,000 = Cost of goods sold
Cost of goods sold = $684,000
(b)Receivables turnover = 9.4 =
9.4 X $99,250 = Net sales (credit) = $932,950
(c)Return on common shareholders equity = 19% =
0.19 X $507,250 = Net earnings = $96,378
(d)Return on assets = 14% =
Average assets = = $688,414
= $688,414
Total assets (Dec. 31, 2004) = ($688,414 X 2) $605,000 = $771,828
EXERCISE 14-15
(a)The fact that the earnings have been so close to analysts expectations would make investors suspicious that management has selected accounting policies or made estimates, which have manipulated earnings so that the analysts expectations are met, and therefore the companys share price would not decline.
(b)Users are concerned that if management is manipulating the accounting figures to meet analysts expectations, the information may not be reliable and useful for decision-making.
SOLUTIONS TO PROBLEMS
PROBLEM 14-1A
(a)
AIR CANADA
(in millions)
$%$%$%$%
2002ChangeChange2001ChangeChange2000ChangeChange1999ChangeChange1998
Operating revenues $ 9,826 $215 2.2 $ 9,611$ 315 3.4 $9,296$2,85344.3$6,443 $545 9.2$5,898
Operating expenses 10,018 (324)(3.1)10,342 1,307 14.5 9,0352,96948.96,066 63 4.55,803
Nonrecurring expenses 31 52247.6(21) (199) (111.8)178216 (568.4) (38) (37)(3,700.0)(1)
Interest expense 221 (54)(19.6)275 65 31.0 2105636.4154 (20)(11.5) 174
Income tax 384 54 16.4 330 375 833.3(45)(166) (137.2) 121 155455.9 (34)
Net earnings (loss)$ (828) $487 37.0 $(1,315) $(1,233) (1,503.7) $ (82) $ (222) 158.6 $ 140 $184 418.2$ (44)
Current assets $1,771 $(464)(20.8)$ 2,235$ 60.3 $2,229$ 97177.2 $1,258$ 16615.2 $1,092
Total assets 7,416 (1,328)(15.2)8,744(988)(10.2)9,7323,02745.1 6,7052834.4 6,422
Current liabilities 2,592 (277)(9.7)2,869(691)(19.4)3,5602,155153.4 1,4051269.9 1,279
Total liabilities 9,704 (500)(4.9)10,2047888.4 9,4163,43657.5 5,9801,01520.4 4,965
Share capital 992 00.0 99200.0 99220.2 990(315) (24.1)1,305
Retained earnings (3,280)(828)33.8 (2,452)(1,776)(262.7) (676)(411)(155.1) (265)(417) (274.3)152
(b)The primary drivers of the decline are the flattening of operating revenues combined with the increase in operating expenses.
(c) Air Canada has been financing its operations primarily through debt.
PROBLEM 14-2A
(a)Condensed Statement of Earnings
Year Ended December 31, 2004
Breau Ltd.Shields Ltd.
DollarsPercentDollarsPercent
Net sales
Cost of goods sold
Gross profit
Operating expenses
Earnings from operations
Other expenses and losses
Interest expense
Earnings before income taxes
Income tax expense
Net earnings$350,000
180,000 170,000
51,000 119,000
3,000 116,000
29,000$ 87,000100.0%
51.4%48.6%
14.6%34.0%
0.9% 33.1%
8.3%24.8%$1,400,000
720,000 680,000
272,000 408,000
10,000 398,000
100,000$ 298,000100.0%
51.4%48.6%
19.4%29.2%
0.7%28.5%
7.2%21.3%
(b)Breau: Return on Assets
$87,000 $457,500 = 19%
$87,000 is Breaus 2004 net earnings. $457,5001 is Breaus 2004 average assets:
120042003
Current assets
Noncurrent assets
Total assets
$130,000
405,000$535,000+$110,000
270,000$380,000=$915,000 2
PROBLEM 14-2A
(b)
(Continued)
Shields: Return on Assets
$298,000 $1,550,000
= 19.2%
$298,000 is Shields 2004 net earnings. $1,550,0002 is Shields 2004 average assets:
220042003
Current assets
Noncurrent assets
Total assets$ 700,000
1,000,000$1,700,000+$ 650,000
750,000$1,400,000=$3,100,000 2
Breau: Return on Common Shareholders Equity
$87,000 $342,500 = 25.4%
$87,000 is Breaus 2004 net earnings. $342,5003 is Breaus 2001 average shareholders equity:
320012000
Common shares
Retained earnings
SE$288,000
137,000$425,000+$210,000
50,000$260,000=$685,000 2
Shields: Return on Common Shareholders Equity
$298,000 $1,112,500 = 26.8%
$298,000 is Shields 2004 net earnings. $1,112,5004 is Shields 2004 average shareholders equity:
420012000
Common shares
Retained earnings
SE$ 677,000
573,000$1,250,000+$700,000
275,000$975,000=$2,225,000 2
(c)Shields Ltd. appears to be more profitable. ADVANCE \r 1 Shields return on assets of 19.2% is higher than Breaus return on assets of 19%, and Shields return on common shareholders equity of 26.8% is higher than Breaus return on common shareholders equity of 25.4%.
(a)Current ratio
= 1.33:1
(b)Acid-test ratio
= 0.76:1
(c)Receivables turnover
= 7.57 times
(d)Average collection period 365 days 7.57 = 48.22 days
(e)Inventory turnover
= 4.72 times
(f)Days in inventory 365 days 4.72 = 77.33 days
(g)Cash current debt coverage
= 0.19 times
(h)Debt to total assets
= 28.75%
(i)Times interest earned
= 19.77 times
(j)Cash total debt coverage
= 0.15 times
PROBLEM 14-3A (Continued)
(k)Gross profit margin
= 43.6%
(l)Profit margin
= 17.9%
(m)Return on assets
= 19.62%
(n)Asset turnover
= 1.10 times
(o)Return on common shareholders equity
= 29.98%
(p)Earnings per share
= $9.31
(a)20042003
1.Profit margin
= 10.6% = 5.0%
2.Gross profit margin
= 44.7% = 42.9%
3.Asset turnover
= 0.98 times
= 1.2 times
4.Earnings per share
= $2.22 = $1.14
5.Price-earnings
= 3.60 times = 8.77 times
6.Payout
* = 24.0%
*$124,000 + $80,300 - $185,000 = $19,300** = 45.2%
**$105,000 + $34,650 - $124,000 = $15,650
PROBLEM 14-4A (Continued)
(a) (Continued)
7.Debt to total assets
$348,000 = 37.3%
$933,000 = 24.4%
8.Current ratio
= 1.97:1
= 1.92:1
(b)The underlying profitability of the corporation has improved. For example, the profit margin and gross profit margin have both increased. In addition, the corporations earnings per share have increased, which suggests that investors will be looking more favourably at the corporation. However, its payout ratio has decreased, which may account for the decline in the price earnings ratio that occurred despite the increased profitability. The company is also less solvent as its debt to total assets has increased.
(a)Liquidity
20042003Change
Current = 2.08:1 = 3.09:1Deterioration
Acid-test = 0.69:1 = 1.08:1Deterioration
Cash current debt coverage $80,000
$249,375
= 0.32 times $65,000
$232,500
= 0.28 timesImprovement
Receivables turnover
= 10.20 times
= 10.80 timesDeterioration
Inventory turnover
= 1.76 times
= 1.95 timesDeterioration
An overall decrease in short-term liquidity occurred.
PROBLEM 14-5A
(a)(Continued)
Profitability
20042003Change
Return on common shareholders equity
= 11.3%
= 9.2%Improvement
Return on assets
= 7.4%
= 6.25%Improvement
Profit margin
= 8.63%
= 7.18%Improvement
Asset turnover
= 0.86 times
= 0.87 timesNo change
Gross profit margin
= 35.0%
= 32.4%Improvement
Earnings per share = $0.86 = $0.68Improvement
Overall profitability has improved.
PROBLEM 14-5A (Continued)
(a)(Continued)
Solvency
20042003Change
Debt to total assets
= 39.8%
= 26.9%Deteriorated
Cash total debt coverage
= .20
= 0.19Improved
Overall solvency has deteriorated
*Total assets total shareholders equity = 2002 total debt
= $1,175,000 $740,000 = $435,000
Average total liabilities = ($265,000 + $435,000) 2 = $350,000
(b)20052004
1.Earnings per share = $1.21 = $0.86
2.Debt to total assets = 28.2% = 39.8%
3.Price-earnings = 5.0 times = 5.8 times
*100,000 + (6,500 x 6/12) = 103,250
**$125,000 100,000 = $1.25 (independent of #1)
(a)Ratio (Industry Average)INCOFALCONBRIDGE
(in millions)(in millions)
Liquidity
Current (1.2:1)
Acid-test (0.7:1)
Receivables turnover (8.3x)
Average collection period (44 days)
Inventory turnover (4.9x)
Days in inventory (74.5 days)
Solvency
Debt to total assets (40.1%)
Times interest earned (2x)
Cash total debt coverage (N/A)
Profitability
Profit margin (1.6%)
Asset turnover (0.5 times)
Return on assets (0.8%)
Return on common shareholders equity (2.3%)
Payout ratio (N/A)
2.1:1
($1,987 $930)
1.4:1
($1,338 $930)
8.19
($2,161 $264)
44.6
(365 8.19)
2.6
($1,377* $538)
140.4
(365 2.6)
55.4%($4,735 $8,540)
(41.4)
[(($2,120) + $50) $50]
0.13
($599 $4,514**)
(68.5%)[($1,481) $2,161]
0.24
($2,161 $9,064)
(16.3%) [($1,481) $9,064]
(32.5%) [($1,481) $4,550]
(1.8%)
[$26 ($1,481)]
2.5:1
($1,050 $424)
1.4:1
($602 $424)
7.95
($2,394 $301)
45.9
(365 8.0)
3.8
($1,733* $454)
96.1
(365 3.8)
56.1%($2,918 $5,204)
1.55
[($48 + $88) $88]
0.12
($341 $2,853**)
3.0%
[$73 $2,394]
0.47
($2,394 $5,136)
1.4%
[$73 $5,136]
3.2%
[$73 $2,283]
114%
($83 $73)
* Estimate, as operating expenses included
** Average total liabilities = Average total assets Average total shareholders equity
PROBLEM 14-6A (Continued)
(b)The comparison of the two companies relative to the industry reveals the following:
LiquidityFalconbridges liquidity is better than the industry average and Inco. Its current ratio is higher although Inco and Falconbridge's acid test ratios are nearly identical at double the industry average. The management of its accounts receivable is worse than Incos and the industry average. However, this is offset somewhat by its inventory performance, which is better than Incos but still below that of the industry.
SolvencyThe companies are reasonably comparable in terms of debt to total assets and cash total debt coverage solvency measures. Falconbridges cash-based solvency is slightly lower than Incos, even though it is carrying a higher proportion of debt to total assets than is Inco. Both companies are less solvent than the average firm in the industry.
ProfitabilityFalconbridge is significantly more profitable than both Inco and the average company in the industry. Inco is operating at a loss while Falconbridge had positive net earnings.
(a)RatioCompany A
(in millions)Company B
(in millions)
1.
2.
3.
4.
5.
6.
7.
8.
Current ratio
Acid-test ratio
Receivables turnover
Average collection period
Debt to total assets
Return on assets
Profit margin
Asset turnover
0.78:1
($746.4 $953.6)
0.60:1
[($302.4 + $267.7) $953.6]
12.95 times
[$3,171.3 (($267.7 + $221.9) 2)]
28.2 days
(365 12.95)
107.61%
($2,258.4 $2,098.6)
(6.86%)
[($137.6) (($2,098.6 + $1,911.2) 2)]
(4.3%)
(($137.6) $3,171.3)
1.58 times
($3,171.3 (($2,098.6 + $1,911.2) 2)]1.21:1
($60.5 $49.9)
1.12:1
[($50.7 + $5.2) $49.9]
39.15 times
[$203.6 (($5.2 + $5.2) 2)]
9.3 days
(365 39.15)
49.36%
($92.1 $186.6)
10.72%
($15.8 (($186.6 + $108.2) 2)]
7.8%
($15.8 $203.6)
1.38 times
($203.6 (($186.6 + $108.2) 2)]
(b) It appears that Company A is in financial trouble. Its current ratio is less than 1, indicating that it cannot meet its current obligations with its current assets. Its acid-test ratio is only 0.60:1. Company A has more debt than assetsits debt to total asset ratio is over 100%. Its return on assets is negative and its operating expenses are greater than revenue. The only ratio that it exceeds Company B on is its asset turnover ratio.
(a)Black and Decker appears to be more liquid. Even though its current ratio is lower than both Snap-On and the industry, Black and Decker has a higher receivables turnover and is also moving its inventory more quickly.
(b)By reviewing the debt to total assets we can see Snap-On has significantly less debt than Black and Decker and is more in line with the industry average. Snap-On also has a much better times interest earned which again indicates that it is the more solvent of the two companies.(c)Both companies appear to be very profitable. Snap-On has a higher gross margin than Black and Decker but Black and Decker has a higher profit margin, offers a better return on shareholders equity and earns a higher return on assets. Black and Decker also has higher earnings per share. All of this would indicate that Black and Decker is the more profitable company.
(d)Investors seem to favour Snap-On as it has the higher price-earnings ratio. This is not consistent with (c), as you would expect investors to favour the more profitable company. Investors must be anticipating better future profitability from Snap-On.
VIENNA CORPORATION
Statement of Earnings
Year Ended December 31, 2004
Per
QuestionCalculationSolution
Sales
$11,000,000$11,000,000
Cost of goods sold
(a)Step 3 $11,000,000 - $3,960,000 7,040,000
Gross profit
(b)Step 2 $11,000,000 x 36%3,960,000
Operating expenses
1,665,000 1,665,000
Earnings from operations
(c)Step 4 $3,960,000 - $1,665,0002,295,000
Interest expense(d)Step 7 $2,295,000 - $2,155,000 140,000
Earnings before income taxes
(e)Step 6 $1,595,000 + $560,000 2,155,000
Income tax expense
560,000 560,000
Net earnings
(f)Step 5 $11,000,000 x 14.5% $ 1,595,000
VIENNA CORPORATION
Balance Sheet
December 31, 2004
ASSETS
Current assets
Cash
$ 450,000Step 11 $2,630,000 $1,100,000
$880,000$ 650,000
Accounts receivable (net)
(g)Step 1 $11,000,000 101,100,000
Inventory
(h)Step 8 $7,040,000 8 880,000
Total current assets
(i)Step 10 $7,250,000 - $4,620,0002,630,000
Property, plant and equipment4,620,000 4,620,000
Total assets
(j)Step 9 $1,595,000 0.22$7,250,000
LIABILITIES
Current liabilities
(k)Step 14 $2,630,000 3$ 877,000
Long-term liabilities
(l)Step 15 $3,850,000 - $877,000 2,973,000
Total liabilities
(m)Step 13 $7,250,000 - $3,400,000 3,850,000
SHAREHOLDERS' EQUITY
Common shares
3,000,0003,000,000
Retained earnings
400,000 400,000
Total shareholders' equity
3,400,000 3,400,000
Total liabilities and shareholders' equity
(n)Step 12 = Total assets$7,250,000
(a) Decrease total debt will now increase causing the ratio to decrease.
(b) Decrease interest expense will increase causing the ratio to decrease.
(c) Increase Assuming the shares are cancelled; the shareholders equity should decline causing the return to the remaining shareholders to increase.
(d) No effect on payout ratio as this ratio only considers cash dividends. No effect on return on common shareholders equity as there is no change in total common shareholders equity as a result of a stock dividend.
(e) Decrease Assuming the current ratio is greater than 1:1; the increase in payables will cause the current ratio to decrease. If the current ratio were less than 1:1, the increase in payables would cause the current ratio to increase.
(f) Increase the inventory turnover, as cost of goods sold will now be higher. The effect on the gross profit margin will depend on the selling price of the item compared to its cost.
(g) No effect as gross accounts receivables will remain the same.
(h) The average total assets will now be lower, causing return on assets to increase.
(a)Taste.com has greater liquidity than Refresh Corp. Its current ratio is higher than Refresh Corp.s and, indeed, higher than the industry. Within its current ratio, its acid-test ratio, receivables turnover, and inventory turnover are all greater than the industry. All of these ratios, with the exception of the receivables turnover, are also higher than Refresh Corp.s. The receivables turnover ratio, while not as high as Refresh Corp., is still a good ratio, with the collection period averaging 37 days (365/9.8).
(b)No, investors would not be overly concerned with either companys debt levels. Although Taste.com has a much higher debt position than does Refresh Corp., they have sufficient earnings (see times interest earned ratio) to cover their debt charges. Taste.coms times interest earned ratio, although lower than Refresh Corp.s, is still better than the industrys. Taste.com is, however, quite thin in terms of generating enough cash annually (see cash total debt coverage ratio) to repay its debt. Still, over time they may be okay. They should monitor their cash flow carefully, however, to ensure that they dont over stress their cash demands (e.g., from large capital expansion requirements).
(c)Refresh Corp. is generating a better gross profit margin than Taste.com (perhaps reducing its costs due to greater buying power). Refresh Corp. is also more profitable than Taste.com in its profit margin. This means that it is controlling all other expenses, in addition to cost of sales, much better than Taste.com. Its return on assets (profitability of assets) is also well done. Its asset turnover ratio is the same as Taste.coms, and it exceeds the industry average for all these profitability ratios. Investors also believe Refresh Corp. is more profitable, or has more future potential, than Taste.com since its P-E ratio far exceeds both Taste.com and the industry. The only profitability ratios for Refresh Corp. that are less than Taste.com and the industry average are the return on equity and EPS ratios. These could be influenced by the capital structure of each company. That is, Refresh Corp. could have more common shares issued, proportionately, than Taste.com.
PROBLEM 14-11 (Continued)
(d)Examples of factors you should be aware of when using ratio analysis are
Management may be unduly affecting the results through estimates.
Historical cost basis of accounting ignores inflation.
Differences in choice of GAAP may affect interpretation.
One company may be highly diversified, which may affect comparisons using consolidated data.
Qualitative factors ignored in traditional financial statements (e.g., goals, motivation, intellectual capital, etc.).
(Note: Students were only required to identify two factors.)
Policy ChoiceCurrent
ratio (1.5:1)Gross profit
margin (40%)Earnings per share($1.50)Debt to
total
assets (25%)Times
interest
earned (20x)Return
on total
assets
(10%)
(a)It is a period of deflation and the president would like to use the average inventory cost flow assumption instead of FIFO.
IIIDII
(b)The company is considering using straight-line amortization, which will produce a lower expense than other methods.
NENEIDII
(c)The company is leasing equipment and is setting up the lease as an operating lease. Its rent expense under an operating lease will be lower than interest expense and amortization expense under a capital lease.NENEIDII
NORTEL NETWORKS CORPORATION
(in U.S. millions)
(a)
$%$%
2002ChangeChange2001ChangeChange2000
Revenues $10,560 $ (6,951)(39.7)$17,511$(10,437)(37.3)$27,948
Cost of revenues 6,953 (7,214)(50.9)14,167(947)(6.3)15,114
Gross profit 3,607 2637.9 3,344(9,490)(73.9)12,834
Operating expenses 5,184 (22,169)(81.0)27,35317,918189.9 9,435
R&D expense 2,230 (1,009)(31.2)3,239(1,809)(35.8)5,048
Interest expense 256 (55)(17.7)31114284.0 169
Net loss from continuing operations before (4,063) 23,496 85.3 (27,559) (25,741) (1415.9) (1,818)
Income taxes
Income tax recovery (expense) 478 (2,774)(85.3) 3,252 4,429376.3 (1,177)
Net loss from continuing operations (3,585)20,72285.3(24,307)(21,312)(711.6) (2,995)
Net loss from discontinued operations - (2,995)(2,520)(530.5) (475)
Net earnings (loss) $ (3,585)$23,71786.9$(27,302)$(23,832)(686.8) $(3,470)
Loss per share$(0.93)$6.6987.8$(7.62)$(6.61)(654.5) $(1.01)
Market price per share$2.52 $(9.38)(78.8)$11.90$(36.35)(75.3)$48.25
Current assets of discontinued operations $ 223 $ (485)(68.5)$ 708$ (814)(53.5)$ 1,522
Total current assets 8,476 (3,286)(27.9)11,762(4,768)(28.8)16,530
Total assets 15,971 (5,166)(24.4)21,137(21,043)(49.9)42,180
Current liabilities 6,982 (2,475)(26.2)9,4573994.4 9,058
Total liabilities 14,011 (2,302)(14.1)16,3133,24224.8 13,071
Common shares 35,696 7212.1 34,9753,1409.9 31,835
Deficit 33,736 3,58511.9 30,15127,4251,006.1 2,726
(b)The primary drivers of the companys deterioration are declining revenues, increasing operating expenses in 2001 and higher debt as a proportion of total assets.
(c)Nortel has been financing its operations through issuing common shares.
(a)Condensed Statement of Earnings
Year Ended December 31, 2004
Chen CorporationCouric Ltd.
DollarsPercentDollarsPercent
Net sales
Cost of goods sold
Gross profit
Operating expenses
Earnings from operations
Interest expense
Earnings before income taxes
Income tax expense
Net earnings$1,849,035
1,080,490 768,545
502,275 266,270
6,800 259,470
103,800$ 155,670100.0%
58.4%41.6%
27.2%14.4%
0.4%14.0%
5.6% 8.4%$539,038
338,006201,032
79,000122,032
1,252120,780
48,300$ 72,480100.0%
62.7%37.3%
14.7%22.6%
0.2%22.4%
9.0% 13.4%
(b)
Chen: Return on Assets
$155,670 $894,750 = 17.4%
$155,670 is Chens 2004 net earnings. $894,7501 is Chens 2004 average assets:
120042003
Current assets
Noncurrent assets
Total assets$325,975
651,115$977,090+$312,410
500,000$812,410=
PROBLEM 14-2B (Continued)
(b) (Continued)
Couric: Return on Assets
$72,480 $251,313 = 28.8%
$72,480 is Courics 2004 net earnings. $251,3132 is Courics 2004 average assets:
220042003
Current assets
Capital assets
Total assets$83,336
214,010$297,346+$79,467
125,812$205,279=
Chen: Return on Common Shareholders Equity
$155,670 $724,430 = 21.5%
$155,670 is Chens 2004 net earnings. $724,4303 is Chens 2004caverage shareholders equity:
320042003
Common shares
Retained earnings
Shareholders equity$500,000
302,265$802,265+$500,000
146,595$646,595=
Couric: Return on Common Shareholders Equity
$72,480 $191,238 = 37.9%
$72,480 is Courics 2004 net earnings. $191,2384 is Courics 2004 average shareholders equity:
420042003
Common shares
Retained earnings
Shareholders equity$120,000
112,478$232,478+$120,000
29,998$149,998=
PROBLEM 14-2B (Continued)
(c)Chen Corporation appears to be more profitable. In terms of total dollars it has higher gross profit, earnings from operations, earnings before taxes, and net earnings. However, when looking at relative values we see that Couric has a higher return on assets and a higher return on shareholders equity. Chen is higher only in gross profit. Therefore, once size differences have been eliminated, Couric is clearly the more profitable of the two companies.
(a)Current ratio
= 1.71:1
(b)Acid-test ratio
= 1.04:1
(c)Receivables turnover
= 17.37 times
(d)Average collection period 365 days 17.37 = 21 days
(e)Inventory turnover
= 7.8 times
(f)Days in inventory 365 days 7.8 = 47 days
(g)Cash current debt coverage
= 1.40 times
(h)Debt to total assets
= 28.23%
(i)Times interest earned
= 14.54 times
(j)Cash total debt coverage
= 0.84 times
PROBLEM 14-3B (Continued)
(k)Gross profit margin
= 47.6%
(l)Profit margin
= 13.8%
(m)Return on assets
= 28.8%
(n)Asset turnover
= 2.08 times
(o)Return on common shareholders equity
= 45.1%
(p)Earnings per share
= $4.57
(a)20052004
1.Profit margin
= 4.7%= 3.7%
2.Gross profit margin
= 40.0%= 38.5%
3.Asset turnover
= 1.07 times
= 1.27 times
4.Earnings per share
= $0.94= $0.74
5.Price-earnings ratio
= 8.51 times = 6.76 times
6.Payout ratio
* = 9.1%
*$105,000 + $33,000 $x = $135,000; x = $3,000** = 8.3%
**$83,000 + $24,000 $x = $105,000; x = $2,000
PROBLEM 14-4B (Continued)
(a) (Continued)
20042003
7.Debt to total assets
= 36.1%
* $90,000 + $170,000 = $260,000= 27.1%
**$75,000 + $85,000 = $160,000
8.Current
= 1.8:1
*$25,000 + $50,000 + $90,000= 2.0:1
** $20,000 + $45,000 + $85,000
(b)The underlying profitability of the corporation appears to have improved (see profit margin, gross profit margin, and earnings per share and P-E ratio). The corporations price-earnings ratio has increased, which suggests that investors may be looking more favourably at the corporation. However, the corporations debt to total assets and payout ratio have both increased which reduces the companys solvency. The companys liquidity position has deteriorated as evidenced by the decline in the current ratio.
(a)Liquidity20042003Change
Current = 1.8:1 = 1.9:1Deterioration
Acid-test = 0.8:1 = 1.1:1Deterioration
Receivables
turnover = 9.3 times = 9.1 timesImprovement
Inventory
turnover = 3.5 times = 4.8 timesDeterioration
An overall decrease in short-term liquidity has occurred. All measures with the exception of the collection of receivables have declined.
PROBLEM 14-5B (Continued)
(a) (Continued)
Profitability
20042003Change
Gross profit$280,000 = 31.1%
$900,000$265,000 = 31.5%
$840,000Deterioration
Profit margin = 6.2% = 6.5%Deterioration
Asset turnover = 1.2 times
= 1.3 timesDeterioration
Return on assets
= 7.5%
= 8.6%Deterioration
Return on shareholders equity = 16.8% = 17.4%Deterioration
EPS = $2.80 = $2.75Improvement
Profitability has decreased slightly.
PROBLEM 14-5B (Continued)
(a) (Continued)
Solvency20042003Change
Debt to total assets
= 59.1%
= 51.2%Deteriorated
Overall solvency has deteriorated.
(b)20052004
1.Return on common
shareholders equity
= 10.5%
= 16.8%
2.Debt to total assets
= 37%
= 59.1%
3.Price-earnings
= 6.0 times
= 3.6 times
(a) ($221,600* + $189,000** + $200,000 + $149,000) 2 = $379,800
**$200,000 + (1,800 X $12/share) = $221,600
**$149,000 + $40,000 = $189,000
(b) ($200,000 + $149,000 + $200,000 + $116,000) 2 = $332,500
(c) $45,000 + $40,000 + $250,000 = $335,000
(d) $170,000 + $45,000 + $40,000 + $250,000 = $505,000
(e) $40,000 20,000 = $2.00
(f) $56,000 20,000 = $2.80
(a)Ratio (Industry average)FUTURE SHOP LTD.INTERTAN, INC.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.Current (1.6:1)
Receivables turnover (23.7 times)
Average collection period (15 days)
Inventory turnover (5.5 times)
Days in inventory (66 days)
Cash current debt coverage (n/a)
Debt to total assets (n/a)
Cash total debt coverage (n/a)
Profit margin (2.1%)
Asset turnover (2.6 X)
Return on assets (5.2%)
Return on common shareholders equity (9.8%)
Gross profit margin (27.4%)
0.88:1
($241.7 $275.2)
147.1 times
($1,985.2 $13.5)
2.5 days
(365 147.1)
7.4 times
($1,534.4 $207.2)
49.3 days
(365 7.4)
0.13 ($34.9 $275.2*)
74.0% ($326.7 $441.6)
0.11 ($34.9 $326.7*)
1.6%
($32.4 $1,985.2)
4.9 times
($1,985.2 $405.4)
8.0% ($32.4 $405.4)
33.2%
($32.4 $97.6)
22.7%
($450.8 $1,985.2)3.0:1
($192.7 $64.1)
36.9 times
($468.8 $12.7)
9.9 days
(365 36.9)
2.6 times
($281.0 $106.2)
140.4 days
(365 2.6)
0.29 times
($18.8 $64.1*)
33.0% ($71.2 $215.5)
0.26 times ($18.8 $71.2*)
5.0%
($23.5 $468.8)
2.2 times
($468.8 $211.8)
11.1% ($23.5 $211.8)
17.9%
($23.5 $131.6)
40.1%
($187.8 $468.8)
*Average current and total liability figures were not included; ending current and total liability amounts were used instead.
PROBLEM 14-6B (Continued)
(b)The comparison of the two companies shows the following:
LiquidityInterTAN has a much higher current ratio than both the industry and Future Shop. However, this is largely attributable to a large inventory balance (very high number of days in inventory). Future Shop appears to be the more liquid of the two when considering accounts receivable and inventory turnovers.
SolvencyIn terms of solvency, Future Shops debt to total assets ratio of 74.0% is above InterTANs at 33.0%. InterTAN also has more cash from operating activities available to pay its liabilities as evidenced by the companys higher cash total debt coverage ratio.
ProfitabilityWhile both companies are profitable, InterTANs profit margin, return on assets and gross profit margin are all higher than Future Shop and the industry average. Future Shop has a high return on shareholders equity, which is likely due to the financial leverage gained by using more debt financing.
(a)RatioCompany ACompany B
1. Current ratio
2. Acid-test ratio
3. Receivables turnover
4. Average collection period
5. Debt to total assets
6. Times interest earned
7. Return on assets
8. Asset turnover
2.18:1
($2,688.1 $1,230.9)
0.74:1
($910.4 $1,230.9)
8.25 times
[$7,075.0 (($718.7 + $169.7 + $645.0 + $181.9) 2)]
44 days
(365 8.25)
55.29%
($2,545.8 $4,604.1)
1.93 times
($187.2 $97.2)0.94%
[$39.7 (($4,604.1 + $3,880.2) 2)]
1.67 times
[$7,075 (($4,604.1 + $3,880.2) 2)]1.06:1
($884.4 $837.8)
0.08:1
($64.2 $837.8)
39.82 times
[$1,688.2 (($56.7 + $28.1) 2)]
9 days
(365 39.82)
87.94%
($953.9 $1,084.7)
(6.28) times
(($108.6) $17.3)
(24.45%)
[($333.6) (($1,084.7 + $1,644.3) 2)]
1.24 times
[$1,688.2 (($1,084.7 + $1,644.3) 2)]
(b)Based on the current ratio, acid-test ratio and debt to total assets ratio, Company Bs performance is far worse than Company A. Company B has had net losses for the last two years. Company A showed positive earnings on the current statement of earnings.
[Note to instructor: Company A is actually the Hudson's Bay Company and its results for January 31, 1999 and for January 31, 1998. Company B is actually The T. Eaton Company Limited and its results for January 31, 1998 and January 25, 1997.
(a)Wendys appears to be more liquid. Its current ratio, quick ratio and receivable turnover are all higher than McDonalds. Wendys current and quick ratios are also better than the industry average. McDonalds has a higher inventory turnover meaning the company is able to move inventory more quickly than Wendys. However, Wendys inventory turnover is still significantly better than the average company in the industry.
(b)By reviewing the debt to total asset we can see Wendys has significantly less debt than both McDonalds and the industry. Wendys also has a much better times interest earned which again indicates that it is the more solvent of the two companies.(c)Both companies appear to be very profitable. Wendys has a higher profit margin than McDonalds but McDonalds has a higher gross profit margin. Wendys also has a better return on shareholders equity, a higher return on assets and higher earnings per share. All of this would indicate that Wendys is the more profitable company.
(d)Investors seem to favour McDonalds as it has the higher price-earnings ratio; this is not consistent with (c), as you would expect investors to favour the more profitable company. Investors must anticipate that McDonalds will have better future profitability than Wendys.
SCHWENKE CORPORATION
Statement of Earnings
Year Ended December 31, 2004
Per QuestionCalculationSolution
Sales
(a)Step 1 $125,000 0.10 $1,250,000
Cost of goods sold
(b)Step 3 $1,250,000 - $500,000 750,000
Gross profit
(c)Step 2 $1,250,000 x 40% 500,000
Operating expenses
$287,500 287,500
Earnings from operations
(d)Step 4 $500,000 - $287,500212,500
Interest expense4,167 4,167
Earnings before income taxes
(e)Step 5 $212,500 - $4,167208,333
Income tax expense (36.3%)
(f)Step 6 $208,333 x 40% 83,333
Net earnings
$125,000$ 125,000
SCHWENKE CORPORATION
Balance Sheet
December 31, 2004
ASSETS
Current assets
Cash
$ 54,000$ 54,000
Accounts receivable (net)
(g)Step 12 ($140,000 x 1.1) - $54,000100,000
Inventory
(h)Step 13 $280,000 - $54,000 - $100,000 126,000
Total current assets
(i)Step 11 $140,000 x 2280,000
Property, plant and equipment (net)
(j)Step 14 $1,000,000 - $280,000 720,000
Total assets
(k)Step 7 $1,250,000 1.25$1,000,000
LIABILITIES
Current liabilities
(l)Step 10 $350,000 - $210,000$ 140,000
Long-term liabilities
210,000 210,000
Total liabilities
(m)Step 9 $1,000,000 - $650,000 350,000
SHAREHOLDERS' EQUITY
Common shares
320,000320,000
Retained earnings
330,000 330,000
Total shareholders' equity
650,000 650,000
Total liabilities and shareholders' equity
(n)Step 8 (from Step 7)$1,000,000
(a)Increase/Decrease total debt will now increase causing the debt to total assets ratio to increase and the additional interest on the debt will cause the times interest earned ratio to decline.
(b)Decrease The additional shares capital will cause the return on common shareholders equity to decline.
(c) Increase The payment of dividends (assuming they are cash) will cause the payout ratio to increase.
(d) Decrease - The purchase of inventory will cause inventory and current liabilities to increase. This will cause the current ratio to deteriorate (provided that the current ratio is greater than 1:1) and the inventory turnover ratio to decline.
(e) Decrease - The sale of the inventory on credit will cause accounts receivable to increase, which will improve the acid test ratio. The effect on the gross profit margin will depend on the selling price of the inventory compared to its cost.
(f) No effect - The increase in the allowance for doubtful accounts does not affect this ratio as it is calculated using gross, not net receivables.
(g) No effect/Increase Current assets will remain the same as net receivables are unchanged due to the write-off. The write off will cause gross accounts receivable to decline, which will improve the accounts receivable turnover.
(h) Total assets will now be higher which will cause the return on assets to decrease.
(a)Current ratio
Favourable
Collection period
Unfavourable
Inventory turnover
Favourable
Return on shareholders' equity Favourable
Debt to total assets
Favourable
Times interest earnedFavourable
(b)Nextecs collection period is higher than the industry average. Even though it has improved some since 2003, Nextec must review its credit policies and place more effort on collecting receivables.
(c)Do not lend money
Borrowing $1,000,000 will cause Nextecs debt to total assets ratio to increase to 73% [($1,000,000 + $294,200) ($1,000,000 + $773,000)]well above the industry average.
The increase in interest burden increases risk of loss to the company if it experiences a downturn.
The collection period is too long compared to the industry. Therefore, the risk of exposure to bad debts is greater than it should be.
(d)They must increase their equity position before the bank will lend them money. This can be done by:
Issuing more shares
Raising venture capital
Accessing government assistance programs
(e)Two other factors to consider:
Strength of management team
Marketability of product
Alternative responses are also acceptable. They may include:
Future cash flows expected
Is there a proper business plan in place
Policy ChoiceCurrent
ratio
(1.5:1)Gross profit
margin
(40%)Earnings per share
(1.50)Debt to
total
assets
(25%)Times
interest
earned
(20x)Return
on assets (10%)
(a)It is a period of inflation and the president would like to use the FIFO inventory cost flow assumption instead of average cost.I
(During times of inflation, FIFO will produce the highest inventory value; lowest cost of goods sold expense, and highest net earnings.)
I
I
D
I
I
(Net earnings will increase as will total assets)
(b)The company is considering using double-declining balance amortization which will produce a higher expense than other methods.
NE
NE
D
I
(Total assets will decrease.)
D
D
(Net earnings will decrease as will total assets.)
(c)The company will be leasing automobiles and is setting up the lease as a capital lease. Its interest expense and amortization expense under the capital lease will be higher this year than would be rent expense under an operating lease.
D
(A portion of the liability for the capital lease will be classified as a current liability.)
NE
D
I
D
D
BYP 14-1 FINANCIAL REPORTING PROBLEM
(a)LOBLAW COMPANIES LIMITED
Horizontal Trend Analysis
2002 ($ in millions)
$%
2002ChangeChange2001
Sales$23,082 $1,596 7.4 $21,486
Operating expenses 21,779 1,429 7.0 20,350
Interest expense 161 3 1.9 158
Income tax 414 42 11.3 372
Net earnings (loss)$ 728 $ 165 29.3 $ 563
Current assets$ 3,526 $ 440 14.3 $ 3,086
Total assets 11,110 1,085 10.8 10,025
Current liabilities 3,154 358 12.8 2,796
Total liabilities 6,986 530 8.2 6,456
Share capital 1,195 1 0.1 1,194
Retained earnings 2,929 554 23.3 2,375
There have been no significant changes in Loblaws results during 2002. Sales and expenses both increased by around 7%. Current assets increased at a faster rate than current liabilities, which indicates the company is more liquid.
BYP 14-1 (Continued)
(b)($ in millions)
2002Debt to total assetsTimes interest earnedCash total debt
coverage
63%
($6,986 $11,110)$1,303 $161
= 8.1 times
$981
($6,986 + $6,456) 2
= 0.15 times
Loblaws long-term solvency is not in jeopardy. Even with a high debt to total assets indicating that creditors are providing 63% of Loblaws total assets, Loblaw has the ability to pay interest payments when they come due as indicated by the times interest earned ratio of 8.1 times.
(c)($ in millions)
Profit margin$728 $23,082 = 3.2%
Asset turnover$23,082 [($11,110 + $10,025) 2] = 2.2 times
Return on assets$728 [($11,110 + $10,025) 2] = 6.9%
Return on common shareholders equity
$728 [($4,124 + $3,569) 2] = 18.9%
Loblaw is a profitable corporation. Shareholders are earning 18.9% on their investment. Considering that Loblaw is primarily in a high-volume business where the margin above costs is historically low, the profit margin is acceptable.
(d)Substantial amounts of important information about a company are not in its financial statements. Events involving such things as industry changes, management changes, competitors actions, technological developments, governmental actions, and union activities are often critical to the successful operation of a company. Financial reports in the media and publications of financial service firms (Standard & Poors, Dun & Bradstreet) will provide sufficient relevant information not usually found in the annual report.BYP 14-2 COMPARATIVE ANALYSIS PROBLEM
(a)($ in millions)LoblawSobeys
1.Percentage increase in sales
= 7.4%
= 7.0%
Percentage increase in net earnings
= 29.3%
= (15.0%)
2.Percentage increase in total assets
= 10.8%
= 11.0%
Percentage increase in total shareholders equity
= 15.6%
= 12.0%
3.Earnings per share*2002: $2.64
2001: $2.042003: $2.72
2002: $1.76
*Given on statement of earnings
(b)Both companies had significant increase in sales. Loblaw also had a corresponding increase in earnings, while Sobeys experienced a slight decline in 2003. However, the entire decline in earnings was due to the loss on the discontinued operations. Sobeys earnings from continuing operations actually increased in 2003. In terms of total assets and shareholders equity, both Sobeys and Loblaw experienced healthy increases during the most recent fiscal year.
BYP 14-3 RESEARCH CASE
(a)As an investor you would be better informed of the magnitude of the attacks by using financial statements prepared in Canada since Canadian standard setters plan to allow the effects of September 11 to be treated as an extraordinary item and disclosed separately on the financial statements. American standard setters believe such treatment would be misleading and therefore have recommended that the effects of September 11 be included as regular business activities.
(b)Air Canada might report the multi-million-dollar aid package as revenue or as a reduction in any extraordinary loss reported as a result of the September 11 attacks.
(c)
Air Canada might report losses due to severe weather as unusual. The frequency of bad weather in Canada would not allow the company to classify such losses as extraordinary.
(d)Quebecor has provided extra disclosure by showing separately the effects of all nonrecurring activities. For example the company has presented separately, before tax, the effect of items such as a reserve for restructuring and gains on dilution from the issuance of capital stock by subsidiaries. These provide users with additional information to allow them to make more informed decisions concerning the future profitability of the business.
BYP 14-4 INTERPRETING FINANCIAL STATEMENTS
(a)Liquidity RatiosCoca-ColaPepsiCo
1.Current ratio1.0:1
($7,352 $7,341)1.06:1
($6,413 $6,052)
2.Acid-test ratio0.61:1
($4,442 $7,341)0.72:1
($4,376 $6,052)
3.Receivables turnover9.83 times
($19,564 $1,990)10.75 times
($25,112 $2,337)
4.Average collection period37.1 days
(365 9.83)34.0 days
(365 10.75)
5.Inventory turnover6.0 times
($7,105 $1,175)8.7 times
($11,497 $1,326)
6.Days in inventory60.8 days
(365 6.0)42.0 days
(365 8.7)
7.Cash current debt coverage ratio0.60
($4,742 $7,885)0.84
($4,627 $5,525)
PepsiCo is slightly more liquid than Coca-Cola as it is higher in all of the liquidity ratios prepared above.
BYP 14-4 (Continued)
(b)Solvency RatiosCoca-ColaPepsiCo
1.Debt to total assets = 51.8% = 60.4%
2.Times interest earned
= 24.0 times
= 28.3 times
3.Cash total debt coverage
= 0.40 times
= 0.34 times
Coca-Cola has a lower debt to total assets ratio than PepsiCo and its cash total debt coverage is higher than PepsiCos. However, both companies appear to have sufficient earnings to repay all debts as evidenced by the high times interest earned ratios. Overall, Coca-Cola is slightly more solvent than PepsiCo.
(c)Profitability RatiosCoca-ColaPepsiCo
1.Profit margin15.6%
($3,050 $19,564)13.2%
($3,313 $25,112)
2.Gross profit margin63.7%
($12,459 $19,564)54.2%
($13,615 $25,112)
3.Asset turnover0.83 times
($19,564 $23,459)1.11 times
($25,112 $22,585)
4.Return on assets13.0%
($3,050 $23,459)14.7%
($3,313 $22,585)
5.Return on common shareholders equity26.3%
($3,050 $11,583)36.9%
($3,313 $8,973)
The Coca-Cola Company is more profitable than PepsiCo, Inc. It is better in terms of profit margin and gross profit. However, PepsiCo is turning over its assets better and providing a better return on assets and shareholders equity. BYP 14-5 A GLOBAL FOCUS
(a)Ratio
(Industry Average)CN
($ in millions CND)BNSF
($ in millions US)
1.Current ratio (0.7:1) = 0.54:1 = 0.38:1
2.Acid-test ratio (0.4:1) = 0.35:1 = 0.08:1
3.Cash current debt
coverage (n/a)
= 0.62 times
= 0.99 times
4.Receivables
turnover (13x)
= 8.9 times
= 57.4 times
In terms of liquidity, both companies have relatively low current ratios relative to the industry. BNSFs and CNs current ratio are similar, but their acid-test ratios differ. CN has better immediate liquidity than BNSF, however, much of this is due to the fact that BNSF collects its receivables significantly quicker than CN and the industry.
BYP 14-5 (Continued)
(b)Ratio
(Industry Average)CN
($ in millions)BNSF
(US$ in millions)
1.Debt to total assets (46.8%) = 65% = 69%
2.Times interest
earned (3.3x)
= 3.4 times
= 3.8 times
3.Cash total debt coverage (n/a)
= 0.09 times
= 0.12 times
4.Free cash flow (n/a)$1,173 - $571 - $179
= $423$2,106 - $1,358 - $183
= $565
The comparison here is mixed. The debt to total assets ratio showsthat BNSF relies more heavily on debt, suggesting it is less solvent. BNSF has a higher times interest earned ratio, suggesting that, even though it relies on a significant amount of debt financing, it has a better ability to service its debt. Finally, the cash total debt coverage ratio and free cash flow continue to support our assertion that BNSF is more solvent.
Both companies appear well able to support their capital expenditure growth as they both have positive free cash flow.
BYP 14-5 (Continued)
(c)Ratio
(Industry Average)CN
($ in millions)BNSF
(US$ in millions)
1.Asset turnover (0.4x)
= 0.32 times
= 0.36 times
2.Profit margin (8.1%) = 9.3% = 8.5%
3.Return on assets (2.9%)
= 3.0%
= 3.0%
4.Return on common
shareholders equity (8.8%)
= 9%
= 9.6%
The companies are similar in their ability to generate sales from their assets, as evidenced by their asset turnover. This is also consistent with the industry average. However, CN reports a slightly higher profit margin. Overall both companies are performing well when compared to the industry.
BYP 14-5 (Continued)
(d)We have done this comparison without giving consideration to the fact that these two companies prepare their financial statements using the accounting principles of different countries. If there are significant differences in these principles, then the ratios may differ even though the underlying economics are the same.
In addition to differences in accounting practices, other non-accounting issues need to be considered. For example, if bankruptcy laws differ across the two countries, it may make reliance on debt more or less desirable in one country than the other. Also, the railroad industry may be a protected industry in one country but not the other, enjoying subsidies or an implied guarantee that it wont be allowed to fail. This would have implications for analysis of the companys future. Or, railroads may be a regulated industry in one of the countries, thus being allowed to earn only a prescribed level of profit and being allowed to increase its fares only when the government says it can. The bottom line is, to evaluate a company, one must know the industry well, and to compare across countries, one must additionally know the factors that affect that industry that are unique to each country.
BYP 14-6 FINANCIAL ANALYSIS ON THE WEB
Due to the frequency of change with regard to information available on the World Wide Web, the Accounting on the Web cases are updated as required. Their suggested solutions are also updated whenever necessary, and can be found online in the Instructor Resources section of our home page .
BYP 14-7 COLLABORATIVE LEARNING ACTIVITY
(a)Lenders prefer that financial statements are audited because an audit gives independent assurance that the financial statements give a reasonable representation of the companys financial position and results of operations. With this independent assurance we feel more comfortable making a decision.
(b)The current ratio increase is a favourable indication as to liquidity, but tells little on its own about the going concern prospects of the client. From this ratio change alone, it is impossible to know the amount and direction of the changes in individual accounts, total current assets, and total current liabilities. Also unknown are the reasons for the changes.
The acid-test ratio is an unfavourable indication as to liquidity, especially when the current ratio increase is also considered. This decline is also unfavourable to the going concern prospects of the client because it reflects a declining cash position and raises questions as to reasons for the increases in other current assets, such as inventories.
The change in asset turnover cannot alone tell anything about either profitability or going-concern prospects. There is no way to know the amount and the direction of the changes in the two items. An increase in sales would be favourable for going concern prospects, while a decrease in assets could represent a number of possible scenarios and would need to be investigated further.
The increase in net earnings is a favourable indicator for both solvency and going concern prospects although much depends on the quality of receivables generated from sales and how quickly they can be converted into cash. One possibility here may be that despite a decline in sales the clients management has been able to reduce costs to produce this increase. Indirectly, the improved earnings may have a favourable impact on solvency and going concern potential by enabling the client to borrow currently to meet cash requirements.
The 32% increase in earnings per common share, which is identical to the percentage increase in net earnings, is an indication there has probably been no change in the number common shares outstanding.
This in turn indicates that financing was not obtained through the issue of common shares. It is not possible to reach conclusions about solvency and going concern prospects without additional information about the nature and extent of financing.
BYP 14-7 (Continued)
(b) (Continued)
The collective implications of these data alone are that the client entity is about as solvent and as viable as a going concern at the end of the current year as it was at the beginning, although there may be a need for short-term operating cash.
Although a quick evaluation of a reporting entity can be made using only a few ratios and comparing these with past ratios and industry statistics, the creditors should realize the limitations of such analysis even from the best prepared statements carrying an unqualified opinion.
A limitation on comparisons with industry statistics or other companies within the industry exists because material differences can be created through the use of alternative (but acceptable) accounting methods. Further, when evaluating changes in ratios or percentages, the evaluation should be directed to the nature of the item being evaluated because very small differences in ratios or percentages can represent significant changes in dollar amounts or trends.
The creditors should evaluate conclusions drawn from ratio analysis in light of the current status of, and expected changes in, such things as general economic conditions, the clients competitive position, the publics demand (for the product itself, increased quality of the product, control of noise and pollution, etc.), and the clients specific plans.
(c)1.Cash current debt coverageindicates liquidity
(short-term debt paying ability).
2.Debt to total assetsindicates solvency (percentage of assets financed by creditors).
3.Times interest earnedindicates solvency (ability to repay interest when due.)
Other answers are possible.
(d)The usefulness of analytical tools is limited by the use of estimates, the cost basis, the application of alternative accounting methods, atypical data at year-end, and the diversification of companies.
BYP 14-8 COMMUNICATION ACTIVITY
Memorandum
To: Self
Re: Earnings Quality at Shifty.com
In evaluating the financial performance of an entity it is important to understand the quality of the firms earnings, that is, does the information provide a full and complete picture of the companys performance.
To assess the quality of earnings, we should inquire of the audit committee some of the following questions:
1.What accounting policies are being used? Have any of these policies changed during the year?
2.What estimates have been used in preparing the financial statements? How reliable are these estimates?
3.Have pro forma numbers been presented? How have these numbers been calculated?
4.Has management been pressured to increase earnings? Are there any bonus plans or stock option plans, which would lead management to manipulate earnings?
BYP 14-9 ETHICS CASE
(a)The stakeholders in this case are:
Vern Fairly, president of Fairly Industries
Anne Saint-Onge, public relations director
You, as controller of Fairly Industries
Shareholders of Fairly Industries
Potential investors in Fairly Industries
Any readers of the press release
(b)The presidents press release is deceptive and incomplete and to that extent his action is unethical.
(c)As controller you should at least inform Anne Saint-Onge, the public relationsdirector, about the biased content of the release. She should be aware that the information she is about to release, while factually accurate, is deceptive and incomplete. Both the controller and the public relations director (if she agrees) have the responsibility to inform the president of the bias of the about-to-be-released information.Legal Notice
Copyright
Copyright 2004 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved.
The data contained in these files are protected by copyright. This manual is furnished under licence and may be used only in accordance with the terms of such licence.
The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd.
PROBLEM 14-10A
EMBED Equation.3
EMBED Equation.3
PROBLEM 14-3A
PROBLEM 14-4A
PROBLEM 14-6A
PROBLEM 14-7A
PROBLEM 14-8A
PROBLEM 14-9A
PROBLEM 14-11A
PROBLEM 14-12A
PROBLEM 14-5A
PROBLEM 14-1B
PROBLEM 14-2B
PROBLEM 14-3B
PROBLEM 14-5B
PROBLEM 14-6B
PROBLEM 14-7B
PROBLEM 14-8B
PROBLEM 14-9B
PROBLEM 14-11B
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Solutions Manual14-1Chapter 14
Copyright 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
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