ACF1200 Lecture 4: WEEK 4

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turquoiserat551

2 Aug 2018

School

Monash University

Department

Business - Accounting

Course

ACF1200

Professor

Tirukumar Thiagarajah

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

Provides valuable insight into the wealth of a business and its debts, and is also used for internal decision making. Assets and liabilities are split into current and non-current, however some businesses list them in terms of liquidity (how quickly non-cash assets can be turned into cash. Non-current - assets are expected to be consumed or liabilities are expected to be consumed or liabilities are expected to be repaid within 12 months repaid outside of a 12 month period. Flexibility and choice is allowed for some areas of the formatting and the content of balance sheets. How to measure the value of property, plant and equipment: historical cost, market value, recoverable, present value: What it is worth the assets (default) cost to buy today end of the life of now the non-current asset. The fair value model would be estimates on the values of more relevant to assets that inventory increase in value over time.

Related Questions

1.The useful life of a plant asset is:

The length of time it is used productively in a company'soperations

Never related to its physical life

Its productive life, but not to exceed one year

Determined by the FASB

Determined by law

2. Depreciation:

Measures the decline in market value of an asset

Measures physical deterioration of an asset

Is the process of allocating to expense the cost of a plantasset

Is an outflow of cash from the use of a plant asset

Is applied to land

3. Plant assets are

Tangible assets used in the operation of a business that have auseful life of more than one accounting period

Current assets

Held for sale

Intangible assets used in the operations of a business that havea useful life of more than one accounting period

Tangible assets used in the operation of business that have auseful life of less than one accounting period

4. A company has net sales of $870,000 and average accountsreceivable of $174,000. What is its accounts receivable turnoverfor the period?

0.20

5.00

20.0

73.0

1,825

5. FICA taxes include:

Social Security taxes

Charitable giving

Employee income taxes

Unemployment taxes

6. Times interest earned is calculated by:

Multiplying interest expense times income

Dividing interest expense by income before interest expense

Dividing income before interest expense and any income tax byinterest expense

Dividing interest and income tax expense by income beforeinterest and income tax expense

7. Amortization:

Is the systematic allocation of the cost of an intangible assetto expense over its estimated useful life

Is the process of allocating to expense the cost of a plantasset to the accounting periods benefiting from its use

Is the process of allocating the cost of natural resources toperiods when they are consumed

Is an accelerated form of expensing an asset's cost

Is the same as depletion

8. A method of estimating bad debts expense that involves adetailed examination of outstanding accounts and their length oftime past due is the:

Direct write-off method

Aging of accounts receivable method

Percentage of sales method

Aging of investments method

Percent of accounts receivable method

9. A company purchased a tract of land for its natural resourcesat a cost of $1,500,000. It expects to mine 2,000,000 tons of orefrom this land. The salvage value of the land is expected to be$250,000. The depletion expense per ton of ore is:

$0.75

$0.625

$0.875

$6.00

$8.00

10. The matching principle requires:

That expenses be ignored if their effect on the financialstatements are less important than revenues to the financialstatement user

The use of the direct write-off method for bad debts

The use of the allowance method of accounting for bad debts

That bad debts be disclosed in the financial statements

That bad debts not be written off

11. Liabilities:

Must be certain

Must sometimes be estimated

Must be for a specific amount

Must always have a definite date for payment

Must involve an outflow of cash

12. In the accounting records of a defendant, lawsuits:

Are estimated liabilities

Should always be recorded

Should always be disclosed

Should be recorded if payment for damages is probable and theamount can be reasonably estimated

13. A contingent liability:

Is always of a specific amount

Is a potential obligation that depends on a future event arisingout of a past transaction or event

Is an obligation not requiring future payment

Is an obligation arising from the purchase of goods or serviceson credit

Is an obligation arising from a future event

14. Total asset turnover is calculated by dividing:

Gross profit by average total assets

Average total assets by gross profit

Net sales by average total assets

Average total assets by net sales

Net assets by total assets

15. If the times interest ratio:

Increases, then risk increases

Increases, then risk decreases

Is greater than 1.5, then the company is in default

Is less than 1.5, the company is carrying too little debt

16. Promissory notes that require the issuer to make a series ofpayments consisting of both interest and principal are:

Debentures

Discounted notes

Installment notes

Indentures

Investment notes

17. A company borrowed $300,000 cash from the bank by signing a5-year, 8% installment note. The present value factor for anannuity at 8% for 5 years is 3.9927. Each annuity payment equals$75,137. The present value of the note is:

$75,137

$94,013

$300,000

$375,685

18. A bond traded at 102

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Hands-On Project 10-12

IMPROVING DECISION MAKING: USING SPREADSHEET SOFTWARE TO ANALYZEA DOT- COM BUSINESS

Software skills: Spreadsheet downloading, formatting, andformulas

Business skills: Financial statement analysis 10- 12

Pick one e- commerce company on the Internetâ for example,Ashford, Buy. com, Yahoo, or Priceline. Study the Web pages thatdescribe the company and explain its purpose and structure. Use theWeb to find articles that comment on the company. Then visit theSecurities and Exchange Commissionâs Web site at www. sec.gov to access the companyâs 10- K ( annual report) formshowing income statements and balance sheets. Select only thesections of the 10- K form containing the desired portions offinancial statements that you need to examine, and download theminto your spreadsheet. Instructions below provide more detailedinstructions on how to download this 10- K data into a spreadsheetand information on financial statements. Create simplifiedspreadsheets of the companyâs balance sheets and income statementsfor the past three years.

â¢ Is the company a dot- com success, borderline business, orfailure? What information provides the basis of your decision? Why?When answering these questions, pay special attention to thecompanyâs three- year trends in revenues, costs of sales, grossmargins, operating expenses, and net margins.

â¢ Prepare a PowerPoint overhead presentation (with a minimum offive slides), including appropriate spreadsheets or charts, andpresent your work to your professor and classmates. An examplePowerPoint slide presentation is attached for your review in thislearning module folder in Blackboard.

As needed: Students can find material on understanding financialstatements on financial Web sites such as Ameritrade(www.ameritrade.com) or the Small Business Knowledge Basehttp://www.bizmove.com/finance/m3b2.htm.

Downloading the Data into a Spreadsheet

Use the Convert Text to Columns Wizard in your spreadsheetsoftware to arrange the 10-K data you downloaded into spreadsheetcolumns and rows. From the Excel menu, select Data and then selectthe Text to Columns option. The software brings up a Wizard toconvert the imported text into spreadsheet columns. Although youcan decide to create line breaks, it may be easiest to accept thedefault settings (Fixed Width, General format) and then adjustcolumn widths after the Wizard has arranged the data in spreadsheetcolumns.

Financial Statements

Financial statements are used to evaluate the performance of abusiness and diagnose its strengths and weaknesses. The two primaryfinancial statements are income statements and balance sheets. Theincome statement, also called an operating statement or profit andloss statement, shows the income and expenses of a firm over aperiod of time, such as a year, a quarter, or a month. Gross profitis calculated by subtracting the cost of goods sold from revenues,or sales. The gross margin is calculated by dividing gross profitby revenues (or sales). Net profit (or loss) is calculated bysubtracting all other expenses, including operating expenses andincome taxes from gross profit. Operating expenses are all businesscosts (such as expenditures for sales and marketing, general andadministrative expenditures, and depreciation) other than thoseincluded in the cost of goods sold. Net margins arecalculated by dividing net profit (or loss) by revenues (orsales).

A balance sheet provides a snapshot of a companyâs financialassets and liabilities on a given date, usually the close of anaccounting period. It lists what material andintangible assets the business owns and what money the businessowes either to its creditors (liabilities) or to its owners(shareholdersâ equity, also known as net worth). At any given timea businessâs assets equals the sum of its liabilities plus its networth. Current assets include cash, securities, accountsreceivable, or other investments that are likely to be convertedinto cash within one year. Liabilities are outstanding obligationsof the firm. Current liabilities are debts that are due within oneyear. Long-term debt consists of liabilities that are not due untilafter a year or more. If too much debt has been used to finance thefirmâs operations, problems may arise in meeting future interestpayments and repaying outstanding loans. By examining a series ofbalance sheets, one can identify and analyze trends in thefinancial strength of a business.

erinweasel323

A large loss occurred in 2017 at Transpire Inc in Canterbury, rather than the expected profit. As a result, its stakeholders are concerned about the firmâs performance.

You are hired as the new Chief Financial Officer and are given the task of getting the company back into a sound financial position. Transpireâs 2016 and 2017 balance sheets and income statements, together with projections for 2018, are shown in the following tables. The tables also show the 2016 and 2017 financial ratios, along with industry average data. The 2018 projected financial statement data represent the best projection for 2018 results, assuming that some new financing is arranged to get the company âover the humpâ and back on track.

You must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken.

Table 1. Transpire Inc. Balance Sheets

Assets

2016

2017

2018e

($â000)

Cash

8,000

7,482

15,000

Short-Term Investments

48,600

20,000

71,632

Accounts Receivable

351,200

652,160

878,000

Inventories

715,200

1,287,360

1,816,480

Total Current Assets

1,123,000

1,967,002

2,781,112

Gross Fixed Assets

491,000

1,202,950

1,220,000

Less: Accumulated Depreciation

146,200

263,160

383,160

Net Fixed Assets

344,800

939,790

836,840

Total Assets

1,467,800

2,906,792

3,617,952

Liabilities And Equity	2016		2017			2018e
		($â000)		($â000)		($â000)
Accounts Payable	145,600		324,000		359,800
Notes Payable	200,000		701,800		301,000
Accruals	135,000		284,960		380,000
Total Current Liabilities	480,600		1,310,760		1,040,800
Long-Term Debt	323,432		1,000,000		600,000
Common Stock	460,000		536,800		1,680,936
Retained Earnings	203,768		59,232		296,216
Total Equity	663,768		596,032		1,977,152
Total Liabilities And Equity	1,467,800		2,906,792		3,617,952

Table 2. Transpire Inc. Income Statements

	2016			2017		2018e
		($â000)		($â000)		($â000)
Sales	4,432,000			5,834,400	8,035,600
COGS excluding depreciation	2,864,000			4,980,000	5,800,000
Depreciation	18,900			116,960	120,000
Other Expenses	340,000			720,000	612,960
Total Operating Costs	3,222,900			5,816,960	6,532,960
EBIT	1,209,100			17,440	1,502,640
Interest Expense	62,500			176,000	80,000
EBT	1,146,600		-	158,560	1,422,640
Taxes (40%)		458,640		-		569,056
Net Income	687,960		-	158,560	853,584

Table 3 Transpire Inc. other data

Stock Price ($)	85.00		60.00	78.00
Shares (units)	100,000		100,000	250,000
Earnings per Share ($)	6.88	-	1.59	3.41
Dividend per Share ($)	0.22		-	0.22
Tax Rate (%)	40.00		40.00	40.00
Book Value per Share ($)	6.638		5.960	7.909
Lease Payments ($)	40,000		40,000	40,000

Table 4 Transpire Inc. Ratio Analysis

	2016		2017	2018e	Industry
	2016		2017	2018e	Average
					Average
Current Ratio (X)	2.34		1.50	2.67	2.00
Quick Ratio (X)	0.85		0.52	0.93	1.00
Inventory Turnover (X)	4.00		3.87	3.19	5.00
Average Age of Inventory (days)	91.15		94.35	114.31	45.00
Average Collection Period (days)	28.92		40.80	39.88	30.00
Average Payment Period (days)	18.56		23.75	22.64	60.00
Fixed Asset Turnover (X)	12.85		6.21	9.60	8.00
Total Asset Turnover (X)	3.02		2.01	2.22	2.50
Debt Ratio (X)	0.55		0.79	0.45	0.35
Debt to Equity Ratio (X)	1.21		3.88	0.83	0.80
Times Interest Earned (X)	19.35		0.10	18.78	25.00
Gross Profit Margin (%)	35.38		14.64	27.82	28.00
Operating Profit Margin (%)	27.28		0.30	18.70	17.00
Net Profit Margin (%)	15.52	-	2.72	10.62	12.00
Return on Total Assets (%)	46.87	-	5.45	23.59	30.00
Return on Equity (%)	103.64	-	26.60	43.17	35.00
Price/Earnings (P/E) Ratio (X)	12.36	-	37.84	22.84	10.00
Market/Book Value Ratio (X)	12.81		10.07	9.86	7.00

Required:

Prepare a financial statement analysis of Transpire Inc. Your analysis should cover each of the following:

1. Why are ratios useful? Which three groups uses ratio analysis and for what reasons?

2.Transpireâs liquidity position (using current and quick ratios) in 2016, 2017, and projected for 2018. Compare it to the industry averages. What actions should be taken to improve its liquidity position?

3.Transpireâs operating and utilisation of assets projected (using inventory turnover, average age of inventory, average collection period, average payment period, fixed asset turnover, and total asset turnover) in 2016, 2017, and projected for 2018. Compare it to the industry averages. What actions should be taken to improve its operating and utilisation of assets position?

4.Transpireâs financial leverage (using debt ratio, debt to equity ratio, and times-interest-earned) in 2016, 2017, and projected for 2018. What actions should be taken to improve its financial leverage position?

5.Transpireâs profitability (using gross profit margin, operating profit margin, net profit margin, return on assets (ROA), and return on equity (ROE)) in 2016, 2017, and projected for 2018. Compare it to the industry averages. What actions should be taken to improve its profitability position?

6.Analyse the projected 2018 price/earnings ratio and market/book value ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company? Explain your answers

7. Discuss the major strengths and weaknesses of the firm using the results of Du Pont analysis as projected for 2018

8.Perform a common size analysis and percent change analysis. What do these analyses tell you about Transpire? What actions should be taken to improve its overall financial position?

9.If one uses the industry average P/E ratio to estimate the firmâs share price in 2018, how much should it be? Comment on this method.

10.What are some potential problems and limitations of financial ratio analysis?

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ACF1200 Lecture 4: WEEK 4

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