ADM 1340 Lecture Notes - Lecture 2: Accounts Payable, Current Liability, Deferral
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Basic Financial Ratios
The accounting staff of CCB Enterprises has completed the financial statements for the 2016 calendar year. The statement of income for the current year and the comparative statements of financial position for 2016 and 2015 follow.
CCB Enterprises | |
Statement of Income | |
For the Year Ended December 31, 2016 | |
(thousands omitted) | |
Revenue: | |
Net sales | $794,620 |
Other | 58,420 |
Total revenue | $853,040 |
Expenses: | |
Cost of goods sold | $530,320 |
Research and development | 24,480 |
Selling and administrative | 155,320 |
Interest | 19,600 |
Total expenses | $729,720 |
Income before income taxes | $123,320 |
Income taxes | 49,328 |
Net income | $73,992 |
CCB Enterprises | ||
Comparative Statements of Financial Position | ||
December 31, 2016 and 2015 | ||
(thousands omitted) | ||
2016 | 2015 | |
Assets | ||
Current assets: | ||
Cash and short-term investments | $25,910 | $20,860 |
Receivables, less allowance for doubtful accounts | ||
($1,130 in 2016 and $1,410 in 2015) | 48,190 | 50,300 |
Inventories, at lower of FIFO cost or market | 64,860 | 62,100 |
Prepaid items and other current assets | 5,220 | 3,280 |
Total current assets | $144,180 | $136,540 |
Other assets: | ||
Investments, at cost | $105,880 | $105,880 |
Deposits | 10,160 | 7,980 |
Total other assets | $116,040 | $113,860 |
Property, plant, and equipment: | ||
Land | $12,100 | $12,100 |
Buildings and equipment, less accumulated depreciation | ||
($126,330 in 2016 and $122,240 in 2015) | 268,840 | 247,870 |
Total property, plant, and equipment | $280,940 | $259,970 |
Total assets | $541,160 | $510,370 |
Liabilities and Ownersâ Equity | ||
Current liabilities: | ||
Short-term loans | $22,180 | $23,900 |
Accounts payable | 72,240 | 71,070 |
Salaries, wages, and other | 26,300 | 26,780 |
Total current liabilities | $120,720 | $121,750 |
Long-term debt | $160,620 | $171,030 |
Total liabilities | $281,340 | $292,780 |
Ownersâ equity: | ||
Common stock, at par | $43,840 | $42,010 |
Paid-in capital in excess of par | 64,020 | 61,260 |
Total paid-in capital | $107,860 | $103,270 |
Retained earnings | 151,960 | 114,320 |
Total ownersâ equity | $259,820 | $217,590 |
Total liabilities and ownersâ equity | $541,160 | $510,370 |
Required:
1. Calculate the following financial ratios for 2016 for CCB Enterprises:
Round items h, j, and k to the nearest whole number. Round all other answers to two decimal places. Assume a 360-day year.
a. Times interest earned | to 1 |
b. Return on total assets | % |
c. Return on common stockholders' equity | % |
d. Debt-to-equity ratio (at December 31, 2016) | to 1 |
e. Current ratio (at December 31, 2016) | to 1 |
f. Quick (acid-test) ratio (at December 31, 2016) | to 1 |
g. Accounts receivable turnover ratio (Assume that all sales are on credit.) | times |
h. Number of days' sales in receivables | days |
i. Inventory turnover ratio (Assume that all purchases are on credit.) | times |
j. Number of days' sales in inventory | days |
k. Number of days in cash operating cycle | days |
2. Which of the following statements pertaining to ratio analysis of CCB Enterprises is true?
All of these are true.
Analyzing and Interpreting Footnote on Operating and Capital Leases
Assume Verizon Communications, Inc., provides the following footnote relating to its leasing activities in its 10-K report. The aggregate minimum rental commitments under noncancelable leases for the periods shown at December 31, 2010, are as follows:
Years (dollars in millions) | Capital Leases | Operating Leases |
---|---|---|
2011 | $ 83 | $ 1,449 |
2012 | 71 | 1,316 |
2013 | 67 | 1,056 |
2014 | 63 | 806 |
2015 | 46 | 527 |
Thereafter | 161 | 1,937 |
Total minimum rental commitments | 491 | $ 7,091 |
Less interest and executory costs | (89) | |
Present value of minimum lease payments | 402 | |
Less current installments | (46) | |
Long-term obligation at December 31, 2010 | $ 356 |
(a) Confirm that the implicit discount rate for Verizon's capital leases is 5.01%.
N | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 |
Amount | Answer | Answer | Answer | Answer | Answer | Answer | Answer | Answer | Answer | Answer |
IRR | Answer % |
(b) What effect does the failure to capitalize operating leases have on Verizon's balance sheet? Over the life of its leases, what effect does this lease classification have on net income?
There is no effect on the balance sheet and income statement as a result of the classification of leases.
Total assets and total liabilities are higher than if the operating lease had been classified as a capital lease. Over the lease term, total rent expense under operating leases will be equal to the interest and depreciation expense that the company would record under capital leases.
Total assets and total liabilities are lower than if the operating lease had been classified as a capital lease. Over the lease term, total rent expense under operating leases will be equal to the interest and depreciation expense that the company would record under capital leases.
Total assets and total liabilities are lower than if the operating lease had been classified as a capital lease. Over the lease term, total rent expense under operating leases will be greater than the interest and depreciation expense that the company would record under capital leases.
1.00 points out of 1.00
(c) Compute the present value of Verizon's operating leases, assuming an 5.01% discount rate and rounding the remaining lease term to 3 decimal places. (Use a financial calculator or Excel to compute. Do not round until your final answers. Round each answer to the nearest whole number.)
($ millions) | Present Value |
---|---|
Year 1 | Answer |
Year 2 | Answer |
Year 3 | Answer |
Year 4 | Answer |
Year 5 | Answer |
After 5 | Answer |
Total* | Answer |
* (Use subsequent rounded answers for calculation.)
Which of the following statements best describes how we might use this additional information in our analysis of the company?
To assess the company's financial condition and performance, we might add the present value of its operating leases to both operating assets and nonoperating liabilities. No adjustment is necessary for the income statement.
To assess the company's financial condition and performance, we might add the sum of the contractual payments under the operating leases to both assets and nonoperating liabilities, and we can replace rent expense with the depreciation of the lease assets and the interest on the lease liability.
To assess the company's financial condition and performance, we might add the present value of its operating leases to both operating assets and nonoperating liabilities, and we can replace rent expense with the depreciation of the lease assets and the interest on the lease liability.
Verizon's balance sheet and income statement are prepared in accordance with GAAP. No adjustments are necessary to evaluate the financial condition of the company.
1.00 points out of 1.00