ENVS 1800 Lecture 9: ENVS 1800 Tutorial 9 Notes

CASE 6–30 Service Organization; Segment Reporting[LO6–4]

Music Teachers, Inc., is an educational association for musicteachers that has 20,000 members. The association operates from acentral headquarters but has local membership chapters throughoutthe United States. Monthly meetings are held by the local chaptersto discuss recent developments on topics of interest to musicteachers. The association’s journal, Teachers’ Forum, is issuedmonthly with features about recent developments in the field. Theassociation publishes books and reports and also sponsorsprofessional courses that qualify for continuing professionaleducation credit. The association’s statement of revenues andexpenses for the current year is presented below.

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The board of directors of Music Teachers, Inc., has requestedthat a segmented income statement be prepared showing thecontribution of each segment to the association. The associationhas four segments: Membership Division, Magazine SubscriptionsDivision, Books and Reports Division, and Continuing EducationDivision. Mike Doyle has been assigned responsibility for preparingthe segmented income statement, and he has gathered the followingdata prior to its preparation.

Membership dues are $100 per year, of which $20 is considered tocover a one-year subscription to the association’s journal. Otherbenefits include membership in the association and chapteraffiliation. The portion of the dues covering the magazinesubscription ($20) should be assigned to the Magazine SubscriptionDivision.

One-year subscriptions to Teachers’ Forum were sold tononmembers and libraries at $30 per subscription. A total of 2,500of these subscriptions were sold last year. In addition tosubscriptions, the magazine generated $100,000 in advertisingrevenues. The costs per magazine subscription were $7 for printingand paper and $4 for postage and shipping.

A total of 28,000 technical reports and professional texts weresold by the Books and Reports Division at an average unit sellingprice of $25. Average costs per publication were $4 for printingand paper and $2 for postage and shipping.

The association offers a variety of continuing education coursesto both members and nonmembers. The one-day courses had a tuitioncost of $75 each and were attended by 2,400 students. A total of1,760 students took two-day courses at a tuition cost of $125 foreach student. Outside instructors were paid to teach somecourses.

Salary costs and space occupied by division follow:

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Personnel costs are 25% of salaries inthe separate divisions as well as for the corporate staff. The$280,000 in occupancy costs includes $50,000 in rental cost for awarehouse used by the Books and Reports Division for storagepurposes.

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Printing and paper costs other than for magazine subscriptionsand for books and reports relate to the Continuing EducationDivision.

General and administrative expenses include costs relating tooverall administration of the association as a whole. The company’scorporate staff does some mailing of materials for generaladministrative purposes.

The expenses that can be traced or assigned to the corporatestaff, as well as any other expenses that are not traceable to thesegments, will be treated as common costs. It is not necessary todistinguish between variable and fixed costs.

Required:

Prepare a contribution format segmented income statement forMusic Teachers, Inc. This statement should show the segment marginfor each division as well as results for the association as awhole.

Give arguments for and against allocating all costs of theassociation to the four divisions.

Somewhat similar to a vignette in literature, this provides anopportunity to look at the application of Managerial Accounting ina diverse set of factual circumstances.

After completing the requirements for the case study, pleaseprovide a short narrative (two to four pages) and analysis of yourimpressions on how these principles and processes can be appliedproductively in settings that you encounter or expect to encounterin your career. Which aspects of the course do you believe you willbe able to apply most productively going forward? Which of thesetechniques are you regularly using in your current positions? Ifyou are using different applications, provide insight of the prosand cons in comparison to the reports and analysis above.

Schedules should be submitted in excel format and any analysisand write-ups should be in a Microsoft Word Document.

Question 1-9 please

1. Apply to actual companies the basic knowledge and analytical techniques learned from our course.

2. Prepare common-size financial statements, comparative financial statements, and various profitability and risk ratios.

3. Compare the calculated results with competitors and across different years.

4. Summarize the analyses and make investment recommendations.

You will be analyzing the following firms:

Williams-Sonoma, Inc.

Pier 1 Imports, Inc.

For these firms, download the most recent annual report (10-K report) to begin your work. In 10-K reports, you can find companies’ basic information, financial statements, footnotes to the financials, and the management discussions and analyses. Please download the 10-K reports from the following web links:

10-K reports (fiscal year 2016) for Williams-Sonoma, Inc.

https://www.sec.gov/Archives/edgar/data/719955/000119312517104341/d265187d10k.htm

10-K reports (fiscal year 2015) for Williams-Sonoma, Inc.

https://www.sec.gov/Archives/edgar/data/719955/000119312516525847/d120289d10k.htm

10-K reports (fiscal year 2014) for Williams-Sonoma, Inc.

https://www.sec.gov/Archives/edgar/data/719955/000119312515118009/d851953d10k.htm#tx851953_13

10-K reports (fiscal year 2016) for Pier 1 Imports, Inc.

https://www.sec.gov/Archives/edgar/data/278130/000119312517136345/d343458d10k.htm

10-K reports (fiscal year 2015) for Pier 1 Imports, Inc.

https://www.sec.gov/Archives/edgar/data/278130/000119312516556025/d133529d10k.htm

10-K reports (fiscal year 2014) for Pier 1 Imports, Inc.

https://www.sec.gov/Archives/edgar/data/278130/000119312515153179/d881010d10k.htm#toc881010_13

For your convenience, I also provided the balance sheet and income statement of each company for the most recent years at the end (page 5-8; Table 1-4). Please use them to prepare common-size financial statements and comparative financial statements.

Guidance

The required tasks are detailed below:

(1) Prepare common-size balance sheets and income statements for both companies. Note: Compute for the most recent THREE years.

(2) Prepare comparative analysis (i.e., change of percentage analysis) on income statement and balance sheet for both companies. You should compute for the most recent THREE years.

(3) Prepare ratio analyses (for the same THREE year time period) for both companies. At least, you should include the following ratios in your computations: (1) current ratio, (2) acid-test ratio, (3) receivables turnover, (4) inventory turnover, (5) asset turnover, (6) profit margin on sales, (7) rate of return on assets, (8) rate of return on common stock equity, (9) earnings per share, (10) payout ratio, (11) debt to total assets ratio, (12) times interest earned, (13) cash debt coverage ratio, and (14) book value per share.

(4) Comment on the analytical results of the two companies. Your comments should concentrate on the trends across the companies. In addition to contrasting the ratios between the companies, you should interpret the numbers and make suggestions as to why the ratio of one company might be higher/lower than the other.

(5) Write a conclusive summary on the firms you have studied. Based upon your conclusions, recommend the better performing firm for potential investment. Your conclusions should be based upon, and specifically reference, the analyses prepared in this report.

(6) Read sample project to get some ideas.

Report Format Requirements:

A. Report body requirements:

Cover page. List the title of the project, your names, and semester/year.

Abstract or Executive Summary. This is a separate page. It should cover the purpose of the project, the major findings, and the conclusions/recommendations, in summary form.

Table of Contents.

Main body. Use the following sequence for report content:

Introduction to the two companies and to the purpose of the report

Analytical section. This should include all your numerical analyses. This is where you will discuss the results of, comments on, and conclusions about the vertical and horizontal common-size statements, comparative analysis (i.e., change of percentage analysis), and the ratio analyses for both companies.

Comparisons of companies and all other analysis (observations and/or interpretations). (You may combine b and c if you wish, as long as both are well covered.)

Conclusions and recommendation for investment.

References. List all major reference sources.

Appendices. Include tables and graphs of your numerical analyses. For reference convenience, assign a title to each separate item, such as Table 1, Exhibit 1, etc.

B. Typesetting requirements:

Use size 12 font. Times New Roman is preferred.

Double space between lines.

Number pages in accordance with the APA style guide.

One inch on all sides.

Do not right justify text. Use left justify.

Minimum length: 8 pages. (Note: You can easily meet the minimum length requirement since you will have a lot of tables in the paper.)

The submitted work should be in ONE file with a word or pdf format. An Excel spreadsheet file is NOT acceptable.

Plagiarism

Plagiarism will not be tolerated. Evidence of plagiarism will result in a grade of “F” to the course and be subject to appropriate disciplines.

NOTES:

A portion of your grade will be assessed based on the overall report quality, clarity, format, and cohesiveness.

A FREE RIDER in the group will not be tolerated. However, to report an alleged free rider, you should send me a formal written complaint. You should carefully manage your group over the semester to ensure that no teammate will take the chance of turning into a free rider. Try to contact/manage your teammates frequently and inform me if any member is not willing to participate the group work so we can address this issue ASAP. A free rider will receive his/her group project grades solely based on what he/she has contributed to the projects. If there is a free-rider in your group or a member drops the class, the rest of the group members are still expected to submit a COMPLETE paper.

Again, the balance sheet and income statements are provided at the end. Please use them to prepare common-size and comparative financial statements.

Table 1. Williams-Sonoma, Inc ----Balance Sheet

Table 2. Williams-Sonoma, Inc --- Statement of Income