The company is principally in the retail drugstore business and its operations are within one reportable segment. At August 31,2013 there was 8,582 drugstore and other locations in 50 states, the District of Columbia, Guam, and Puerto Rico. Prescription sales were 62.9% of total sales for fiscal 2013 compared to 63.2% in 2012 and 64.7% in 2011.

Allowance for Doubtful Accounts

The provision for bad debt is based on both historical write-off percentages and specifically identified receivables. Activity in the allowance for doubtful accounts was as follows (In millions):

	2013	2012	2011
Balance at beginning of year	$99	$101	$104
Bad debt provision	$124	$107	$88
Write-offs	($69)	($109)	($91)
Balance at end of year	$154	$99	$101

Inventories

Inventories are valued on a lower of last-in, first-out (LIFO) cost or market basis. At August 31, 2013 and 2012, inventories would have been greater by $2.1 billion and $1.9 billion, respectively, if they had been valued on a lower of first-in, first-out (FIFO) cost or market basis. As a result of declining inventory levels, the fiscal 2013 and 2012 LIFO provisions were reduced by $194 million and $268 million of LIFO liquidation, respectively. Inventory includes product costs, inbound freight, warehousing costs, and vendor allowances not classified as a reduction of advertising expense.

3.Leases

The company owns 20.2% of its operating locations; the remaining locations are leased premises. Initial terms are typically 20 to 25 years, followed by additional terms containing renewal options at five-year intervals, and may include rent escalation clauses. The commencement date of all lease terms is the earlier of the date the company becomes legally obligated to make rent payments or the date the Company has to right to control the property. The Company recognizes rent expense on a straight-line basis over the term of the lease. In addition to minimum fixed rentals, some leases provide for contingent rentals based upon a portion of sales.

Minimum rental commitments at August 31, 2013, under all leases having an initial or remaining non-cancelable term of more than one year are shown below (in Millions):

	Capital Lease	Operatin Lease
2014	$19	$2,536
2015	$19	$2,514
2016	$18	$2,464
2017	$17	$2,389
2018	$15	$2,292
Later	$270	$23,507
Total Minimum lease Payments	$358	$35,702

The capital lease amoutn includes $155 million of imputed interest and executory costs. Total minimum lease payments have not been reduced by minimum sublease rentals of approximately $140 million on leases due in the future under non-cancelable subleases.

The Company remains secondarily liable on 26 assigned leases. The maiximum potential undiscounted future payments are $18 million at August 31, 2013. Lease option dates vary, with some extending to 2041.

WALGREEN CO. INFORMATION FROM CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended August 31,2013 and 2012 (in millions)
	2013	2012
Sales	$72,217	$71,633
Net Income	$2,450	$2,127

Required:

a. Using the consolidated balance sheets for Walgreen Co. for August 31,2013 and 2012, prepare a common-size balance sheet.

b. Which current asset is the most significant? Which noncurrent asset is the most significant? Are the relative proportions of current and noncurrent assets what you would expect for a drug store?

c. Analyze accounts recievable and allowance for doubtful accounts.

d. What inventory is used to value inventories? Has Walgreen experienced inflation or deflation? Explain your answer. Explain the reference in the inventory note to the LIFO liquidation and what this means with regard to net income reported.

e. Assess the level of debt and risk that Walgreen has by looking only at the balnce sheet.

f. Estimate the dollar amount of dividends Walgreens paid in 2013.

g. Does Walgreen use off-balance sheet fiancing? Explain your answer.

h. Evaluate the creidtworthiness of Walgreen based on the Balance sheet and the excerpts from the notes.

coralhyena380

Question 2 (60 marks)

On January 1, 2015, Portia Ltd. issued shares worth $1,120,000to Storm Ltd. to acquire 80% of Stormâs outstanding shares. On theacquisition date, Stormâs statement of financial position showsshare capital of $420,000 and retained earnings of $777,000. At theacquisition date, all of Stormâs identifiable assets andliabilities equaled their fair values with the exception of thefollowing:

Inventories (fair value exceeded book value by $14,000)

Investments (fair value exceeded book value by $14,000)

Equipment(fair value exceed net book value by $105,000)

At the acquisition date, Stormâs accumulated amortizationaccount for the equipment had a balance of $805,000. As of theacquisition date, Stormâs equipment had a remaining useful life of10 years.

Additional information:

- Portia records its investments using the cost method.

- Portia uses the entity theorymethod of consolidation.

- In 2017, Portia sold all itsinvestments for a gain of $63,000.

- In 2018, Portia purchased equipment from Storm for $127,400.At the sale date, Stormâs net book value of the equipment was$98,000. Storm had originally purchased the equipment for $140,000.After the purchase, Portia amortized the equipment at a rate of$18,200 per year for the remaining 7 years of its useful life,taking a full year of amortization in 2018.

- During 2019, Storm purchased goods from Portia. At the end of2019, Storm still had $28,000 of these goods in inventory. Portiahad earned a gross margin of 40% on the sale. The goods were soldto external customers in 2020.

- During 2019, Portia purchased goods from Storm. At the end of2019, Portia still had $140,000 of these goods in inventory. Stormhad earned a gross margin of 40% on the sale. The goods were soldto external customers in 2020.

- During 2020, Portia sold goods of $140,000 to Storm. Portiaearned a gross profit of $56,000 on this sale. At the end of 2020,Storm still had $56,000 worth of goods in inventory.

- During 2020, Storm sold goods of $980,000 to Portia at a grossmargin of 40%. At the end of 2020, Portia still had 10% of thegoods in inventory.

- During 2020, Portia received $126,000 in royalties from Storm.Between January 1, 2015 and December 31, 2019, Portia received$700,000 in royalties from Storm.

- The financial statements for Portia and Storm for the yearended December 31, 2020 are presented on the following pages.

Statement of FinancialPosition

As of December 31,2020

Portia Ltd. Storm Ltd.

Assets:

Current assets:

Cash $70,000 $ 28,000

Accountsreceivable 210,000 224,000

Inventory 252,000 140,000

532,000 392,000

Noncurrent assets:

Land 140,000 -

Equipment 7,000,000 3,780,000

Accumulated amortization,equipment(2,478,000) (1,736,000)

Investment inStorm 1,120,000 ____-___

5,782,000 2,044,000

Totalassets $6,314,000 $ 2,436,000

Liabilities and shareholdersâequity:

Current liabilities:

Accountspayable $ 630,000 $ 280,000

Noncurrent liabilities:

Loanpayable 420,000 700,000

1,050,000 980,000

Shareholdersâ equity:

Sharecapital 1,680,000 420,000

Retainedearnings 3,584,000 1,036,000

5,264,000 1,456,000

$ 6,314,000 $ 2,436,000

Condensed Statement ofComprehensive Income

For the year ended December31, 2020

Portia Ltd. Storm Ltd.

Revenue:

Sales $2,804,200 $ 2,100,000

Royalties 210,000 -

Dividends 100,800 ____-___

3,115,000 2,100,000

Expenses:

Cost of sales 1,680,000 1,260,000

Other 784,000 575,400

2,464,000 1,835,400

Net Comp. income $ 651,000 $ 264,600

Statement of Changes in Equityâ Retained Earnings Section

For the year ended December31, 2020

Portia Ltd. Storm Ltd.

Retained earnings, beginning of theyear $ 3,353,000 $ 897,400

Netincome 651,000 264,600

Dividendsdeclared (420,000) (126,000)

Retained earnings, end ofyear $ 3,584,000 $ 1,036,000

Required:

Prepare Portiaâs consolidatedfinancial statements for the year ended December 31, 2020. Be sureto show all your supporting calculations.

viridianmanatee89

Baldwin Bicycle Case

This case looks at a âprivate labelâ opportunity for a smallmid-market bicycle manufacturer. Analysis of the problem requires ablending of financial, marketing and strategicconsiderations.

In March 2009, Suzanne Leister, marketing vice president ofBaldwin Bicycle Company, was mulling over the discussion she hadthe previous day with Karl Knott, a buyer from Hi-Valu Inc., aretail mass merchandiser with stores in the Northwest. Hi-Valu'ssales volume had grown to the extent that it was beginning to add"house-brand" (also called "private-label") merchandise to theproduct lines of several of its departments. Mr. Knott, Hi-Valu'sbuyer for sporting goods, has approached Ms. Leister about thepossibility of Baldwin producing bicycles for Hi-Valu. The bicycleswould bear the name "Challenger," which Hi-Valu planned to use forall of its house-brand sporting goods.

Baldwin had been making bicycles for over 10 years. In 2009, thecompany's line included 12 models, ranging from a child's beginnersmodel to a high-end adult's mountain bike targeted at amateurweekend competitors. Sales were currently at an annual rate ofabout $10 million. The company's 2008 financial statements appearin Exhibit 1. Most of Baldwin's sales were through independentlyowned retailers, primarily bike shops but to a lesser extent toystores, hardware stores and sporting goods stores. Baldwin hadnever before distributed its products through store chains of anytype. Ms. Leister felt that Baldwin bicycles had the image of beingabove average in quality and price, but not exclusively a "top ofthe line" product.

Hi-Valu's proposal to Baldwin had features that made it quitedifferent from Baldwin's normal way of doing business. First, itwas very important to Hi-Valu to have ready access to a largeinventory of bicycles, because Hi-Valu had had great difficulty inpredicting bicycle sales, both by store and by month. Hi-Valuwanted to carry these inventories in its regional warehouses, butit did not want title on a bicycle to pass from Baldwin to Hi-Valuuntil the bicycle was shipped from one of its regional warehousesto a specific Hi-Valu store. At that point, Hi-Valu would regardthe bicycle as having been purchased from Baldwin, and would payfor it within 30 days. However, Hi-Valu would agree to take titleto any bicycle that had been in one of its warehouses for fourmonths, again paying for it within 30 days. Mr. Knott estimatedthat on average, a bike would remain in a Hi-Valu regionalwarehouse for two months.

Second, Hi-Valu wanted to sell its Challenger bicycles at lowerprices than the name-brand bicycles it carried, and yet still earnapproximately the same gross margin percentage on each bicycle sold- - the rationale being that Challenger bike sales would erodesomewhat the sales of the name-brand bikes. Hi-Valu expected thatgiven the lower price there would be increased total volume thatwould more than offset the volume loss. Nevertheless, Hi-Valuneeded to purchase bikes from Baldwin at lower prices than thewholesale prices of comparable bikes sold through the more typicalmarket channels.

Finally, Hi-Valu wanted the Challenger bike to be somewhatdifferent in appearance from Baldwin's other bikes. While frame andmechanical components could be the same as used on one of Baldwin'scurrent models, the seats, handlebars and shifters would need to besomewhat different, and the tires would have to have the name"Challenger" molded into their sidewalls. Also, the bicycles wouldhave to be packed in boxes printed with the Hi-Valu and Challengernames. These requirements were expected by Ms. Leister to increaseBaldwin's purchasing, inventorying, and production costs over andabove the added costs that would be incurred for a comparableincrease in volume for Baldwin's regular products.

Ms. Leister was acutely aware that the "bicycle boom" hadflattened out, and this plus a poor economy had caused Baldwin'ssales volume to also flatten out the past two years.[1] As aresult, Baldwin currently was operating its plant at about 80percent of its two-shift capacity. Thus, the added volume fromHi-Valu's purchases could possibly be very attractive. If agreementcould be reached on prices, Hi-Valu would sign a contractguaranteeing to Baldwin that Hi-Valu would buy its house-brandbicycles only from Baldwin for a three-year period. The contractwould then be automatically extended on a year-to-year basis,unless one party gave the other at least three-months' notice thatit did not wish to extend the contract.

Suzanne Leister realized she needed to do some preliminaryfinancial analysis of this proposal before having any furtherdiscussions with Karl Knott. She had written on a pad theinformation she had gathered to use in her initial analysis; thisinformation is shown in Exhibit 2.

Exhibit 1

BALDWIN BICYCLE COMPANY

Balance Sheet, As of December 31, 2008

(thousand of dollars)

Assets Liabilities and Owners Equity

Cash $ 340 Accountspayable $ 520

Accountsreceivable 1,360 Accruedexpenses 340

Inventories 1,760 Short-term bankloan 2,640

Plant and equipment(net) 4,640 Long-term Notespayable 2,000

Total liabilities 5,500

Owner'sequity 2,600

$8,100 $8,100

BALDWIN BICYCLE COMPANY

Income Statement, For the Year Ended December 31,2008

Salesrevenues $10,900

Cost of GoodsSold 8,500

Grossmargin 2,400

Selling, General and Administrative (including interest)costs 1,900

Income beforetaxes 500

Incometaxes 200

Netincome $ 300

Exhibit 2

DATA PERTINENT TO HI-VALU PROPOSAL

(Notes taken by Suzanne Leister)

1. Estimated first-year costs of producing Challenger bicycles(average unit costs, assuming a constant mix of models):

Components andMaterials $40.00

Assembly Labor 20.00

Allocated Overhead

variable manufacturing overhead10.00

fixed manufacturing overhead 15.00

$85.00

Components and materials includes items specific to models forHi-Valu, not used in our standard models. Variable manufacturingoverhead costs includes an estimate of the incremental costs ofhandling materials, shipments out, etc. Fixed manufacturingoverhead includes depreciation on the building, managementsalaries, etc., is allocated over total projected productionvolume.

2. One-time added costs of preparing designs and tooling,arranging sources for seats, handlebars, shifters, tires, andshipping boxes that differ from those used in our standard models:approximately $100,000.

3. Unit price and annual volume: Hi-Valu estimates it will need24,000 bikes a year and proposes to pay us an average of $95.00 perbike for the first year. The contract contains an inflationescalation clause. The price will increase in proportion toinflation-caused increases in costs shown in item 1, above. Thus,the $95.00 and $85.00 figures are, in effect, "constant-dollar"amounts. Knott intimated that there was very little, if any,negotiating leeway in the $95.00 proposed price.

4. Working capital financing costs (annual variable financingcosts, as percent of dollar value of working capital) are:

Pre-tax cost of funds (to finance receivables and inventoriesnot carried by vendors) is 12.0%.

5. Other assumptions for Challenger-related added inventories(average over the year):

Materials: two month's supply.

Work in process: 1,000 bikes, half completed(but all materials for them issued).

Finished goods: 500 bikes (awaiting the next truckload lotshipment to a Hi-Valu warehouse).

6. Impact on our regular sales: Some retail consumers comparisonshop for bikes, and many of them are likely to conclude that aChallenger bike as a good value when compared with a similar bike(either ours or a competitor's) at a higher price in a non-chainstore. Also, our direct customers (local shop owners, etc.) arelikely to recognize these bikes as Baldwin products or to otherwiselearn of this private brand deal. In 2008, we sold 99,000 bikes. Mybest guess is that our sales over the next three years will beabout 100,000 bikes a year if we forego the Hi-Valu deal. If weaccept it, I think we'll lose about 4,000 units of our regularsales volume a year, since our retail distribution is quite strongin Hi-Valu's market region.

CASE QUESTIONS - No Math

1. In a write-up format, answer the questions with anâorganizedâ thought process rather than just doing the math. Thisis meant to help you think thru the case.

a. How did the special order/pricing case apply?

b. In your own words, discuss the blending of Cost &Financial Analysis with Marketing & Strategic consideration

c. Identify and analyze revenues and costs applicable to thespecial order/pricing decision.

d. What other implications are relevant to the case?

2. What are the pertinent aspects of Baldwinsituation?

a. How would you describe Baldwin's financial situationincluding operating

b. performance as of 2008?

c. How would you describe Baldwin's strategic position at theend of 2008?

d. Is the Challenger deal a good strategic fit for Baldwin?

3. Without performing a cost analysis of theChallenger deal, talk about

a. Relevant manufacturing

b. Relevant Costs & Profits