ACCT 3001 Chapter : Chapter 5 Notes
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I am unsure of what is unclear. The instructions are:
1. Set up a worksheet for the solvency ratios--currentratio and the quick ratio.
2. Compute these ratios for Doctors Smith and Brown. Todo so, you will need one additional piece of information that isnot present on the doctorsâstatements: their maximum annual debt service is$22,200.
Practice Exercise 11âII: Solvency Ratios
Refer to Doctors Smith and Brownâs financial statementspresented in the preceding Chapter 10.
Required
1. Set up a worksheet for the solvency ratios. current ratio and the quick ratio.
2. Compute these ratios for Doctors Smith and Brown. Todo so, you will need one additional piece of information that isnot present on the doctorsâstatements: their maximum annual debt service is$22,200.
The requested information is below:
Exhibit 10-1 Westside Clinic Balance Sheet
Assets | December 31, 20x2 | December 31, 20x1 | ||
Current Assets | ||||
Cash and cash equivalents | $190,000 | $145,000 | ||
Accounts receivable (net) | 250,000 | 300,000 | ||
Inventories | 25,000 | 20,000 | ||
Prepaid Insurance | 5,000 | 3,000 | ||
Total Current Assets | $470,000 | $468,000 | ||
Property, Plant, and Equipment | ||||
Land | $100,000 | $100,000 | ||
Buildings (net) | 0 | 0 | ||
Equipment (net) | 260,000 | 300,000 | ||
Net Property, Plant, and Equipment | 360,000 | 400,000 | ||
Other Assets | ||||
Investments | $133,000 | $32,000 | ||
Total Other Assets | 133,000 | 32,000 | ||
Total Assets | $963,000 | $900,000 | ||
Liabilities and Fund Balance | ||||
Current Liabilities | ||||
Current maturities of long-term debt | $52,000 | $48,000 | ||
Accounts payable and accruedexpenses | 293,000 | 302,000 | ||
Total Current Liabilities | $345,000 | $350,000 | ||
Long-Term Debt | $252,000 | $300,000 | ||
Less Current Maturities of Long-Term Debt | ?52,000 | ?48,000 | ||
Net Long-Term Debt | 200,000 | 252,000 | ||
Total Liabilities | $545,000 | $602,000 | ||
Fund Balances | ||||
Unrestricted fund balance | $418,000 | $298,000 | ||
Restricted fund balance | 0 | 0 | ||
Total Fund Balances | 418,000 | 298,000 | ||
Total Liabilities | $963,000 | $900,000 | ||
Exhibit 10-2 sets out the result of operations for two years,with the most current period in the left column. If the balancesheet is a snapshot, then the statement of revenue and expenses isa diary because it is a record of transactions over the period of ayear. Operating revenues and operating expenses are set out first,with the result being income from operations of $115,000($2,000,000 less $1,885,000). Then other transactions are reported;in this case, interest income of $5,000 under the headingâNonoperating Gains (Losses).â The total of $120,000 ($115,000 plus$5,000) is reported as an increase in fund balance. This figurecarries forward to the next major report, known as the statement ofchanges in fund balance.
STATEMENT OF CHANGES IN FUND BALANCE/NET WORTH
Remember that our formula for a basic statement of revenue andexpense looked like this:
Operating Revenue â Operating Expenses = Operating Income
Exhibit 10-2 Westside Clinic Statement of Revenue andExpenses
For the Year Ending | |||||
Revenue | December 31, 20x2 | December 31, 20x1 | |||
Net patient service revenue | $2,000,000 | $1,850,000 | |||
Total operating revenue | $2,000,000 | $1,850,000 | |||
Operating Expenses | |||||
Medical/surgical services | $600,000 | $575,000 | |||
Therapy services | 860,000 | 806,000 | |||
Other professional services | 80,000 | 75,000 | |||
Support services | 220,000 | 220,000 | |||
General services | 65,000 | 60,000 | |||
Depreciation | 40,000 | 40,000 | |||
Interest | 20,000 | 24,000 | |||
Total operating expenses | 1,885,000 | 1,800,000 | |||
Income from Operations | $115,000 | $50,000 | |||
Nonoperating Gains (Losses) | |||||
Interest Income | $5,000 | $2,000 | |||
Net nonoperating gains | 5,000 | 2,000 | |||
Revenue and Gains in Excess of | |||||
Expenses and Losses | $120,000 | $52,000 | |||
Increase in Unrestricted Fund Balance | $120,000 | $52,000 | |||
The excess of revenue over expenses flows back into equity orfund balance through the mechanism of the statement of fundbalance/net worth. Exhibit 10-3 shows a balance at the first of theyear; then it adds the excess of revenue over expenses (in theamount of $115,000) plus some interest income (in the amount of$5,000) to arrive at the balance at the end of the year.
If you refer back to the balance sheet, you will see the$418,000 balance at the end of the year appearing on it. So we canthink of the balance sheet, the statement of revenue and expenses,and the statement of changes in fund balance/net worth as lockedtogether, with the statement of changes in fund balance being themechanism that links the other two statements.
But there is one more major reportâthe statement of cashflowsâand we will examine it next.
STATEMENT OF CASH FLOWS
To perceive why a statement of cash flows is necessary, we mustfirst revisit the concept of accrual basis accounting. If cash isnot paid or received when revenues and expenses are entered on thebooksâthe usual situation in accrual accountingâwhat happens? Theother side of the entry for revenues is accounts receivable, andthe other side of the entry for expenses is accounts payable. Theseaccounts rest on the balance sheet and have not yet been turnedinto cash. Another characteristic of accrual accounting is therecognition of depreciation. A capital assetâa piece of equipment,for exampleâis purchased for $20,000. It has a usable life of fiveyears. So depreciation expense is recognized in each of the fiveyears until the $20,000 is used up, or depreciated. (Land is anexception to this rule: it is never depreciated.) Depreciation isrecognized within each year as an expense, but it does notrepresent a cash expense. This is a concept that now enters intothe statement of cash flows.
Exhibit 10-4 presents the current period cash flow. In effect,this statement takes the accrual basis statements and converts themto a cash flow for the period through a series of reconcilingadjustments that account for the noncash amounts.
Understanding the cash/noncash concept makes sense of thisstatement. The starting point is the income from operations, thesubtotal from the statement of revenue and expense. Depreciationand interest are added back, and changes in asset and liabilityac-counts, both positive and negative, are recognized. Theseadjustments account for operating activities. Next, capital andrelated financing activities are addressed; then investingactivities are adjusted. The result is a net increase in cash andcash equivalents of $45,000 in our example. This figure is added tothe cash balance at the beginning of the year ($145,000) to arriveat the cash balance at the end of the year ($190,000). Now referback to the balance sheet, and you will find the cash balance isindeed $190,000. So the fourth major reportâthe statement of cashflowsâinterlocks with the other three major reports.
Exhibit 10-3 Westside Clinic Statement of Changes in FundBalance
For the Year Ending | |||
Statement of Changes in Fund Balance | December 31, 20x2 | December 31, 20x1 | |
Balance First of Year | $298,000 | $246,000 | |
Revenue in Excess of Expenses | 115,000 | 50,000 | |
Interest Income | 5,000 | 2,000 | |
Balance End of Year | $418,000 | $298,000 | |
Exhibit 10-4 Westside Clinic Statement of Cash Flows
Statement of Cash Flows | For the Year Ending | |||
December 31, 20x2 | December 31, 20x1 | |||
Operating Activities | ||||
Income from operations | $115,000 | $50,000 | ||
Adjustments to reconcile income from | ||||
operations to net cash flows from | ||||
operating activities | ||||
Depreciation and amortization | 40,000 | 40,000 | ||
Interest expense | 20,000 | 24,000 | ||
Changes in asset and liabilityaccounts | ||||
Patient accountsreceivable | 50,000 | â250,000 | ||
Inventories | â5,000 | â5,000 | ||
Prepaid expenses andother assets | â2,000 | â1,000 | ||
Accounts payable andaccrued expenses | â9,000 | 185,000 | ||
Net cash flow from operating activities | $209,000 | $43,000 | ||
Cash Flows from Noncapital Financing Activities | 0 | 0 | ||
Cash Flows from Capital and Related Financing ActivitiesAcquisition of equipment | $ 0 | $(300,000) | ||
Proceeds from loan for equipment | 0 | 300,000 | ||
Interest paid on long-term obligations | â20,000 | 0 | ||
Repayment of long-term obligations | â48,000 | 0 | ||
Net cash flows from capital and related financing activities | â68,000 | 0 | ||
Cash Flows from Investing Activities | ||||
Interest income received | $5,000 | $2,000 | ||
Investments purchased (net) | â 101,000 | 0 | ||
Net cash flows from investing activities | â96,000 | 2,000 | ||
Net Increase (Decrease) in Cash and Cash Equivalents | $45,000 | $45,000 | ||
Cash and Cash Equivalents, Beginning of Year | 145,000 | 100,000 | ||
Cash and Cash Equivalents, End of Year | $190,000 | $145,000 | ||
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 companiesâ 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 âFâ 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
| Williams-Sonoma, Inc. | ||||
| BALANCE SHEET | ||||
| Fiscal Years 2016, 2015, 2014, 2013 | ||||
| (In thousands) | FY 2016 | FY 2015 | FY 2014 | FY 2013 |
| ASSETS | ||||
| Current assets | ||||
| Cash and cash equivalents | $ 213,713 | $ 193,647 | $ 222,927 | 330121 |
| Restricted cash | â | â | â | 14289 |
| Accounts receivable, net | 88,803 | 79,304 | 67,465 | 60,330 |
| Merchandise inventories, net | 977,505 | 978,138 | 887,701 | 813,160 |
| Prepaid catalog expenses | 23,625 | 28,919 | 33,942 | 33,556 |
| Prepaid expenses | 52,882 | 44,654 | 36,265 | 35,309 |
| Deferred income taxes, net | â | â | 130,618 | 121,486 |
| Other assets | 10,652 | 11,438 | 13,005 | 10,852 |
| Total current assets | 1,367,180 | 1,336,100 | 1,391,923 | 1,419,103 |
| Property and equipment, net | 923,283 | 886,813 | 883,012 | 849,293 |
| Deferred income taxes, net | 135,238 | 141,784 | 4,265 | 13,824 |
| Other assets, net | 51,178 | 52,730 | 51,077 | 54,514 |
| Total assets | $ 2,476,879 | $ 2,417,427 | $ 2,330,277 | 2,336,734 |
| LIABILITIES AND STOCKHOLDERSâ EQUITY | ||||
| Current liabilities | ||||
| Accounts payable | $ 453,710 | $ 447,412 | $ 397,037 | 404791 |
| Accrued salaries, benefits and other liabilities | 130,187 | 127,122 | 136,012 | 138,181 |
| Customer deposits | 294,276 | 296,827 | 261,679 | 228,193 |
| Income taxes payable | 23,245 | 67,052 | 32,488 | 49,365 |
| Current portion of long-term debt | â | â | 1,968 | 1,785 |
| Other liabilities | 59,838 | 58,014 | 46,764 | 38,781 |
| Total current liabilities | 961,256 | 996,427 | 875,948 | 861,096 |
| Deferred rent and lease incentives | 196,188 | 173,061 | 166,925 | 157,856 |
| Long-term debt | 1,968 | |||
| Other long-term obligations | 71,215 | 49,713 | 62,698 | 59,812 |
| Total liabilities | 1,228,659 | 1,219,201 | 1,105,571 | 1,080,732 |
| Stockholdersâ equity | ||||
| Preferred stock: $.01 par value; 7,500 shares authorized; none issued | â | â | â | 0 |
| Common stock: $.01 par value; 253,125 shares authorized; | ||||
| 87,325 and 89,563 shares issued and outstanding at | 873 | 896 | 919 | 941 |
| January 29, 2017 and January 31, 2016, respectively | ||||
| Additional paid-in capital | 556,928 | 541,307 | 527,261 | 522,595 |
| Retained earnings | 701,702 | 668,545 | 701,214 | 729,043 |
| Accumulated other comprehensive loss | (9,903) | (10,616) | (2,548) | 6524 |
| Treasury stock â at cost: 20 and 29 shares as of January 29, 2017 and January 31, 2016, respectively | (1,380) | (1,906) | (2,140) | (3,101) |
| Total stockholdersâ equity | 1,248,220 | 1,198,226 | 1,224,706 | 1,256,002 |
| Total liabilities and stockholdersâ equity | $ 2,476,879 | $ 2,417,427 | $ 2,330,277 | 2,336,734 |
Table 2. Williams-Sonoma, Inc --- Statement of Income
| Williams-Sonoma, Inc. | ||||
| STATEMENT OF INCOME | ||||
| Fiscal Years 2016, 2015, 2014,2013 | ||||
| (In thousands) | FY 2016 | FY 2015 | FY 2014 | FY 2013 |
| E-commerce net revenues | $ 2,633,602 | $ 2,522,580 | $ 2,370,694 | $ 2,115,022 |
| Retail net revenues | 2,450,210 | 2,453,510 | 2,328,025 | 2,272,867 |
| Net revenues | 5,083,812 | 4,976,090 | 4,698,719 | 4,387,889 |
| Cost of goods sold | 3,200,502 | 3,131,876 | 2,898,215 | 2,683,673 |
| Gross profit | 1,883,310 | 1,844,214 | 1,800,504 | 1,704,216 |
| Selling, general and administrative expenses | 1,410,711 | 1,355,580 | 1,298,239 | 1,252,118 |
| Operating income | 472,599 | 488,634 | 502,265 | 452,098 |
| Interest (income) expense, net | 688 | 627 | 62 | (584) |
| Earnings before income taxes | 471,911 | 488,007 | 502,203 | 452,682 |
| Income taxes | 166,524 | 177,939 | 193,349 | 173,780 |
| Net earnings | $ 305,387 | $ 310,068 | $ 308,854 | $ 278,902 |
