Description
Complete two problems. Problem 1 focuses on working capital and quick ratio, and Problem 2 is a comprehensive problem in which you will bring together various financial analysis measures and interpret their meaning in order to draw conclusions about hypothetical companies.
For this assessment, complete Problems 1 and 2. You may use Word or Excel to complete the
assessments throughout this course, but you will find Excel to be most helpful for creating spreadsheets.
Tutorials for using Excel are provided in the Supplemental Resources in the left navigation menu. If you
use Excel, submit the assessment in one Excel document, using separate tabs for each spreadsheet.
Problem 1: Working Capital, Current Ratio, Quick Assets, Acid-Test Ratio
The Sanchez Corporation is preparing its 2012 balance sheet. The company records show the following
selected amounts at the end of the accounting period, December 31, 2012:
Problem 1: Sanchez Corporation Selected Amounts
Account
Dollar Amount
Total assets
$600,000
Total noncurrent assets
$350,000
Liabilities
Dollar Amount
Notes payable (8%, due in 6 years)
$40,000
Accounts payable
$60,000
Income taxes currently payable
$15,000
Liability for withholding taxes
$4,000
Rent revenue collected in advance by up to
four months
$8,000
Bonds payable (due in 15 years).
$100,000
Liabilities
Dollar Amount
Wages payable
$6,000
Property taxes payable
$3,000
Note payable (10%, due in 6 months)
$22,000
Interest payable
$1,200
Common stock
$200,000
Use the information provided in the table to compute and answer the following for the Sanchez
Corporation:
1. Compute (a) working capital and (b) the quick ratio—quick assets are $120,000.
2. Why is working capital important to management?
3. How do financial analysts use the quick ratio?
4. Would your computations be different if the company reported $250,000 worth of contingent
liabilities in the notes to the statements? Explain. Include in your explanation a definition of
contingent liabilities and an example of a contingent liability.
Problem 2: Comprehensive Problem
Bring together various financial analysis measures and interpret their meaning in order to draw
conclusions about hypothetical companies.
Note that each situation provided is to be considered independently of the others.
Situation A:
The following tables represent selected data from recent financial statements of Lincoln and Samuelson,
Inc. (dollars in thousands):
Problem 2, Table 1: Lincoln and Samuelson, Inc. Selected Items from Balance Sheets
Assets (in thousands)
December 31, 2012
December 31, 2011
Current assets: Cash and cash
equivalents
$4,000
$3,400
Accounts receivable (net of
allowances of $32 and $28,
respectively)
$6,500
$5,700
Problem 2, Table 2: Lincoln and Samuelson, Inc. Selected Income Statement Data
Account
2012
2011
2010
Net sales (in
millions)
$6,020
$5,425
$5,000
Net income (in
millions)
$300
$285
$220
The selected income statement data is for the year ended December 31. The company also reported bad
debt expense of $62,000 in 2012; $55,000 in 2011; and $49,500 in 2010.
Using the data provided, complete the following for Lincoln and Samuelson, Inc.:
1. Compute the dollar amount of uncollectible accounts receivable that the company wrote off as
uncollectible in 2012. Show all of your work.
2. Assuming all sales were on credit, what amount of cash did the company collect on accounts
receivable in 2012? Show all of your work.
3. Compute the company’s net profit margin for the three years presented. What does the trend
suggest to you about the company?
Situation B:
The Israel Manners Entertainment Group uses the allowance approach to estimate bad debt expense, as
is required of all companies with significant sales on accounts receivable. At the end of 2012, the
Manners Group reported a balance in accounts receivable of $4,350,000 and estimated that $44,000 of
its accounts receivable would likely be uncollectible. The allowance for doubtful accounts has a $1,500
debit balance at year-end, prior to the adjustment needed to raise it to the $44,000 desired amount.
Use this information to answer the following questions for the Manners Group:
1. How is it possible that the allowance for doubtful accounts has developed a debit balance
instead of a credit balance?
2. What amount of bad debt expense should be recorded for 2012?
3. What amount will be reported on the 2012 balance sheet as the net realizable amount of
accounts receivable?
Situation C:
At the end of 2012, the unadjusted trial balance of Donovan, Inc. included $6,000,000 in accounts
receivable, a credit balance of $50,000 in the allowance for doubtful accounts, and sales revenue (all on
credit) of $200,000,000. Based on knowledge that the current economy is in distress, Donovan increased
its bad debt rate estimate to 0.4 percent on credit sales. Use this information to answer the following
questions for Donovan, Inc.:
1. What amount of bad debt expense should be recorded for 2012?
2. What amount will be reported on the 2012 balance sheet for the net realizable amount of
accounts receivable, after being reduced by the balance in the allowance for uncollectible
accounts?
Situation D:
BrightStar Company reported the following inventory records for June 2012:
Problem 2, Table 3: BrightStar Company Inventory Records
Date
Activity
# of Units
Cost/Unit
June 1
Beginning balance
200
$40
June 5
Purchase
600
$42
June 8
Sale @ $100 per unit
500
Problem 2, Table 3: BrightStar Company Inventory Records
Date
Activity
# of Units
Cost/Unit
June 17
Purchase
400
$45
June 23
Sale @ $100 per unit
500
Selling, administrative, and depreciation expenses for the month were $20,000. BrightStar’s tax rate is
35 percent. Use this information and the table above to complete the following for BrightStar Company:
1. Calculate the cost of ending inventory and the cost of goods sold under each of the following
methods:
o
a. First in, first out (FIFO).
o
b. Last in, first out (LIFO).
o
c. Weighted average.
2. Using your answers from question 1 above, answer the following:
o
a. What is the gross profit percentage under the FIFO method?
o
b. What is net income under the LIFO method?
o
c. Which method would you recommend to BrightStar for tax purposes? Explain your
recommendation.
o
d. If BrightStar also used the method that you recommended for tax purposes on its
balance sheet, would BrightStar’s current ratio suffer, compared to the use of FIFO?
3. BrightStar uses the lower of FIFO cost or market method to value its inventory for reporting
purposes at the end of the month. If inventory had a market replacement value of $44 per unit,
what would BrightStar report in its balance sheet for inventory? Why?
Situation E:
BlackBurn Company purchased the following on January 1, 2012:
•
Office Equipment at a cost of $100,000 with an estimated useful life to the company of five
years and a residual value of $10,000. The company uses the double-declining-balance method
of depreciation for the equipment.
•
Factory equipment at an invoice price of $780,000 plus shipping costs of $20,000. The
equipment has an estimated useful life of 100,000 hours and no residual value. The company
uses the units-of-production method of depreciation for the equipment.
•
A patent at a cost of $450,000 with an estimated useful life of 15 years. The company uses the
straight-line method of amortization for intangible assets with no residual value.
Use the information above to complete the following for BlackBurn Company:
1. Prepare a partial depreciation schedule for 2012, 2013, and 2014 for the following assets. Round
your answers to the nearest dollar.
o
a. Office equipment.
o
b. Factory equipment. The company used the equipment for 8,000 hours in 2012; 9,000
hours in 2013; and 8,500 hours in 2014.
2. On January 1, 2014, BlackBurn altered its corporate strategy dramatically. The company sold the
factory equipment for $700,000 in cash. Record the entry related to the sale of the factory
equipment.
3. On January 1, 2014, when the company changed its corporate strategy, its patent had estimated
future cash flows of $300,000 and a fair value of $250,000. What would the company report on
the income statement (account and amount) regarding the patent on January 2, 2014? Explain
your answer. (Hint: You may need to research this question using Internet sources.)
Purchase answer to see full
attachment
assessments throughout this course, but you will find Excel to be most helpful for creating spreadsheets.
Tutorials for using Excel are provided in the Supplemental Resources in the left navigation menu. If you
use Excel, submit the assessment in one Excel document, using separate tabs for each spreadsheet.
Problem 1: Working Capital, Current Ratio, Quick Assets, Acid-Test Ratio
The Sanchez Corporation is preparing its 2012 balance sheet. The company records show the following
selected amounts at the end of the accounting period, December 31, 2012:
Problem 1: Sanchez Corporation Selected Amounts
Account
Dollar Amount
Total assets
$600,000
Total noncurrent assets
$350,000
Liabilities
Dollar Amount
Notes payable (8%, due in 6 years)
$40,000
Accounts payable
$60,000
Income taxes currently payable
$15,000
Liability for withholding taxes
$4,000
Rent revenue collected in advance by up to
four months
$8,000
Bonds payable (due in 15 years).
$100,000
Liabilities
Dollar Amount
Wages payable
$6,000
Property taxes payable
$3,000
Note payable (10%, due in 6 months)
$22,000
Interest payable
$1,200
Common stock
$200,000
Use the information provided in the table to compute and answer the following for the Sanchez
Corporation:
1. Compute (a) working capital and (b) the quick ratio—quick assets are $120,000.
2. Why is working capital important to management?
3. How do financial analysts use the quick ratio?
4. Would your computations be different if the company reported $250,000 worth of contingent
liabilities in the notes to the statements? Explain. Include in your explanation a definition of
contingent liabilities and an example of a contingent liability.
Problem 2: Comprehensive Problem
Bring together various financial analysis measures and interpret their meaning in order to draw
conclusions about hypothetical companies.
Note that each situation provided is to be considered independently of the others.
Situation A:
The following tables represent selected data from recent financial statements of Lincoln and Samuelson,
Inc. (dollars in thousands):
Problem 2, Table 1: Lincoln and Samuelson, Inc. Selected Items from Balance Sheets
Assets (in thousands)
December 31, 2012
December 31, 2011
Current assets: Cash and cash
equivalents
$4,000
$3,400
Accounts receivable (net of
allowances of $32 and $28,
respectively)
$6,500
$5,700
Problem 2, Table 2: Lincoln and Samuelson, Inc. Selected Income Statement Data
Account
2012
2011
2010
Net sales (in
millions)
$6,020
$5,425
$5,000
Net income (in
millions)
$300
$285
$220
The selected income statement data is for the year ended December 31. The company also reported bad
debt expense of $62,000 in 2012; $55,000 in 2011; and $49,500 in 2010.
Using the data provided, complete the following for Lincoln and Samuelson, Inc.:
1. Compute the dollar amount of uncollectible accounts receivable that the company wrote off as
uncollectible in 2012. Show all of your work.
2. Assuming all sales were on credit, what amount of cash did the company collect on accounts
receivable in 2012? Show all of your work.
3. Compute the company’s net profit margin for the three years presented. What does the trend
suggest to you about the company?
Situation B:
The Israel Manners Entertainment Group uses the allowance approach to estimate bad debt expense, as
is required of all companies with significant sales on accounts receivable. At the end of 2012, the
Manners Group reported a balance in accounts receivable of $4,350,000 and estimated that $44,000 of
its accounts receivable would likely be uncollectible. The allowance for doubtful accounts has a $1,500
debit balance at year-end, prior to the adjustment needed to raise it to the $44,000 desired amount.
Use this information to answer the following questions for the Manners Group:
1. How is it possible that the allowance for doubtful accounts has developed a debit balance
instead of a credit balance?
2. What amount of bad debt expense should be recorded for 2012?
3. What amount will be reported on the 2012 balance sheet as the net realizable amount of
accounts receivable?
Situation C:
At the end of 2012, the unadjusted trial balance of Donovan, Inc. included $6,000,000 in accounts
receivable, a credit balance of $50,000 in the allowance for doubtful accounts, and sales revenue (all on
credit) of $200,000,000. Based on knowledge that the current economy is in distress, Donovan increased
its bad debt rate estimate to 0.4 percent on credit sales. Use this information to answer the following
questions for Donovan, Inc.:
1. What amount of bad debt expense should be recorded for 2012?
2. What amount will be reported on the 2012 balance sheet for the net realizable amount of
accounts receivable, after being reduced by the balance in the allowance for uncollectible
accounts?
Situation D:
BrightStar Company reported the following inventory records for June 2012:
Problem 2, Table 3: BrightStar Company Inventory Records
Date
Activity
# of Units
Cost/Unit
June 1
Beginning balance
200
$40
June 5
Purchase
600
$42
June 8
Sale @ $100 per unit
500
Problem 2, Table 3: BrightStar Company Inventory Records
Date
Activity
# of Units
Cost/Unit
June 17
Purchase
400
$45
June 23
Sale @ $100 per unit
500
Selling, administrative, and depreciation expenses for the month were $20,000. BrightStar’s tax rate is
35 percent. Use this information and the table above to complete the following for BrightStar Company:
1. Calculate the cost of ending inventory and the cost of goods sold under each of the following
methods:
o
a. First in, first out (FIFO).
o
b. Last in, first out (LIFO).
o
c. Weighted average.
2. Using your answers from question 1 above, answer the following:
o
a. What is the gross profit percentage under the FIFO method?
o
b. What is net income under the LIFO method?
o
c. Which method would you recommend to BrightStar for tax purposes? Explain your
recommendation.
o
d. If BrightStar also used the method that you recommended for tax purposes on its
balance sheet, would BrightStar’s current ratio suffer, compared to the use of FIFO?
3. BrightStar uses the lower of FIFO cost or market method to value its inventory for reporting
purposes at the end of the month. If inventory had a market replacement value of $44 per unit,
what would BrightStar report in its balance sheet for inventory? Why?
Situation E:
BlackBurn Company purchased the following on January 1, 2012:
•
Office Equipment at a cost of $100,000 with an estimated useful life to the company of five
years and a residual value of $10,000. The company uses the double-declining-balance method
of depreciation for the equipment.
•
Factory equipment at an invoice price of $780,000 plus shipping costs of $20,000. The
equipment has an estimated useful life of 100,000 hours and no residual value. The company
uses the units-of-production method of depreciation for the equipment.
•
A patent at a cost of $450,000 with an estimated useful life of 15 years. The company uses the
straight-line method of amortization for intangible assets with no residual value.
Use the information above to complete the following for BlackBurn Company:
1. Prepare a partial depreciation schedule for 2012, 2013, and 2014 for the following assets. Round
your answers to the nearest dollar.
o
a. Office equipment.
o
b. Factory equipment. The company used the equipment for 8,000 hours in 2012; 9,000
hours in 2013; and 8,500 hours in 2014.
2. On January 1, 2014, BlackBurn altered its corporate strategy dramatically. The company sold the
factory equipment for $700,000 in cash. Record the entry related to the sale of the factory
equipment.
3. On January 1, 2014, when the company changed its corporate strategy, its patent had estimated
future cash flows of $300,000 and a fair value of $250,000. What would the company report on
the income statement (account and amount) regarding the patent on January 2, 2014? Explain
your answer. (Hint: You may need to research this question using Internet sources.)
Purchase answer to see full
attachment
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