Question1) Make a Flexible Budget Gator Divers is a company which provides diving services like underwater ship repairs to clients in the Tampa Bay area. Company’s planning budget for March appears below: Gator Divers Planning Budget For Month Ended March 31 Budgeted diving-hours ( q ) . . . . . . . . . . . . . . . . . . . . . 200 Revenue ($380.00 q ). . . . . . . . . . . . . . . . . . . . . . . . . . $76,000 Expenses: Wages and salaries ($12,000 + $130.00 q ) . . . . . . 38,000 Supplies ($5.00 q ) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 Equipment rental ($2,500 + $26.00 q ) . . . . . . . . . . 7,700 Insurance ($4,200) . . . . . . . . . . . . . . . . . . . . . . . . . 4,200 Miscellaneous ($540 + $1.50 q ) . . . . . . . . . . . . . . . 840 Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,740 Net operating income . . . . . . . . . . . . . . . . . . . . . . . . . $24,260
Required: At the time of March, the company’s activity was actually 190 diving-hours. Make flexible budget for that level of activity.
Question2) Make Report Showing Activity Variances Air Meals is a company which prepares in-flight meals for airlines in its kitchen located next to the local airport. The company’s planning budget for December appears below:
Air Meals Planning Budget For the Month Ended December 31 Budgeted meals ( q ). . . . . . . . . . . . . . . . . . . . . . . . . 20,000 Revenue ($3.80 q ). . . . . . . . . . . . . . . . . . . . . . . . . . . . $76,000 Expenses: Raw materials ($2.30 q ) . . . . . . . . . . . . . . . . . . . . . . 46,000 Wages and salaries ($6,400 + $0.25 q ). . . . . . . . . . 11,400 Utilities ($2,100 + $0.05 q ). . . . . . . . . . . . . . . . . . . . 3,100 Facility rent ($3,800) . . . . . . . . . . . . . . . . . . . . . . . . 3,800 Insurance ($2,600). . . . . . . . . . . . . . . . . . . . . . . . . . 2,600 Miscellaneous ($700 + $0.10 q ). . . . . . . . . . . . . . . . 2,700 Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,600 Net operating income . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,400
In December, 21,000 meals were actually served. The company’s flexible budget for this level of activity is as follows:
Air Meals Flexible Budget For the Month Ended December 31 Budgeted meals ( q ) . . . . . . . . . . . . . . . . . . . . . . 21,000 Revenue ($3.80 q ) . . . . . . . . . . . . . . . . . . . . . . . $79,800 Expenses: Raw materials ($2.30 q ). . . . . . . . . . . . . . . . . 48,300 Wages and salaries ($6,400 + $0.25 q ) . . . . 11,650 Utilities ($2,100 + $0.05 q ) . . . . . . . . . . . . . . 3,150 Facility rent ($3,800) . . . . . . . . . . . . . . . . . . . 3,800 Insurance ($2,600) . . . . . . . . . . . . . . . . . . . . 2,600 Miscellaneous ($700 + $0.10 q ) . . . . . . . . . . 2,800 Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . 72,300 Net operating income . . . . . . . . . . . . . . . . . . . . $ 7,500
Required:
1. Make a report showing company’s activity variances for December.
2. Which of the activity variances must be of concern to management? Explain.
Question3) Make a Report Showing Revenue and Spending Variances Olympia Bivalve farms and sells oysters in the Pacific Northwest. The company harvested and sold 7,000 pounds of oysters in July. The company’s flexible budget for July appears below:
Olympia Bivalve Flexible Budget For the Month Ended July 31 Actual pounds ( q ). . . . . . . . . . . . . . . . . . . . . . . 7,000 Revenue ($4.20 q ). . . . . . . . . . . . . . . . . . . . . . . $29,400 Expenses: Packing supplies ($0.40 q ) . . . . . . . . . . . . . . . 2,800 Oyster bed maintenance ($3,600) . . . . . . . . . 3,600 Wages and salaries ($2,540 + $0.50 q ) . . . . 6,040 Shipping ($0.75 q ) . . . . . . . . . . . . . . . . . . . . . 5,250 Utilities ($1,260) . . . . . . . . . . . . . . . . . . . . . . 1,260 Other ($510 + $0.05 q ) . . . . . . . . . . . . . . . . . 860 Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . 19,810 Net operating income . . . . . . . . . . . . . . . . . . . . $ 9,590
The actual results for July appear below: Olympia Bivalve Income Statement For the Month Ended July 31 Actual pounds . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28,600 Expenses: Packing supplies. . . . . . . . . . . . . . . . . . . . . . 2,970 Oyster bed maintenance. . . . . . . . . . . . . . . . 3,460 Wages and salaries. . . . . . . . . . . . . . . . . . . . 6,450 Shipping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,980 Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,070 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,480 Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . 20,410 Net operating income . . . . . . . . . . . . . . . . . . . . $ 8,190
Required: Make a report showing company’s revenue and spending variances for July.
Question4) Make a Flexible Budget Performance Report Mt. Hood Air offers scenic overflights of Mt. Hood and the Columbia River gorge. Data concerning the company’s operations in August appear below:
Mt. Hood Air Operating Data For the Month Ended August 31 Planning Budget Flexible Budget Actual Results Flights ( q ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 52 52 Revenue ($360.00 q ). . . . . . . . . . . . . . . . . . . . . . . $18,000 $18,720 $16,980 Expenses: Wages and salaries ($3,800 + $92.00 q ) . . . . . 8,400 8,584 8,540 Fuel ($34.00 q ) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,700 1,768 1,930 Airport fees ($870 + $35.00 q ) . . . . . . . . . . . . . 2,620 2,690 2,690 Aircraft depreciation ($11.00 q ) . . . . . . . . . . . . . . 550 572 572 Office expenses ($230 + $1.00 q ) . . . . . . . . . . . 280 282 450 Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,550 13,896 14,182 Net operating income . . . . . . . . . . . . . . . . . . . . . . $ 4,450 $ 4,824 $ 2,79
The company measures its activity in terms of flights. Customers could buy individual tickets for overflights or hire an whole plane for an over flight at a discount.
Required:
1. Make a flexible budget performance report for August.
2. Which of the variances must be of concern to management? Describe.
Question5) Payback Method The management of Weimar, Inc., a civil engineering design company, is considering an investment in a high-quality blueprint printer with the following cash flows: Year Investment Cash Inflow 1 . . . . . . . $38,000 $2,000 2 . . . . . . . $6,000 $4,000 3 . . . . . . . $8,000 4 . . . . . . . $9,000 5 . . . . . . . $12,000 6 . . . . . . . $10,000 7 . . . . . . . $8,000 8 . . . . . . . $6,000 9 . . . . . . . $5,000 10 . . . . . . . $5,000
Required:
1. Find out the payback period of the investment.
2. will the payback period be affected if the cash inflow in the last year were many times larger?
Question6) Comparison of Projects Using Net Present Value Sharp Company has $15,000 to invest. The company is trying to decide between two alternative uses of the funds as follows: Invest in Invest in Project A Project B Investment required . . . . . . . . . . . . . . . . . . . . $15,000 $15,000 Annual cash inflows . . . . . . . . . . . . . . . . . . . . $4,000 $0 Single cash inflow at the end of 10 y ears . . . . $60,000 Life of the project . . . . . . . . . . . . . . . . . . . . . . 10 years 10 years Sharp Company uses a 16% discount rate.
Required: (Ignore income taxes.) Which investment will you recommend that company accept? Demonstrate all computations using net present value. Make separate computations for each investment.
Question7) Net Present Value Analysis of Two Alternatives Wriston Company has $300,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are as follows: A B Cost of equipment required . . . . . . . . . . . . $300,000 $0 Working capital investment required . . . . . $0 $300,000 Annual cash inflows . . . . . . . . . . . . . . . . . . $80,000 $60,000 Salvage value of equipment in seven years $20,000 $0 Life of the project . . . . . . . . . . . . . . . . . . . . 7 years 7 years
The working capital needed for project B will be released for investment elsewhere at the end of seven years. Wriston Company uses a 20% discount rate.
Required: (Ignore income taxes.) Which investment alternative (if either) would you recommend that the company accept? Demonstrate all computations using the net present value format. Mkae separate computations for each project.
Question8) Make a Statement of Cash Flows; Free Cash Flow Comparative financial statement data for Holly Company are given below:
December31 This Year Last Year Assets Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4 $ 7 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . 36 29 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 61 Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 115 97 Property, plant, and equipment . . . . . . . . . . . . . . . 210 180 Less accumulated depreciation . . . . . . . . . . . . . 40 30 Net property, plant, and equipment . . . . . . . . . . . . 170 150 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $285 $247
Liabilities and Stockholders’ Equity Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . $ 45 $ 39 Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 70 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . 150 138 Total liabilities and stockholders’ equity . . . . . . . . . $285 $247
For this year, the company reported net income as follows: Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . . . . . . . . . . Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . Selling and administrative expenses . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $500 300 200 180 $ 20
This year Holly declared and paid a cash dividend. There were no sales of plant and equipment during this year. The company didn’t repurchase any of its own stock this year.
Required: 1. Using the indirect method, prepare a statement of cash flows for this year. Compute Holly’s free cash flow for this year.
Question9) Prepare a Statement of Cash Flows A comparative balance sheet and income statement for Eaton Company follow: Eaton Company Comparative Balance Sheet December 31, 2011 and 2010 2011 2010 Assets Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4 $ 11 Accounts receivable . . . . . . . . . . . . . . . . . . 310 230 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 195 Prepaid expenses . . . . . . . . . . . . . . . . . . . . 8 6 Total current assets . . . . . . . . . . . . . . . . . . . 482 442 Property, plant, and equipment . . . . . . . . . . 500 420 Less accumulated depreciation . . . . . . . . 85 70 Net property, plant, and equipment . . . . . . . 415 350 Long-term investments . . . . . . . . . . . . . . . . 31 38 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $928 $830
Liabilities and Stockholders’ Equity Accounts payable . . . . . . . . . . . . . . . . . . . . $300 $225 Accrued liabilities . . . . . . . . . . . . . . . . . . . . 70 80 Income taxes payable . . . . . . . . . . . . . . . . . 71 63 Total current liabilities . . . . . . . . . . . . . . . . . 441 368 Bonds payable . . . . . . . . . . . . . . . . . . . . . . 195 170 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 636 538 Common stock . . . . . . . . . . . . . . . . . . . . . . 160 200 Retained earnings . . . . . . . . . . . . . . . . . . . . 132 92 Total stockholders’ equity . . . . . . . . . . . . . . 292 292 Total liabilities and stockholders’ equity . . . . $928 $830
Eaton Company Income Statement For the Year Ended December 31, 2011 Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . . . . . . . . Gross margin. . . . . . . . . . . . . . . . . . . . . . . . Selling and administrative expenses . . . . . . Net operating income . . . . . . . . . . . . . . . . . Nonoperating items: Gain on sale of investments . . . . . . . . . . Loss on sale of equipment . . . . . . . . . . . Income before taxes . . . . . . . . . . . . . . . . . . Income taxes. . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . $5 (2) $750 450 300 223 77 3 80 24 $ 56
During 2011, Eaton sold some equipment for $18 that had cost $30 and on which there was accumulated depreciation of $10. In addition, the company sold long-term investments for $12 that had cost $7 when purchased several years ago. A cash dividend was paid during 2011 and the company, repurchased $40 of its own stock. Eaton did not retire any bonds during 2011.
Required:
1.Using the indirect method, determine the net cash provided by operating activities for 2011.
2. Using the information in (1) above, along with an analysis of the remaining balance sheet accounts, make a statement of cash flows for 2011.
Question10) Common-Size Statements and Financial Ratios for Creditors Modern Building Supply sells several building materials to retail outlets. The company has just approached Linden State Bank requesting a $300,000 loan to strengthen the Cash account and to pay certain pressing short-term obligations. The company’s financial statements for the most recent two years follow:
Modern Building Supply Comparative Balance Sheet This Year Last Year Assets Current assets: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90,000 $ 200,000 Marketable securities . . . . . . . . . . . . . . . . 0 50,000 Accounts receivable, net . . . . . . . . . . . . . . 650,000 400,000 Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . 1,300,000 800,000 Prepaid expenses . . . . . . . . . . . . . . . . . . . 20,000 20,000 Total current assets . . . . . . . . . . . . . . . . . . . 2,060,000 1,470,000 Plant and equipment, net . . . . . . . . . . . . . . . 1,940,000 1,830,000 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $4,000,000 $3,300,000
Liabilities and Stockholders’ Equity Liabilities: Current liabilities . . . . . . . . . . . . . . . . . . . . $1,100,000 $ 600,000 Bonds payable, 12% . . . . . . . . . . . . . . . . . 750,000 750,000 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 1,850,000 1,350,000 Stockholders’ equity: Preferred stock, $50 par, 8% . . . . . . . . . . . 200,000 200,000 Common stock, $10 par . . . . . . . . . . . . . . 500,000 500,000 Retained earnings. . . . . . . . . . . . . . . . . . . 1,450,000 1,250,000 Total stockholders’ equity . . . . . . . . . . . . . . . 2,150,000 1,950,000 Total liabilities and stockholder’s equity . . . . $4,000,000 $3,300,000
Modern Building Supply Comparative Income Statement and Reconciliation This Year Last Year Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,000,000 $6,000,000 Cost of goods sold . . . . . . . . . . . . . . . . . . . . 5,400,000 4,800,000 Gross margin . . . . . . . . . . . . . . . . . . . . . . . . 1,600,000 1,200,000 Selling and administrative expenses . . . . . . 970,000 710,000 Net operating income . . . . . . . . . . . . . . . . . . 630,000 490,000 Interest expense . . . . . . . . . . . . . . . . . . . . . . 90,000 90,000 Net income before taxes . . . . . . . . . . . . . . . . 540,000 400,000 Income taxes (40%) . . . . . . . . . . . . . . . . . . . 216,000 160,000 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . 324,000 240,000
Dividends paid: Preferred dividends . . . . . . . . . . . . . . . . . . 16,000 16,000 Common dividends . . . . . . . . . . . . . . . . . . 108,000 60,000 Total dividends paid . . . . . . . . . . . . . . . . . . . 124,000 76,000 Net income retained . . . . . . . . . . . . . . . . . . . 200,000 164,000 Retained earnings, beginning of year . . . . . . 1,250,000 1,086,000 Retained earnings, end of year . . . . . . . . . . $1,450,000 $1,250,000
During the past year, the company has expanded the number of lines that it carries in order to stimulate sales and increase profits. It has also moved aggressively to acquire new customers. Sales terms are 2/10, n/30. All sales are on account. Assume that the following ratios are typical of companies in the building supply industry: Current ratio . . . . . . . . . . . . . . . . . Acid-test ratio . . . . . . . . . . . . . . . . Average collection period . . . . . . . Average sale period . . . . . . . . . . . Debt-to-equity ratio . . . . . . . . . . . . 2.5 1.2 18 days 50 days 0.75 Times interest earned . . . . . . . . . . 6. 0 Return on total assets . . . . . . . . . 10% Price-earnings ratio . . . . . . . . . . . 9
Required: Linden State Bank is uncertain whether the loan should be made. To help it in making a decision, you have been asked to compute following amounts and ratios for both this year and last year:
a. Working capital.
b. Current ratio.
C. Acid-test ratio.
D. Average collection period. (The accounts receivable at the beginning of last year totaled $350,000.)
e. Average sale period. (The inventory at the beginning of last year totaled $720,000.)
f. Debt-to-equity ratio.
G. Times interest earned
Question11) Financial Ratios for Common Stockholders Refer to the financial statements and other data in Problem 15–11 . Suppose that you have just inherited many hundred shares of Modern Building Supply stock. Not being acquainted with the company, you decide to prform some analytical work before making a decision about whether to retain or sell the stock you have inherited.
Required:
1. You decide first to assess the well-being of the common stockholders. For both this year and last year, claculate the following:
A .Earnings per share.
B. Dividend yield ratio for common stock.The company’s common stock is currently selling for $45 per share; last year it sold for $36 per share.
C. Dividend payout ratio for common stock.
D. Price-earnings ratio. How do investors regard Modern Building Supply as compared to other companies in the industry? Describe.
E. Book value per share of common stock. Does the difference between market value and book value suggest that the stock at its current price is too high? Explain
2. You decide next to assess the company’s rate of return. Claculate the following for both this year and last year:
a. Return on total assets. (Total assets at the beginning of last year were $2,700,000.)
b. Return on common stockholders’ equity. (Stockholders’ equity at the beginning of last year was $1,786,000.)