Questions -
1. Inventory
What is the value of Whole Foods' inventory on 09/27/2015 on a LIFO basis? What is the value of Whole Foods' cost of goods sold for the year ending on 09/27/2015 on a LIFO basis? Suppose you want to compare Whole Foods' profit margin to the one of Whole Foods' main competitor. The competitor uses FIFO for inventory and reports a profit margin of 3.7%. What is Whole Foods' profit margin on 09/27/2015 on a FIFO basis? How does that compare to Whole Foods' competitor? How much has Whole Foods saved in taxes up to 09/27/2015 by using LIFO? For this question only, assume a tax rate of 30%.
2. Long-Term Assets
What is the value of Whole Foods' gross and net property, plant and equipment on 09/27/2015? What is the difference between the gross and net amounts? What is the value of Whole Foods' amortization and depreciation expense related to Property Plant and Equipment (PPE) during the year ending on 09/27/2015? Did Whole Foods impair any of its assets related to property Plant and Equipment during the year ending on 09/27/2015? Use the BSE to record this transaction.
3. Leases
Suppose Whole Foods enters into a capital lease for a fixed-asset on 9/28/2015 (the first day of the next fiscal year). The capital lease requires 5 annual payments of $5 million at the end of each fiscal year. The assets have a 5 year useful life and 0 salvage value, and the lease has an implicit interest rate (i.e., the effective interest rate) of 5%. The present value of these cash flows is $21.65 million.
What transaction would they have recorded, if any, when they entered into the capital lease? Use the BSE to record this transaction. What transactions would they record, if any, on 09/27/2016? Use the BSE to record this transaction. Whole Foods reports its operating lease obligations on p. 47 (PDF pg. 14). As an analyst, you would like to treat these operating leases as a capital lease for an "apples to apples" comparison with Whole Foods' competitor. Calculate the present value of Whole Foods' operating lease obligations. Use an interest rate of 5% and assume that the payment of $6,388 of "future years after 2020" reflects 10 payments of $638.8 for the fiscal years 2021 to 2030. Calculate Whole Foods' leverage ratio after adjusting for the operating lease obligations. How does this number compare to the leverage ratio (before the adjustment) of 52.3% on p.1 of the homework? In 1-2 sentences provide an intuition for this result.
4. Marketable Securities
How does Whole Foods classify their marketable securities (Whole Foods uses which of the three classifications discussed in class)? The Fed announced an increase in interest rates on December 2015 causing the market value of Whole Foods' short-term investments to decrease by an additional $10,000. What transaction would they record during the 2016 fiscal year, if any, to reflect this change in market value on their financial statements? Assume that Whole Foods will continue to hold these securities at the end of 2016's fiscal year. Use the BSE to record this transaction.
5. Intangibles
What transaction, if any, did Whole Foods record to recognize the amortization expense associated with intangible assets during the fiscal year of 2015? Use the BSE to record this transaction. What transaction, if any, does Whole Foods expect record to recognize the amortization expense associated with intangible assets during the fiscal year of 2016? Use the BSE to record this transaction.
6. Long-term liabilities
Suppose on 9/28/2015, Whole Foods issued a zero coupon bond with a face amount of $100 million, receiving proceeds of $60 million with an effective rate of 5%. They repurchase the bond on 9/28/2016 (the day after the end of 2016's fiscal year) for $70 million.
What transaction, if any, do they record on 9/28/2015? Use the BSE to record this transaction. What transaction, if any, do they record on 9/27/2016? Use the BSE to record this transaction. What transaction, if any, do they record on 9/28/2016 when they repurchase the bond? Use the BSE to record this transaction.
7. Effect of transactions on financial statements
For this question assume that Whole Foods entered into the following transactions on 09/27/2015.
1. Paid a $10,000,000 dividend in cash.
2. Received a $10,000,000 prepayment (cash) for services to be delivered in 2016.
3. Sold a truck that was purchased for $15,000,000 and had accumulated depreciation of $4,000,000 for $4,000,000 in cash.
4. Sold inventory costing $7,000,000 for $10,000,000 on account.
5. Paid interest expense of $11,000,000 in cash.
Which transaction (or transactions) had the largest (i.e., most positive) impact on Whole Foods' net income for the period ending 09/27/2015? Which transaction (or transactions) had the largest (i.e., most positive) impact on Whole Foods' operating cash flows for the period ending 09/27/2015?