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Chapter 24: Question 26Q (page 1446)
What is the relationship of the asset turnover to the return on assets?
An increase in asset turnover while maintaining a stable profit margin leads to an increase in relation to returning on resources and vice versa.
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As a loan analyst for Utrillo Bank, you have been presented with the following information.
Toulouse Co. | Lautrec Co. | |
Assets | ||
Cash | \(120,000 | \) 320,000 |
Receivables | 220,000 | 302,000 |
Inventories | 570,000 | 518,000 |
Total current assets | 910,000 | 1,140,000 |
Other assets | 500,000 | 612,000 |
Total assets | \(1,410,000 | \)1,752,000 |
Liabilities and Stockholders鈥� Equity | ||
Current liabilities | \( 305,000 | \) 350,000 |
Long-term liabilities | 400,000 | 500,000 |
Capital stock and retained earnings | 705,000 | 902,000 |
Total liabilities and stockholders鈥� equity | \(1,410,000 | \)1,752,000 |
Annual sales | \(930,000 | \)1,500,000 |
Rate of gross profit t on sales | 30% | 40% |
Each of these companies has requested a loan of $50,000 for 6 months with no collateral offered. Because your bank has reached its quota for loans of this type, only one of these requests is to be granted.
Instructions
Which of the two companies, as judged by the information given above, would you recommend as the better risk and why? Assume that the ending account balances are representative of the entire year.
Carlton Company is involved in four separate industries. The following information is available for each of the four industries.
Operating Segment | Total Revenue | Operating Profit (Loss) | Identifiable Assets |
W | \( 60,000 | 15,000 | \)167,000 |
X | 10,000 | 3,000 | 83,000 |
Y | 23,000 | (2,000) | 21,000 |
Z | 9,000 | 1,000 | 19,000 |
\(102,000 | \)17,000 | $290,000 |
Instructions
Determine which of the operating segments are reportable based on the:
a) Revenue test.
The following statement is an excerpt from the FASB pronouncement related to interim reporting. Interim financial information is essential to provide investors and others with timely information as to the progress of the enterprise. The usefulness of such information rests on the relationship that it has to the annual results of operations. Accordingly, the Board has concluded that each interim period should be viewed primarily as an integral part of an annual period. In general, the results for each interim period should be based on the accounting principles and practices used by an enterprise in the preparation of its latest annual financial statements unless a change in an accounting practice or policy has been adopted in the current year. The Board has concluded, however, that certain accounting principles and practices followed for annual reporting purposes may require modification at interim reporting dates so that the reported results for the interim period may better relate to the results of operations for the annual period.
Instructions
The following six independent cases present how accounting facts might be reported on an individual company鈥檚 interim financial reports. For each of these cases, state whether the method proposed to be used for interim reporting would be acceptable under generally accepted accounting principles applicable to interim financial data. Support each answer with a brief explanation.
f) LaBrava Company was reasonably certain it would have an employee strike in the third quarter. As a result, it shipped heavily during the second quarter but plans to defer the recognition of the sales in excess of the normal sales volume. The deferred sales will be recognized as sales in the third quarter when the strike is in progress. LaBrava Company management thinks this is more representative of normal second- and third-quarter operations.
What is the fair value option? Explain how use of the fair value option reflects application of the fair value principle.
(Ratio Computations and Additional Analysis) Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2018, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two \(35,000 notes, which are due on June 30, 2018, and September 30, 2018. Another note of \)6,000 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburn鈥檚 cash flow problems are due primarily to the company鈥檚 desire to finance a \(300,000 plant expansion over the next 2 fiscal years through internally generated funds. The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years
BRADBURN CORPORATION BALANCE SHEET MARCH 31 | ||
Assets | 2018 | 2017 |
Cash | \) 18,200 | \( 12,500 |
Notes receivable | 148,000 | 132,000 |
Accounts receivable (net) | 131,800 | 125,500 |
Inventories (at cost) | 105,000 | 50,000 |
Plant & Equipment (net of depreciation) | 1,449,000 | 1,420,500 |
Total assets | \)1,852,000 | \(1,740,500 |
Liabilities and Stockholders鈥� Equity | ||
Accounts payable | \) 79,000 | \( 91,000 |
Notes payable | 76,000 | 61,500 |
Accrued liabilities | 9,000 | 6,000 |
Common stock (130,000 shares, \)10 par) | 1,300,000 | 1,300,000 |
Retained earnings* | 388,000 | 282,000 |
Total liabilities and stockholders鈥� equity | \(1,852,000 | \)1,740,500 |
*Cash dividends were paid at the rate of \(1 per share in the fiscal year 2017 and \)2 per share in the fiscal year 2018.
BRADBURN CORPORATION INCOME STATEMENT FOR THE FISCAL YEARS ENDED MARCH 31 | ||
2018 | 2017 | |
Sales revenue | \(3,000,000 | \)2,700,000 |
Cost of goods sold* | 1,530,000 | 1,425,000 |
Gross margin | 1,470,000 | 1,275,000 |
Operating expenses | 860,000 | 780,000 |
Income before income taxes | 610,000 | 495,000 |
Income taxes (40%) | 244,000 | 198,000 |
Net income | \( 366,000 | \) 297,000 |
Depreciation charges on the plant and equipment of \(100,000 and \)102,500 for fiscal years ended March 31, 2017, and 2018, respectively, are included in the cost of goods sold.
Instructions
b)Identify and explain what other financial reports and/or financial analyses might be helpful to the commercial loan officer of Topeka National Bank in evaluating Daniel Brown鈥檚 request for a time extension on Bradburn鈥檚 notes.
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