Reference no: EM13264
EXERCISE: Prepare a Flexible Budget Gator Divers is a company that provides diving services such as underwater ship repairs to clients in the Tampa Bay area. The company's planning budget for March appears below:
Gator Divers Planning Budget For the 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: During March, the company's activity was actually 190 diving-hours. Prepare a flexible budget for that level of activity.
EXERCISE: Prepare a Report Showing Activity Variances Air Meals is a company that 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. Prepare a report showing the company's activity variances for December.
2. Which of the activity variances should be of concern to management? Explain.
EXERCISE: Prepare 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: Prepare a report showing the company's revenue and spending variances for July.
EXERCISE: Prepare 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 can buy individual tickets for overflights or hire an entire plane for an overflight at a discount.
Required:
1. Prepare a flexible budget performance report for August.
2. Which of the variances should be of concern to management? Explain.
EXERCISE: 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. Determine the payback period of the investment.
2. Would the payback period be affected if the cash inflow in the last year were several times larger?
EXERCISE: 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 would you recommend that the company accept? Show all computations using net present value. Prepare separate computations for each investment.
EXERCISE: 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? Show all computations using the net present value format. Prepare separate computations for each project.
EXERCISE: Prepare 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 . . . . . . . . . . . . . . . . . . . . . . . . . . .
This year Holly declared and paid a cash dividend. There were no sales of plant and equipment during this year. The company did not repurchase any of its own stock this year. Required: 1. 2. Using the indirect method, prepare a statement of cash flows for this year. Compute Holly's free cash flow for this year.
PROBLEM: 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
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, prepare a statement of cash flows for 2011.
PROBLEM: Common-Size Statements and Financial Ratios for Creditors Modern Building Supply sells various 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 assist it in making a decision, you have been asked to compute the 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
PROBLEM: Financial Ratios for Common Stockholders Refer to the financial statements and other data in Problem 15-11 . Assume that you have just inherited several hundred shares of Modern Building Supply stock. Not being acquainted with the company, you decide to do 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, compute the following: a .The earnings per share.B. The 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. The dividend payout ratio for common stock. D. The price-earnings ratio. How do investors regard Modern Building Supply as compared to other companies in the industry? Explain. E. The 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. Compute the following for both this year and last year: a. The return on total assets. (Total assets at the beginning of last year were $2,700,000.)
b. The return on common stockholders' equity. (Stockholders' equity at the beginning of last year was $1,786,000.)