Indigo Books & Music Inc., operating under Indigo Books, Music More, Chapters, Coles, The World€™s Biggest Bookstore, SmithBooks, The Book Company, and chapters.indigo.ca, has 245 stores across Canada. Through the SEDAR website (www.sedar.com) or the company€™s website, access the financial statements of Indigo Books & Music Inc. for its 52 weeks ending March 28, 2009. Refer to the financial statements and notes to the financial statements and answer the following questions.
Instructions
(a) Identify all lease arrangements that are indicated in the company€™s financial statements, including the notes. Indicate any balances related to these leases that are reported on the income statement and balance sheet.
(b) Calculate the following ratios for Indigo based on the 2009 published financial statements:
1. Debt-to-equity ratio
2. Capital asset turnover ratio
3. Total asset turnover ratio
4. Return on investment (net income to total assets)
(c) Assume that the company adopts the contract-based approach. Assuming an interest rate of 7%, estimate the impact of the adoption on the 2008 and 2009 balance sheet. Also, estimate the impact on the 2009 income statement and cash flow statement. List any assumptions that you have made. To assist with the analysis, below is the information on operating lease payments that were committed to as of March 29, 2008 (excerpts from note 12) and the capital lease interest rates (excerpt from note 6).

(d) Using your estimate of the amount to capitalize for Indigo, recalculate the ratios in (b) above. Compare the recalculated ratios with the original results and comment on the differences.

Transcribed Image Text:

The Companys coneractual obligations due over the next five fiscal years and thereafter are summarized below: (millions of dollars) 2009 2010 2011 2012 2013 Thercafter Operating lcasesCapital leases 58.3 52.0 43.4 37.7 28.1 47.5 267.0 Total 60.9 54.3 44.3 37.8 28.2 47.5 2.6 2.3 0.9 Total obligations 6.0 273.0 The Company has entered into capital lease agreements for cercain cquipment. The obligation under these cap- ical leases is $6.0 million, of which $2.6 million is included in the current portion of long-term debt. These capital leases have an average interest rate of 5.2% and an average term of 51 months.