Grout Inc. is a wholly owned subsidiary of Slait Co. The philosophy of Slait's management is to allow the subsidiaries to operate as independent units. Corporate control is exercised through the establishment of minimum objectives for each subsidiary, accompanied by
Grout Inc. is a wholly owned subsidiary of Slait Co. The philosophy of Slait's management is to allow the subsidiaries to operate as independent units. Corporate control is exercised through the establishment of minimum objectives for each subsidiary, accompanied by substantial rewards for success and penalties for failure. The time period for performance review is long enough for competent managers to display their abilities. Each quarter, the subsidiary is required to submit financial statements. The statements are accompanied by a letter from the subsidiary president explaining the results to date, a forecast for the remainder of the year, and the actions to be taken to achieve the objectives if the forecast indicates that the objectives will not be met. Slait management, in conjunction with Grout management, had set the objectives listed below for the year ending September 30, 2011. These objectives are similar to those set in previous years.
â€¢ Sales growth of 10%
â€¢ Return on stockholders' equity of 20%
â€¢ A long-term debt-to-equity ratio of not more than 1.0
â€¢ Payment of a cash dividend of 50% of net income, with a minimum payment of at least $500,000
Grout's controller has just completed preparing the financial statements for the six months ended March 31, 2011, and the forecast for the year ending September 30, 2011. The statements are presented below. After a cursory glance at the financial statements, Grout's president concluded that not all objectives would be met. At a staff meeting of the Grout management, the president asked the controller to review the projected results and recommend possible actions that could be taken during the remainder of the year so that Grout would be more likely to meet the objectives.
1. Calculate the projected results for each of the four objectives established for Grout Inc. State which results will not meet the objectives by year-end.
2. From the data presented, identify the factors that seem to contribute to the failure of Grout Inc. to meet all of its objectives.
3. Explain the possible actions that the controller could recommend in response to the president's request.
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
Grout Inc. Income Statement (thousands omitted) Year Ended September 30, 2010 Six Months March 31, 2011 $6,000 Forecast for Year Ending September 30, 2011 Sales Cost of goods sold Selling expenses Administrative expenses $10,000 $6,000 $12,000 $ 8,000 1,800 $4,000 1,500 1,000 500 and interest 600 1,200 600 Income taxes Total expenses and taxes Net income Dividends declared and paid 300 $ 200 $ 200 S 400 400 $1,000 500 Income retained Grout Inc. Statement of Financial Position (thousands omitted) September 30, 2010 March 31, 2011 Forecast for September 30, 2011 Assets Cash Accounts receivable (net) Inventory Plant and equipment (net) $ 400 2,100 7000 2,800 $12,300 $ 500 3,400 8,500 2,500 $14,900 S 500 2,600 8,400 3,200 $14,700 Total assets Liabilities and Equities Accounts payable Accrued taxes $4,000 200 5,500 4,000 1,200 $14,900 S 3,000 4,000 4,000 1,000 $12,300 $4,000 200 5,500 4,000 1,000 Common stock Retained earnings Total liabilities and equities
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