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financial statement analysis
Financial Statement Analysis And Valuation 5th Edition Peter D. Easton, Mary Lea McAnally, Gregory A. Sommers - Solutions
Analyzing and Interpreting Receivables and Related Ratios Following is the current asset section from Intuit Inc.’s balance sheet. Total revenues were $4,694 million($1,289 million in product sales and $3,405 million in service revenues and other) in 2016.July 31 ($ millions) 2016 2015 Current
Interpreting Accounts Receivable and Related Footnote Disclosure Following is the current asset section from the W.W. Grainger Inc. balance sheet.As of December 31 ($ 000s) 2015 2014 2013 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 290,136 $ 226,644 $ 430,644
Analyzing Unearned Revenue Disclosures The following disclosures (excerpted) are from the August 28, 2016, annual report of Costco Wholesale Corporation.Revenue Recognition We generally recognize sales, net of estimated returns, at the time the member takes possession of merchandise or receives
Analyzing and Interpreting Income Components and Disclosures The income statement for Xerox Corporation follows.Years Ended December 31 (???? millions) 2015 2014 2013 Revenues Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,748 $ 5,288 $ 5,582
Analyzing and Interpreting Revenue Recognition Policies and Risks Amazon.com Inc. provides the following explanation of its revenue recognition policies in its 2015 10-K report.Sales of our digital devices, including Kindle e-readers, Fire tablets, Fire TVs, and Echo, are considered arrangements
Research and Development Expense International Business Machines Corporation (IBM) reported the following on its 2015 income statement.$ millions ????is????????l 2015 ????is????????l 2014 ????is????????l 201????Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $81,741
Revenue Recognition and Sales Allowances Target Corporation reported total sales of $73,785 million in 2015, $72,618 million in 2014, and$71,279 million in 2013. In 2015, cost of sales was $51,997 million.The revenue recognition footnote from Target’s 2015 annual report includes the following.•
Non-GAAP Disclosures In its 2015 annual report, Kellogg reported the following non-GAAP reconciliation.Reconciliation of Certain Non-GAAP Financial Measures Consolidated Results ($ millions) 2015 2014 2013 2012 Reported net income . . . . . . . . . . . . . . . . . . . . . $ 614 $ 632 $1,807 $ 961
Foreign Currency Fluctuations and Revenue Boeing Corporation has considerable non-U.S. operations. The table below shows Boeing’s 2015 revenue by geographic segment along with related exchange rates at the beginning and end of the year. The exchange rates represent the foreign currency equivalent
Restating Revenue for Retailer with 53-Week Fiscal Year In a press release that accompanied its 2016 annual earnings announcement of Michael Kors Holdings Ltd, its CEO John D. Idol, said, “We are pleased with our financial and operational accomplishments during fiscal year 2016, as we delivered
Estimating Uncollectible Accounts and Reporting Receivables over Multiple Periods Weiss Company, which has been in business for three years, makes all of its sales on credit and does not offer cash discounts. Its credit sales, customer collections, and write-offs of uncollectible accounts for its
Estimating Bad Debts Expense and Reporting Receivables At December 31, Barber Company had a balance of $420,000 in its accounts receivable and an unused balance of $2,600 in its allowance for uncollectible accounts. The company then aged its accounts as follows.Current . . . . . . . . . . . . . . .
Interpreting the Accounts Receivable Footnote Hewlett-Packard Company reports the following in its 2015 10-K report.October 31 ($ millions) 2015 2014 Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,363 $13,832 Footnotes to the company’s 10-K
Analyzing and Reporting Receivable Transactions and Uncollectible Accounts Using Percentage-of-Sales Method to Estimate Bad Debt Expense At the beginning of the year, Penman Company had the following account balances.Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . $356,000
Estimating Uncollectible Accounts and Reporting Accounts Receivable Collins Company analyzes its accounts receivable at December 31 and arrives at the age categories below along with the percentages that are estimated as uncollectible. The balance of the allowance for uncollectible accounts is
Operating Expenses Target Corporation’s footnote from its 2015 annual report table illustrates the primary items classified in each major expense category: cost of sales (COS), or selling, general and administrative (SG&A). For each expense, indicate whether the item would be included in COS or
Interpreting Revenue Recognition for Gift Cards Below are the footnotes to Barnes & Noble Inc.’s 2016 annual report and membership information obtained from its website.The Barnes & Noble Member Program offers members greater discounts and other benefits for products and services, as well as
Analyzing and Interpreting Foreign Currency Translation Effects and Non-GAAP Disclosures Kellogg Co. reports the following table and discussion in its 2015 10-K for its reportable segments.The following table provides an analysis of net sales and operating profit performance for 2015 versus 2014:$
Identifying Operating Income Components Following is the Deere & Company income statement for 2015.$ millions 2015 Net sales and revenues Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,775.2 Finance and interest
Identifying Operating Income Components Following is the income statement information from Apollo Medical Devices. Identify the components that we would consider operating.$ thousands 2016 Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign Currency Impact Kellogg included the following note in its fiscal 2015 10-K report ($ millions).Comparable net income attributable to Kellogg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,257 Foreign currency impact. . . . . . . . . . . . . . . . . . . . . . . . . . .
Constructing and Assessing Income Statements Using Cost-to-Cost Method On March 15, 2017, Gilbert Construction contracted to build a shopping center at a contract price of $220 million. The schedule of expected (which equals actual) cash collections and contract costs follows.Year Cash Collections
Constructing and Assessing Income Statements Using Cost-to-Cost Method Assume General Electric Company agreed in May 2016 to construct a nuclear generator for NSTAR, a utility company serving the Boston area. The contract price of $750 million is to be paid as follows: $250 million at the time of
Assessing Revenue Recognition Timing and Income Measurement Explain when each of the following businesses fulfills the performance obligations implicit in the sales contract and recognizes revenue. Identify any revenue measurement issues that could arise.a. RealMoney.Com, a division of TheStreet
Assessing Revenue Recognition Timing Explain when each of the following businesses fulfills the performance obligations implicit in the sales contract.a. A clothing retailer like American Eagle Outfitters Inc.b. A contractor like Boeing Company that performs work under long-term government
Discontinued Operations and Pro Forma Disclosures In its 2015 annual report, Murphy USA stated, “We use EBITDA and Adjusted EBITDA in our operational and financial decision-making, believing that such measures are useful to eliminate certain items in order to focus on what we deem to be a more
Pro Forma Numbers Kellogg’s included the following note in its fiscal 2015 10-K report.The Company’s fiscal year normally ends on the Saturday closest to December 31 and as a result, a 53rd week is added approximately every sixth year. The Company’s 2014 fiscal year ended on January 3, 2015,
Operating Expenses Indicate whether each of the following is true or false.a. Amortization expense is a noncash expense similar to depreciation, except it applies to intangible assets.b. Income attributable to noncontrolling interests is an expense item that reduces net income.c. Discontinued
Foreign Exchange Effects on Sales True or false: A multinational company reports that a large amount of its sales is generated in foreign currencies that have strengthened vis-à-vis the $US. Consolidated revenues are likely lower than would have been reported in the absence of such a shift in
Deferred Revenue True or false: A reduction of the deferred revenue account can be interpreted as a leading indicator of lower future revenues. Explain.
Sales Returns Which of the following statements is true relating to the allowance for sales returns?a. Sales returns is treated as an expense in the income statement and, therefore, reduces profit for the period.b. An excess of the amount by which the allowance for sales returns is increased
Reporting Unearned Revenue Target Corporation sells gift cards that can be used at any of the company’s Target stores or on Target.com. Target encodes information on the card’s magnetic strip about the card’s value and the store where it was purchased. Target gift cards do not have expiration
Assessing Revenue Recognition for Advance Payments Hamilton Company operates a performing arts center. The company sells tickets for its upcoming season of six Broadway musicals and receives $630,000 cash. The performances occur monthly over the next six months.a. When should Hamilton record
Interpreting Foreign Currency Translation Disclosure Procter & Gamble Company reports the following table in its 10-K report relating to the change in sales from 2015 to 2016.Net Sales Change Drivers 2016 vs. 2015 Volume Foreign Exchange Price Mix Net Sales Growth Beauty . . . . . . . . . . . . . .
Evaluating Accounts Receivable Turnover for Competitors Procter & Gamble Company and Colgate-Palmolive Company report the following sales and accounts receivable balances ($ millions) for 2015 and 2014.$ millions Procter & Gamble Colgate-Palmolive Sales Accounts Receivable Sales Accounts Receivable
Analyzing the Allowance for Uncollectible Accounts Following is the current asset section from the Mondelez balance sheet.$ millions 2015 2014 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,870 $ 1,631 Trade receivables (net of
Interpreting the Allowance Method for Accounts Receivable At a recent board of directors meeting of Bismark Corp., one of the directors expressed concern over the allowance for uncollectible accounts appearing in the company’s balance sheet. “I don’t understand this account,” he said.
Estimating Uncollectible Accounts and Reporting Accounts Receivable Mohan Company estimates its uncollectible accounts by aging its accounts receivable and applying percentages to various aged categories of accounts. Mohan computes a total of $2,100 in estimated uncollectible accounts as of its
Estimating Revenue Recognition with Right of Return ModCloth Inc. offers an unconditional return policy. It normally expects 2% of sales at retail selling prices to be returned before the return period expires. Assuming ModCloth records total sales of $10 million for the current period, what amount
Assessing Risk Exposure to Revenue Recognition BannerAD Corporation manages a website that sells products on consignment from sellers. It pays these sellers a portion of the sales price and charges a commission. Identify two potential revenue recognition issues from the perspective of BannerAd
Assessing Revenue Recognition of Companies Identify and explain when each of the following companies fulfills the performance obligations implicit in the sales contract.a???? The GAP: The GAP is a retailer of clothing items for all ages.b???? Merck & Company: Merck engages in developing,
Applying the Financial Statement Effects Template.Refer to the information for Camden Corporation in M5-13.a???? Use the financial statement effects template to record contract revenues and expenses for each year 2016 through 2018 using the cost-to-cost method.b???? Prepare journal entries and
Computing Revenues under Long-Term Contracts Camden Corporation agreed to build a warehouse for a client at an agreed contract price of $900,000. Expected(and actual) costs for the warehouse follow: 2016, $202,500; 2017, $337,500; and 2018, $135,000.The company completed the warehouse in 2015.
How would a company recognize revenue on a sale that includes equipment and a multi-year service contract all for one price?
What is the current U.S. GAAP accounting treatment for research and development costs?
What is unearned revenue? Provide three examples of unearned revenue.
What is the concept of pro forma income and why has this income measure been criticized?
Under what circumstances is it appropriate to use the cost-to-cost method to measure revenue?
What is meant by “aging” of accounts receivable?
Explain why analysts might remove foreign exchange gains or losses when analyzing revenue and expenses for the year.
What effect, if any, does a weakening $US have on reported sales and net income for companies operating outside the United States?
The income statement line item, “Discontinued operations” typically comprises two distinct components.What are they?
Why do companies allow sales returns, and how does this business practice affect reported revenue?
Explain how management can shift income from one period into another by using the allowance for uncollectibles account.
What is a performance obligation and how is it related to revenue recognition?
Use the following information to answer the requirements.2016 2015 Shares outstanding . . . . . . . . . . . . . . . . . 2,212,547,000 2,082,683,000 Stock price per share . . . . . . . . . . . . . . . . $2.16 $1.34 Requireda. Compute and compare the Altman Z-scores f???????? b????th ????ea????????.
Compute and Interpret Z-score Refer to the financial statements for Bombardier in
Compute and Interpret Liquidity, Solvency and Coverage Ratios Headquartered in Montreal, Quebec, Canada, Bombardier Inc., is a multinational aerospace and transportation company, founded in 1941. The company manufactures regional aircraft, business jets, mass transportation equipment, recreational
Compute and Interpret Z-score Refer to the financial information for Cisco Systems in P4-31, to answer the requirements. Cisco’s stock closed at $30.53 on July 29, 2016 (the last trading day before fiscal year end).Requireda. Compute and interpret the company’s Altman Z-scores for 2016.b. The
Compute and Interpret Z-score Refer to the financial statements for Lockheed Martin Corporation in P4-29 to answer the requirements.As of December 31, 2016 and 2015, there were approximately 289 million and 303 million shares outstanding. The company’s stock closed at $249.94 on December 30,
Assess Credit Risk Financial statement information for Cisco Systems Inc. follow. Refer to these financial statements to answer the requirements.CISCO SYSTEMS INC.Consolidated Balance Sheets(in millions)July 30, 2016 July 25, 2015 Assets Current assets Cash and cash equivalents. . . . . . . . . . .
AAssigning a Long-Term Debt Rating Using Financial Ratios Refer to the Lockheed Martin 2016 financial statements, from P4-29 to answer the following requirements.Requireda. Compute the following seven Moody’s metrics for Lockheed Martin. See Appendix 4A for definitions of Moody’s ratios.
Compute and Interpret Liquidity, Solvency, and Coverage Ratios Information from the balance sheet, income statement, and statement of cash flows for Lockheed Martin Corporation follow. Refer to these financial statements to answer the requirements.LOCKHEED MARTIN CORPORATION Consolidated Statements
Compute and Interpret Altman’s Z-scores (LO5)Following is selected financial information for eBay Inc., for its fiscal years 2016 and 2015.$ millions, except per share data 2016 2015 Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Compute and Interpret Z-scores Following is selected financial information for Procter & Gamble Co. and Kimberly-Clark Corporation from their fiscal 2016 financial statements.$ millions Procter & Gamble Kimberly-Clark Working capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compute and Interpret Liquidity, Solvency, and Coverage Ratios Selected balance sheet and income statement information for Nordstrom Inc. for 2015 and 2016 follows.$ millions 2016 2015 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compute and Interpret Solvency Ratios for Business Segments Selected balance sheet and income statement information from Ford Motor Company and its two principal business segments, Automotive and Financial Services, for 2016 follows.$ millions Pretax Income Interest Expense Net Income Total
Compute and Interpret Coverage, Liquidity and Solvency Ratios Selected balance sheet and income statement information from CVS Health Corp. for 2014 through 2016 follows ($ millions).Total Current Assets Total Current Liabilities EBIT(Operating income)Interest Expense, Gross Total Liabilities
Compute and Interpret Liquidity, Solvency and Coverage Ratios Selected balance sheet and income statement information from Verizon Communications Inc. follows.$ millions 2016 2015 Current assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,395 $ 22,355 Current liabilities. . . . . . . . .
AAssigning a Long-Term Debt Rating Using Financial Ratios Refer to the information below from Nordstrom Inc.’s 2016 financial statements. Use the information to answer the requirements ($ millions).Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bankruptcy Risk and Z-Score Analysis Following are selected ratios for JetBlue Airways Corp. for two recent fiscal years. Compute and interpret Altman Z-scores for the company for both years. Is the company’s bankruptcy risk increasing or decreasing over this period?Ratio 2016 2015 Current ratio
Bankruptcy Risk and Z-Score Analysis Following are selected ratios for Logitech International SA for the company’s 2016 and 2015 fiscal years. Compute and interpret Altman Z-scores for both years.Ratio 2016 2015 Working capital to total assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assume that the company had substantial operating leases that represent material off-balance-sheet liabilities and assets. What types of adjustments would we make to the liquidity and solvency ratios to reflect such financing? Explain.
Off-Balance-Sheet Financing and Liquidity and Solvency Ratios Refer to the liquidity and solvency ratios for Abbott Laboratories in
Risk Analysis Using Profitability, Coverage, Liquidity and Solvency Following are liquidity, solvency and coverage ratios for Baker Hughes Inc. for fiscal years 2016 and 2011. Is the company more or less risky to creditors in 2016 compared to 2011? Explain. (????int: The company is in the oilfield
Risk Analysis Using Liquidity, Solvency and Coverage Ratios Following are liquidity, solvency and coverage ratios for Abbott Laboratories for two recent fiscal years.Is the company more or less risky to creditors in 2016 compared to 2015? Explain.Ratio 2016 2015 Liquidity ratios Current ratio. . .
Analyzing Notes, Yields, Financial Ratios, and Credit Ratings Following are selected ratios from Exhibit 4.7 computed for Comcast Corp. from its December 2016 Form 10-K. Comcast is rated “A3” by Moody’s, which is an upper medium grade. Compare Comcast’s ratios to the ratio values reported
With respect to bankruptcy prediction, what is a Type I error? A Type II error? If you are a creditor, which type of error is more costly to you? Why?
Explain in general terms, the Altman bankruptcy prediction model. What do each of the five model variables measure?
What is a credit rating? Why do companies care about their credit ratings?
Why do lenders impose debt covenants on borrowers? Explain the three types of debt covenants.
Why do lenders require collateral? What are some common types of collateral?
What two factors determine a company’s level of credit risk? Explain what each factor tries to measure.
Explain the concepts of liquidity and solvency. Why is performance on these two dimensions crucial to company survival? How does coverage analysis differ from measures of liquidity and solvency?
Why are missing or understated liabilities especially critical for credit analysis?
What are the four steps to assess the chance of default for a company?
What is credit risk? What is the main purpose of performing a credit analysis?
Identify and explain at least three means that banks have to extend credit to companies.
Distinguish between a line of credit and a letter of credit. Why do companies obtain lines of credit?
Identify at least three parties that routinely supply credit to companies.
Explain how a company’s need of cash for investing activities differs over that company’s life cycle.Suggest three reasons a company would borrow cash for financing activities.
Companies often borrow money to fund operating activities. Why do lenders distinguish between cyclical cash needs and cash needed to fund operating losses?
Analysis and Interpretation of Liquidity and Solvency BT Group is one of the largest telecommunications services companies in the world, headquartered in London, United Kingdom. Refer to the financial information for BT Group in I3-64 to answer the following requirements.Requireda. Compute the
Analysis and Interpretation of Profitability BT Group is one of the largest telecommunications services companies in the world, headquartered in London, United Kingdom. Balance sheets and income statements for BT Group follow.BT GROUP PLC Group Income Statement Year Ended March 31 (in millions)
Compute and Interpret Liquidity and Solvency Ratios Headquartered in Melbourne, Australia, BHP Billiton, is a leading global resources company that operates in diverse commodity and geographic markets. The company is among the world’s top producers of iron ore, metallurgical coal, conventional
Compute, Disaggregate, and Interpret ROE and RNOA Headquartered in Calgary, Alberta, Husky Energy Inc. is a publicly traded, integrated energy company, with extensive conventional oil and natural gas assets, substantial heavy oil production and a range of midstream and downstream operations.
Compute, Disaggregate, and Interpret RNOA of Competitors Shell Oil Company is the U.S.-based subsidiary of Royal Dutch Shell, a multinational oil company headquartered in The Hague, The Netherlands. BP Limited is a multinational oil company headquartered in London U.K. Selected balance sheet and
Compute and Analyze Measures for DuPont Disaggregation Analysis Refer to the fiscal 2015 financial data of Mondelez International Inc. in P3-56 to answer the following requirements. (Perform the required computations from the perspective of a Modelez shareholder.)Requireda. Compute ROE for fiscal
Compute and Analyze Measures for DuPont Disaggregation Analysis Refer to the fiscal 2016 financial data of Costco Wholesale Corporation in P3-50 to answer the following requirements. (Perform the required computations from the perspective of a Costco shareholder.)Requireda. Compute ROE for fiscal
Analysis and Interpretation of Profit Margin, Asset Turnover, and RNOA for Several Companies Net operating profit margin (NOPM) and net operating asset turnover (NOAT) for several selected companies for the most recent year follow.NOPM NOAT Abbott Laboratories . . . . . . . . . . . . . . 11.73%
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