Easton et al - Financial Statement Analysis 2/e (Homework)

James Finch

Finance, Fall 2010

Instructor: Mr. Cambridge

Current Score: 39/87

Due: Wednesday, October 27, 2010 22:00 EDT

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1	2	3	4	5
39	0/17	0/3	0/4	0/24

Total

39/87

Description

Here are textbook questions from Financial Statement Analysis and Valuation 2/e by Peter Easton, Mary Lea McAnally, Patricia Fairfield, Xiao-Jun Zhang, and Robert Halsey published by Cambridge Business Publishers. Click here for a list of all of the questions coded in WebAssign.

Instructions

This demo assignment allows many submissions and allows you to try another version of the same question for practice.

1. 39/39 points All Submissions Notes Question: EasAnalysis2 2.27.stat.

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39/39

Constructing Financial Statements from Account Data
Barth Company reports the following year-end account balances at December 31, 2009. Prepare the 2009 income statement and the balance sheet as of December 31, 2009.

Accounts payable	$	16,000	Inventory	$	36,000
Accounts receivable		30,000	Land		80,000
Bonds payable, long-term		200,000	Goodwill		8,000
Buildings		151,000	Retained earnings		60,000
Cash		48,000	Sales revenue		400,000
Common stock		150,000	Supplies inventory		3,000
Cost of goods sold		180,000	Supplies expense		6,000
Equipment		70,000	Wages expense		40,000

Barth Company
Income Statement
Your answer is correct.

2
Expenses
3
4
5
Total expenses
Net income

		$ Enter a number. 6

Enter a number. 7
Enter a number. 8
Enter a number. 9
		Enter a number. 10
		$ Enter a number. 11

Barth Company
Balance sheet
Your answer is correct.

Assets
13
14
15
16
17
18
19
20
Total assets


$ Enter a number. 21
Enter a number. 22
Enter a number. 23
Enter a number. 24
Enter a number. 25
Enter a number. 26
Enter a number. 27
Enter a number. 28
$ Enter a number. 29

Liabilities and equity
30
31
Total liabilities

32
33
Total equity

Total liabilities and equity


$ Enter a number. 34
Enter a number. 35
Enter a number. 36

Enter a number. 37
Enter a number. 38
Enter a number. 39

$ Enter a number. 40

2. 0/17 points All Submissions Notes Question: EasAnalysis2 3.36.stat.

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0/17

Analysis and Interpretation of Profitability
Balance sheets and income statements for 3M Company follow.

Income Statement
Year ended December 31 ($ millions)	2007	2006	2005
Net sales	$24,462	$22,923	$21,167
Operating expenses
Cost of sales	12,735	11,713	10,408
Selling, general and administrative expenses	5,015	5,066	4,631
Research, development and related expenses	1,368	1,522	1,274
Gain on sale of businesses	(849)	(1,074)	—
Total	18,269	17,227	16,313
Operating income	6,193	5,696	4,854
Interest expense and income
Interest expense	210	122	82
Interest income	(132)	(51)	(56)
Total	78	71	26
Income before income taxes, minority interest and cumulative effect of accounting change	6,115	5,625	4,828
Provision for income taxes	1,964	1,723	1,627
Minority interest	55	51	55
Income before cumulative effect of accounting change	4,096	3,851	3,146
Cumulative effect of accounting change	—	—	(35)
Net income	$ 4,096	$ 3,851	$ 3,111

Balance Sheet
($ millions)	December 31, 2007	December 31, 2006
Assets
Cash and cash equivalents	$ 1,896	$1,447
Marketable securities—current	579	471
Accounts receivable—net of allowances of $75 and $71	3,362	3,102
Inventories
Finished goods	1,349	1,235
Work in process	880	795
Raw materials and supplies	623	571
Total inventories	2,852	2,601
Other current assets	1,149	1,325
Total current assets	9,838	8,946
Marketable securities—noncurrent	480	166
Investments	298	314
Property, plant and equipment	18,390	17,017
Less: Accumulated depreciation	(11,808)	(11,110)
Property, plan and equipment—net	6,582	5,907
Goodwill	4,589	4,082
Intangible assets—net	801	708
Prepaid pension and postretirement benefits	1,378	395
Other assets	728	776
Total assets	$24,694	$21,294

($ millions)	December 31, 2007	December 31, 2006
Liabilities and stockholders' equity
Short-term borrowings and current portion of long-term debt	$ 901	$ 2,506
Accounts payable	1,505	1,402
Accrued payroll	580	520
Accrued income taxes	543	1,134
Other current liabilities	1,833	1,761
Total current liabilities	5,362	7,323
Long-term debt	4,019	1,047
Other liabilities	3,566	2,965
Total liabilities	12,947	11,335
Stockholders' equity
Common stock, par value $.01 per share (Shares outstanding—2007: 709, 156, 031 Shares outstanding—2006: 734, 362, 802)	9	9
Additional paid-in capital	2,785	2,484
Retained earnings	20,316	17,933
Treasury stock	(10,520)	(8,456)
Unearned compensation	(96)	(138)
Accumulated other comprehensive income (loss)	(747)	(1,873)
Stockholders' equity—net	11,747	9,959
Total liabilities and stockholders' equity	$24,694	$21,294

(a) Compute net operating profit after tax (NOPAT) for 2007 and 2006. Assume that combined federal and state statutory tax rates are 35.9% for 2007 and 36.0% for 2006. (Round your answers to the nearest whole number.)
2007 NOPAT = Your answer is incorrect.

($ millions)
2006 NOPAT = Your answer is incorrect.

($ millions)

(b) Compute net operating assets (NOA) for 2007 and 2006.
2007 NOA = Your answer is incorrect.

($ millions)
2006 NOA = Your answer is incorrect.

($ millions)

(c) Compute and disaggregate 3M's RNOA into net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2007 and 2006; the 2005 NOA is $12,776 million. (Round your answers to two decimal places.)
2007 RNOA = Your answer is incorrect.

%
2006 RNOA = Your answer is incorrect.

%

2007 NOPM = Your answer is incorrect.

%
2006 NOPM = Your answer is incorrect.

%

2007 NOAT = Your answer is incorrect.

2006 NOAT = Your answer is incorrect.

Which of the following statements best describes any trend in 3M's RNOA?

3M's RNOA decreased from 2006 to 2007 because of poorer performance with both is profit margin and its asset turnover. 3M's RNOA decreased from 2006 to 2007 because its net operating profit after tax increased to less extent than its sales increased. 3M's RNOA decreased from 2006 to 2007 because its profitability declined. 3M's RNOA decreased from 2006 to 2007 because its NOA increased.

Your answer is incorrect.

(d) Compute net nonoperating obligations (NNO) for 2007 and 2006. Confirm the relation: NOA = NNO + Stockholders' equity.
2007 NNO = ($ millions)
2006 NNO = ($ millions)

(e) Compute return on equity (ROE) for 2007 and 2006. (Stockholders' equity in 2005 is $10,395 million. Round your answers to two decimal places.)
2007 ROE = %
2006 ROE = %

(f) What is the nonoperating return component of ROE for 2007 and 2006? (Round your answers to two decimal places.)
2007 nonoperating return = %
2006 nonoperating return = %

(g) Which of the following statements reflects the best inference we can draw from the difference between 3M's ROE and RNOA?

ROE > RNOA implies that 3M has taken on too much financial leverage. ROE > RNOA implies that 3M's equity has grown faster than its NOA. ROE > RNOA implies that 3M is able to borrow money to fund operating assets that yield a return greater than its cost of debt. ROE > RNOA implies that 3M has increased its financial leverage during the period.

3. –/3 points Notes Question: EasAnalysis2 6.37.rand.

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0/3

Computing and Assessing Plant Asset Impairment
On July 1, 2005, Zeibart Company purchases equipment for $277,000. The equipment has an estimated useful life of 10 years and expected salvage value of $27,000. The company uses straight-line depreciation. On July 1, 2009, economic factors cause the fair value of the equipment to decline to $107,000. On this date, Zeibart examines the equipment for impairment and estimates $152,000 in undiscounted expected cash inflows from this equipment.

(a) Compute the annual depreciation of the equipment for fiscal years ending July 1, 2006 through July 1, 2009.
$

(b) Compute the equipment's net book value at July 1, 2009.
$

(c) Apply the test of impairment to this equipment as of July 1, 2009. Is the equipment impaired? Show supporting computations.

Yes, because the undiscounted expected cash flows are less than net book value. Yes, because the fair value is less than the net book value. Yes, because the net book value is greater than the salvage value. No, because the net book value minus the salvage value is less than undiscounted expected cash flows. No, because the net book value minus the salvage value is greater than undiscounted expected cash flows.

(d) If the equipment is impaired at July 1, 2009, compute the impairment loss. (If the equipment is not impaired, enter 0.)
$

4. –/4 points Notes Question: EasAnalysis2 7.33.stat.

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0/4

Determining Bond Prices, Interest Rates, and Financial Statement Effects
Deere & Company's 2007 10-K reports the following footnote relating to long-term debt. Deere's borrowings include $300 million, 7.125% notes, due in 2031 (highlighted below).

Long-term borrowings at October 31 consisted of the following
in millions of dollars:

Notes and Debentures	2007	2006
7.85% debentures due 2010	$ 306	$ 306
6.95% notes due 2014: ($700 principal)
Swapped to variable interest rates
of 6.1%—2007, 6.4%—2006	743	734
8.95% debentures due 2019	56	56
8-1/2% debentures due 2022	105	105
6.55% debentures due 2028	200	200
8.10% debentures due 2030	250	250
7.125% notes due 2031	300	300
Other notes	13	18
Total	$1,973	$1,969

A recent price quote (from Yahoo! Finance Bond Center) on Deere's 7.125%
notes follows.

Type	Issuer	Price	Coupon (%)	Maturity	YTM (%)	Current Yield (%)	Fitch Rating	Callable
Corp	Deere & CO	134.29	7.125	3-Mar-2031	4.638	5.306	A	No

This price quote indicates that Deere's 7.125% notes have a market price of 134.29 (134.29% of face value), resulting in a yield to maturity of 4.638%.

5. –/24 points Notes Question: EasAnalysis2 8.43.stat.

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0/24

Identifying and Analyzing Financial Statement Effects of Dividends
The stockholders' equity of Kinney Company at December 31, 2008, is shown below.

5% preferred stock, $100 par value, 10,000 shares authorized; 4,000 shares issued and outstanding		$ 400,000
Common stock, $5 par value, 200,000 shares authorized; 50,000 shares issued and outstanding		250,000
Paid-in capital in excess of par value—preferred stock		40,000
Paid-in capital in excess of par value—common stock		300,000
Retained earnings		656,000
Total stockholders' equity		$1,646,000

The following transactions, among others, occurred during 2009:

Apr. 1	Declared and issued a 100% stock dividend on all outstanding shares of common stock. The market value of the stock was $11 per share.
Dec. 7	Declared and issued a 3% stock dividend on all outstanding shares of common stock. The market value of the stock was $14 per share.
Dec.20	Declared and paid (1) the annual cash dividend on the preferred stock and (2) a cash dividend of 80 cents per common share.

(a) Use the financial statement effects template to indicate the effects of these separate transactions. (You MUST enter the number "0", the number zero, in all cells that should be BLANK.)

Transaction	Cash Asset	Noncash Assets	=	Liabilities	Contributed Capital	Earned Capital	Revenues	−	Expenses	=	Net Income
	Balance Sheet						Income Statement
Apr. 1	Enter an exact number. 1	Enter an exact number. 2	=	Enter an exact number. 3	Enter an exact number. 4	Enter an exact number. 5	Enter an exact number. 6	−	Enter an exact number. 7	=	Enter an exact number. 8
Dec. 7	Enter an exact number. 9	Enter an exact number. 10	=	Enter an exact number. 11	Enter an exact number. 12	Enter an exact number. 13	Enter an exact number. 14	−	Enter an exact number. 15	=	Enter an exact number. 16
Dec. 20	Enter an exact number. 17	Enter an exact number. 18	=	Enter an exact number. 19	Enter an exact number. 20	Enter an exact number. 21	Enter an exact number. 22	−	Enter an exact number. 23	=	Enter an exact number. 24

(b) Compute retained earnings for 2009 assuming that the company reports 2009 net income of $253,000.
$

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Easton et al - Financial Statement Analysis 2/e (Homework)

Current Score: 39/87