Question :
145.Will Redmon the CEO of Allistair Holdings, a company that : 1302948
145.Will Redmon is the CEO of Allistair Holdings, a company that manufactures and sells eye care products. Will’s annual bonus depends on meeting a profit target of $7,000,000, but late in the fourth quarter, the CFO brought Will the bad news that, based on current orders, it appeared that earnings would be closer to $6,500,000. To deal with the situation, Will and the CFO decided on the following strategy:
The company has firm orders for $2.5 million of merchandise to be delivered in January and February of next year (the company’s fiscal year ends on December 31). Will proposes that the goods be shipped in December to a warehouse where they will be held until required by customers. Customers will be billed in December and receive a special 15 percent discount for accepting ownership upon shipment to the warehouse. Allistair will pay for storage and insurance until the goods are actually delivered to customer locations.
Explain how the strategy may constitute manipulation of earnings.
146.Will Redmon is the CEO of Allistair, a company that manufactures and sells eye care products. Will’s annual bonus depends on meeting a profit target of $7,000,000, but late in the fourth quarter the CFO brought Will the bad news that, based on current orders, it appeared that earnings would be closer to $6,500,000. To deal with the situation, Will and the CFO decided on the following strategy:
The company has firm orders for $2.5 million of merchandise to be delivered in January and February of next year (the company’s fiscal year ends on December 31). Will proposes that the goods be shipped in December to a warehouse where they will be held until required by customers. Customers will be billed in December and receive a special 15 percent discount for accepting ownership upon shipment to the warehouse. Allistair will pay for storage and insurance until the goods are actually delivered to customer locations.
Comment on why and how a comparison of net income versus cash flow from operations may reveal that this action was undertaken.
147.The following information for Kinnis, Inc., a retail furniture and design firm, is presented at December 31, 2014 and 2013:
December 31
Assets2014 2013
Current assets:
Cash$ 42,000 $ 54,000
Accounts receivable480,000345,000
Inventory5,010,000 4,950,000
Prepaid expenses 84,000 79,000
Total current assets5,616,000 5,428,000
Building and equipment 1,591,000 1,193,000
Total assets$7,207,000 $6,621,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 705,000 $ 628,000
Bank loan payable 679,000625,000
Other accrued payables 215,000 315,000
Total current liabilities1,599,000 1,568,000
Long-term debt 1,729,000 1,791,000
Total liabilities 3,328,000 3,359,000
Stockholders’ equity:
Common stock1,307,000 1,305,000
Retained earnings 2,572,000 1,957,000
Total stockholders’ equity 3,879,000 3,262,000
Total liabilities and stockholders’ equity $7,207,000 $6,621,000
There were 100,000 shares of common stock outstanding at the end of both years. The income tax rate is 35%. Interest expense totaled $139,000 for 2014 and $158,000 for 2013. The market price per share was $110 at the end of 2013 and $134 at the end of 2014. Net income was $615,000 for 2014 and $739,000 in 2013. Net sales totaled $4,568,000 and $3,253,000 for 2014 and 2013, respectively.
a.Calculate the following for 2014 and 2013:
1.Earnings per share
2.Price–earnings ratio
3.Return on total assets
4.Return on common stockholders’ equity
b.Comment on any trends apparent in the ratios.
148.Jim Parker is interested in purchasing the stock of Hackett, a company that sells bricks to the construction industry. Before purchasing the stock, Parker would like to learn as much as possible about the company in which he is contemplating the potential investment. However, the only information that Parker has is a portion of Hackett’s annual report for the current year (Year 3), which contains no comparative data other than the summary of the ratios listed below:
Year 3Year 2Year 1
Current ratio2.8:12.3:12.1:1
Acid-test ratio 0.8:11.0:11.2:1
Accounts receivable turnover8.9 times10.1 times12.5 times
Inventory turnover6.1 times8.1 times8.3 times
Return on total assets15.50%12.10%10.30%
Return on common stockholders’ equity18.10%14.70%11.90%
Price-earnings ratio12.317.217.7
Earnings per share$1.53$1.52$1.55
Is the market price of the company’s stock increasing or decreasing? Support your answer with accounting justification citing specific information in the analysis.
149.Comparative financial statements for Smart Buy are shown below for the year’s ending December 31, 2014 and 2013:
December 31
Assets 20142013
Current assets:
Cash$ 14,000 $ 12,458
Accounts receivable45,489 35,486
Inventory39,23932,568
Other 3,400 2,581
Total current assets102,128 83,093
Long-term investments 128,580 104,600
Property, plant and equipment, net 789,145 771,258
Total assets$1,019,853 $958,951
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$ 98,789 $ 85,451
Other current liabilities 3,456 5,157
Total current liabilities 102,245 90,608
Long-term debt 456,781 414,760
Total liabilities 559,026 505,368
Stockholders’ equity:
Common stock375,000 375,000
Retained earnings 85,827 78,583
Total stockholders’ equity 460,827 453,583
Total liabilities and stockholders’ equity $1,019,853 $958,951
Year Ended December 31
20142013
Net sales $2,281,789 $2,074,354
Cost of goods sold 1,505,981 1,348,330
Gross margin 775,808 726,024
Operating expenses 458,245 420,408
Operating income 317,563 305,616
Interest expense 36,542 33,181
Earnings before income taxes 281,021 272,435
Income tax expense 98,357 95,352
Net earnings $ 182,664 $ 177,083
Smart Buy had 50,000 common shares outstanding throughout 2014. The December 31, 2014 market price is $43 per share. Calculate the following profitability ratios for 2014 for Smart Buy:
a.Earnings per share
b.Price-earnings ratio
c.Gross margin percentage
d.Return on total assets
e.Return on common stockholders’ equity
