Assessment 7Complete three problems: Problem 1 focuses on working capital and quick ratio, and Problem 2involves reading public financial statements. Problem 3 is a comprehensive problem in which you willbring together various financial analysis measures and interpret their meaning in order to drawconclusions.Problem 1: Working Capital, Current Ratio, Quick Assets, Acid-Test RatioThe Sanchez Corporation is preparing its 2012 balance sheet. The company records show the followingselected amounts at the end of the accounting period, December 31, 2012:Problem 1: Sanchez Corporation Selected AmountsAccountDollar AmountTotal assets$600,000Total noncurrent assets$350,000LiabilitiesDollar AmountNotes payable (8%, due in 6 years)$40,000Accounts payable$60,000Income taxes currently payable$15,000Liability for withholding taxes$4,000Rent revenue collected in advance by up to four months$8,000Bonds payable (due in 15 years).$100,000Wages payable$6,000Property taxes payable$3,000Note payable (10%, due in 6 months)$22,000Interest payable$1,200Common stock$200,000Using the information provided in the table, complete the following:Compute (a) working capital and (b) the quick ratio (quick assets are $120,000)Then, answer the following questions?1. Why is working capital important to management?2. How do financial analysts use the quick ratio?3. Would your computations be different if the company reported $250,000 worth of contingentliabilities in the notes to the statements? Explain. Include in your explanation a definition ofcontingent liabilities and an example of a contingent liability.Assessment 7Problem 2: Reading Publically Available Financial StatementsUse the Lowe’s 2011 10-K, to answer the following questions, which all refer to the fiscal year end2012. Indicate the source of each answer, including the page number from the Lowe’s 2011 10-K.1. How many shares of common stock are authorized at the end of the current year? How many sharesare issued and outstanding at the end of the current year?2. Is there more than one class of common stock? If so, what is the name of each class of commonstock?3. Is there any preferred stock? If so, what is the dividend rate on the preferred stock, as a percentageof the par value of the preferred stock?4. Did the company pay dividends on the common stock during the most recent reporting year? If so,what was the total amount of dividends paid and how much were they per share?5. Does the company have any treasury stock? If so how much?6. Has the company issued a stock dividend or a stock split over the past three reporting years? If so,what percentage and in what year or years?7. Does the company’s common stock have par value? If it does, what is the par value?8. Did the common buy back a significant amount of its shares in the current year? You can see this inthe Statement of Stockholders’ Equity as a reduction in shares.Assessment 7Problem 3: Comprehensive Problem 2Bring together various financial analysis measures and interpret their meaning in order to drawconclusions about various companies.Note that each situation provided is to be considered independently of the others.Situation A: The following tables represent selected data from recent financial statements of Lincolnand Samuelson, Inc. (dollars in thousands of dollars):Problem 3, Table 1: Lincoln and Samuelson, Inc. Selected Items from Balance SheetsAssets (in thousands)December 31, 2012December 31, 2011Current assets: Cash and cashequivalents$4,000$3,400Accounts receivable (net ofallowances of $32 and $28,respectively)$6,500$5,700Selected Income Statement Data for the Year Ended December 31Problem 3, Table 2: Lincoln and Samuelson, Inc. Selected Income Statement DataAccount201220112010Net sales (in millions)$6,020$5,425$5,000Net income (in millions)$300$285$220The company also reported bad debt expense of $62,000 in 2012; $55,000 in 2011; and $49,500 in 2010.Using the data provided, complete the following for Lincoln and Samuelson, Inc.:1. Compute the dollar amount of uncollectible accounts receivable that the company wrote off asuncollectible in 2012. Show all of your work.2. Assuming all sales were on credit, what amount of cash did the company collect on accountsreceivable in 2012? Show all of your work.3. Compute the company’s net profit margin for the three years presented. What does the trendsuggest to you about the company?Assessment 7Situation B: The Israel Manners Entertainment Group uses the allowance approach to estimate bad debtexpense, as is required of all companies with significant sales on accounts receivable. At the end of2012, the Manners Group reported a balance in accounts receivable of $4,350,000 and estimated that$44,000 of its accounts receivable would likely be uncollectible. The allowance for doubtful accounts hasa $1,500 debit balance at year-end, prior to the adjustment needed to raise it to the $44,000 desiredamount. Use this information to answer the following questions:1. How is it possible that the allowance for doubtful accounts has developed a debit balanceinstead of a credit balance?2. What amount of bad debt expense should be recorded for 2012?3. What amount will be reported on the 2012 balance sheet as the net realizable amount ofaccounts receivable?Situation C: At the end of 2012, the unadjusted trial balance of Donovan, Inc. included $6,000,000 inaccounts receivable, a credit balance of $50,000 in the allowance for doubtful accounts, and salesrevenue (all on credit) of $200,000,000. Based on knowledge that the current economy is in distress,Donovan increased its bad debt rate estimate to 0.4 percent on credit sales. Use this information toanswer the following:1. What amount of bad debt expense should be recorded for 2012?2. What amount will be reported on the 2012 balance sheet for the net realizable amount ofaccounts receivable, after being reduced by the balance in the allowance for uncollectibleaccounts?Assessment 7Situation D: BrightStar Company reported the following inventory records for June, 2012:Problem 3, Table 3: BrightStar Company Inventory RecordsDateActivity# of UnitsCost/UnitJune 1Beginning balance200$40June 5Purchase600$42June 8Sale @ $100 per unit500June 17Purchase400June 23Sale @ $100 per unit500$45Selling, administrative, and depreciation expenses for the month were $20,000. BrightStar’s tax rate is35 percent. Use this information and the table above to complete the following:1. Calculate the cost of ending inventory and the cost of goods sold under each of the followingmethods:a. First-in, first-out.b. Last-in, first-out.c. Weighted average.2. Using your answers from question 1 above, answer the following:a. What is the gross profit percentage under the FIFO Method?b. What is net income under the LIFO method?c. Which method would you recommend to BrightStar for tax purposes? Explain your recommendation.d. If BrightStar also used the method that you recommended for tax purposes on its balance sheet,would BrightStar’s current ratio suffer, compared to the use of FIFO?3. BrightStar uses the lower of FIFO cost or market method to value its inventory for reportingpurposes at the end of the month. If inventory had a market replacement value of $44 perunit, what would BrightStar report in its balance sheet for inventory? Why?Assessment 7Situation E: BlackBurn Company purchased the following on January 1, 2012:â€¢ Office Equipment at a cost of $100,000 with an estimated useful life to the company of five years anda residual value of $10,000. The company uses the double-declining-balance method of depreciation forthe equipment.â€¢ Factory equipment at an invoice price of $780,000 plus shipping costs of $20,000. The equipment hasan estimated useful life of 100,000 hours and no residual value. The company uses the units-ofproduction method of depreciation for the equipment.â€¢ A patent at a cost of $450,000 with an estimated useful life of 15 years. The company uses thestraight-line method of amortization for intangible assets with no residual value.Use the information above to complete the following:1. Prepare a partial depreciation schedule for 2012, 2013, and 2014 for the following assets. Roundyour answers to the nearest dollar.a) Office equipment.b) Factory equipment. The company used the equipment for 8,000 hours in 2012; 9,000hours in 2013; and 8,500 hours in 2014.2. On January 1, 2014, BlackBurn altered its corporate strategy dramatically. The company sold thefactory equipment for $700,000 in cash. Record the entry related to the sale of the factoryequipment.3. On January 1, 2014, when the company changed its corporate strategy, its patent had estimatedfuture cash flows of $300,000 and a fair value of $250,000. What would the company report on theincome statement (account and amount) regarding the patent on January 2, 2014? Explain youranswer.
Assessment 7Complete three problems: Problem 1 focuses on working capital and quick ratio, and Probl
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