Problem Set of Companies Income - Case Study Example

Problem Set Part Transaction Analysis: Items Effects on net earning for the year No effect 2 No effect 3 Increase by £ 50,000 4 Increase by £500 5 Increase by £ 500 6 Increase by £ 4,000 7 Increase by £ 3,000 8 No effect Part2: Transaction Analysis: # Net Income Total Assets Total Liabilities 1 - + 1,000 - 2 + 2,000 + 2,000 - 3 - 10,000 - + 10,000 4 - 1,000 - 1,000 - 5 - 500 - + 500 6 - 8,000 - + 8,000 7 - 1,000 - + 1,000 8 - 4,000 - + 4,000 9 - 4,000 - - 10 - - + 5,000 11 - + 100,000 - 12 - 22,500 - 22,500 - 13 + 1,000 - - Part 3: MIF Co. Profit and Loss Statement: Income     Sales £283,000   Inventories £82,000         Expenses     Depreciation   £5,000 Depreciation (Non- Factory)   £2,000 Raw materials   £65,000 Salary   £180,000       Profit Before Interest and Tax   £43,000       Interests   £11,000 Tax   £19,000       Net Income   £83,000       Dividends Paid   £33,000       Retained Earnings £50,000   Part 4: Starbucks Corporation: Cash Flows 1. a) Net earnings in 2001 = $181,210 Net earnings in 2002 = $215,073 Therefore % increase of net earning from 2001 to 2002 = 18.69% b) Net Cash provided by operation in 2001 = $456,305 Net Cash provided by operation in 2001 = $477, 685 % increase in ‘Net Cash provided by operations’ = 4.69% c) The net earnings indicate the actual income to the company during the period. This includes only the expenses and the income specific to that particular period. However, the cash from operations includes all the cash inflows and outflows irrespective of the period for which the cash has been received or spent. The primary sources of difference are the depreciation and amortization expenses, deferred taxes and all the accrued expenses. 2. a) Starbucks appears to be in sustained growth phase. It is evident from the steady increase in the net earnings every year (around 20% growth every year). Also, the investing activities are also very stable. The financing activities are also generating steady and substantial cash flows to the company. b) Apart from earnings, Starbuck’s four largest sources of cash in 2002 are Proceeds from sale of common stock under employee stock purchase plan Proceeds from exercise of stock options Sale of available – for – sale securities Maturity of available – for – sale securities Starbuck’s four largest uses of cash in 2002 are Purchase of available – for – sale securities Additions to property, plant and equipment Repurchase of common stock Inventories 3. i) Sales revenue = $ 3,288,908,000 ii) Cash collection from sales = $ 1,203,101,000 Difference = 4. a) Sale of inventory for the year 2002 = $ 1,104,011,000 Purchase of inventory for the year 2002 = $ 1,145,932,000 The difference is mainly due to the sale of previous year’s inventories and the inventories that have been stocked for the next year and appreciated as a current asset. The evidence is present in the consolidated balance sheet in the current assets and also in the inventories in the consolidated cash flow statement. b) Average inventory on hand per store as of the end of 2001 = $ 68,926.17 Average inventory on hand per store as of the end of 2002 = $ 67,828.36 c) Looking at the above information Startbucks has been careful while ordering the inventories and there is no reason to be concerned with the amount of cash that is invested into inventories. 5. Change in inventory over 2001 to 2002 = 18.95% Difference amount in inventories = $ 41,921,000 6. a) Investment into additional property, plant and equipment in 2002= $ 1,235,756,000 b) This can be computed from the balance sheet using the net from plant and equipment, the asset values and the accumulated depreciation values. c) Starbucks finances these investments from the earnings and from the shareholder’s equity that is raised every year. 7. The ‘provision for impairment and assets disposals’ listed as a positive adjustment on Starbuck’s statement of cash flows because the there is a positive cash flow related to asset disposals due to scrap value and there need not be any impairment expenses during the year. 8. The investors need not be concerned about liquidity as there is a steady growth pattern in the company and it is able to increase the cash generated from the financing and investing activities every year. Part 5: uBid co. 1. The company expects to collect $ 3,728,000 ($ 3,615,000 + Allowance $ 113,000) from its customers in the future for sales made before 31st December 1999. 2. uBid wrote-off $ 113,000 as bad debt expenses. This accounts for 98.26 % of the total bad debts of $ 115,000. 3. Fixed Asset Turnover = Net Fixed Assets / Total Revenue = 4,543,000 / 204,925,000 = 2.22 % Hence the Fixed Asset Turnover rate is 2.22%. 4. a. For sales of merchandise on hand in inventory, the revenue is THE TOTAL AMOUNT BID BY THE CUSTOMER b. For sales of merchandise that uBid purchases, the revenue is THE TOTAL AMOUNT BID BY THE CUSTOMER 5. a. Amount of Profit earned if uBid recognized the gross profit as the revenue in both the cases of sales, the revenue would have been $ 19,127,000 6. Fixed Asset Turnover = Net Fixed Assets / Total Revenue = 4,543,000 / 19,127,000 = 23.75 % The fixed asset turnover rate in this case is 23.75%. Part 6: Martha Stewart: Revenue Recognition 1. a. The company recognizes revenue on the magazines when the magazines are sold to the retail outlets and also when a customer subscribes to the magazine directly. b. Magazine Subscription Sale of a Subscription (12 * $ 24) $ 288 The company would record this transaction under revenues when a customer buys a one year subscription. Cost of Revenues (No. of Subscribers * 0.95) $ 0.95 times the no. of magazines The company would record this transaction under cost of sales when a monthly magazine is sent to the customers. c. The customers who have ordered subscriptions till November 31, 2002 will come under the future delivery of magazines which were paid for already - $ 7,833,000. d. Cash received for Subscriptions - $ 147,452,000 2. a. The nature of revenue earned from television is mainly ‘Advertising Revenue’. b. The company recognizes revenue when payment is made to Martha Stewart for appearing in the CBS This Morning show. The company also recognizes revenue when payments are made for the advertisements booked (to appear in the shows produced by Martha Stewart). c. The company should record the transactions related to the production development under the operating expenses of the current year. d. ‘Deferred television production costs’ represents the amount receivable for the television show when the show will be aired (by way of advertisements booked now). Part 7: Electronic Arts: Accounts Receivable 1. Total amount of customers to EA as of March 31st 2003 =$ 164,634 Expected collections =$ 82,083 2. a) Provision for bad debts $ 95 million Cr Debtors/ receivable a/c $ 95 million b) Amount written off = $ 7,058,000 3. Estimated Cash collection for 2003 = $ 885,332 4. Account write - off is a major decision to be made by management. It is essential that the management keeps in mind the various aspects. It is essential that the account is confirmed to be uncollectable either by a collection agency or if the debtor has filed for bankruptcy and the court decides that the company would get little or nothing of the money back. 5. Accounts receivable that is not expected = $7058 Change in percentage over the previous year =24.60% The percentage change over the previous year shows that there is a decrease and the number of bad debts is decreasing over time. This sows that the customers are more loyal to the company, and the popularity of the company is growing. 6. a) Using Gross Accounts receivable: ARDOH = 118.7 days b) Using Net of allowance for doubtful account: ARDOH = 182.0 days 7. There are various assumptions taken into consideration. The estimated collection period and the annual receivables. Part 8: LA Fitness Fixed Assets 1. LA Fitness paid £ 10,962,000 to purchase additional fittings, fixtures and equipments. 2. The average useful life of the short leasehold and buildings is 22 (21.7) years. 3. Approximately 20 years of this life is remaining. 4. a. The accumulated depreciation on this Freehold and Long Leasehold and Buildings is £ 37,000. b. On these disposals, LA Fitness recognized a Total GAIN of £ 3,891,000. Part 9: LIFO and FIFO LIFO: Date Purchases Sales Total   Price Per Unit No. of Units Value Price Per Unit No. of Units Value Price Per Unit No. of Units Value March     1             20 800 16000   8       20 600 12000 20 200 4000   15 22 400 8800       20 200 4000               22 400 8800   22 24 400 9600       20 200 4000               22 400 8800               24 400 9600   27       24 400 9600 20 200 4000               22 400 8800 FIFO: Date Purchases Sales Total   Price Per Unit No. of Units Value Price Per Unit No. of Units Value Price Per Unit No. of Units Value March     1             20 800 16000   8       20 600 12000 20 200 4000   15 22 400 8800       20 200 4000               22 400 8800   22 24 400 9600       20 200 4000               22 400 8800               24 400 9600   27       20 200 4000 22 200 4400         22 200 4400 24 400 9600 1. Cost of Inventory at the end of March – LIFO (20 * 200) + (22 * 400) = $ 12,800 2. Cost of Inventory at the end of March – FIFO (22 * 200) + (20 * 400) = $ 14,000 3. Cost of Goods Sold – LIFO (22 * 400) + (24 * 400) = $ 19,200 Tax = $ 2,560 4. Cost of Goods Sold – FIFO (22 * 400) + (24 * 400) = $ 19,200 Tax Problem Set 2: Problem Set 2: Part 1: Statement of Chat Flow: 1. Looking at the Cash Flow statement it is evident that Krispy Kreme is in a stage of fast growth. The company’s cash flow imply that the company has a very strong liquidity position and is capable of generating sufficient cash to manage its expenses and also focus on its expansion activities in the near future. 2. Cash received from sale of property and equipment = $ 1,419,000 3. The company received $ 65,637,000 following the issuance (offering) of stock. Uses of the funds: a) Purchase of property and equipment b) Investments in unconsolidated joint ventures c) Purchase of Investments net 2. The amount of income taxes expensed is higher than the actual income taxes paid. Income Taxes expensed = $ 2,312,000 Income Taxes Paid = $ 644,000 Therefore, the taxes expensed is higher by $ 1,668,000 3. Original cost of property and equipment = $ 1,900,000 Proceeds from sale of property and equipment = $ 1,419,000 Net Loss on sale of Property and Equipment = $ 20,000 Therefore, depreciation on property and equipment = $ 461,000 Part 2: Revenue Recognition, Accounts Receivable, Un-collectable Accounts 1. NYT recognizes the revenue of sales of newspapers at the time of sale and is included in the consolidated statement of income on a prorate basis as per the terms of the subscription. 2. Paid up capital unrecognized =$ 16,738,000 3. % of outstanding accounts receivable turned bad = 22.93% 4. Assuming the sale of newspapers is $765,000 Total revenue recognized = 5. Assuming: Total revenue for 2000 were =$3,490,000 Accounts receivable written off =$37,000 Then; a) NYT bad debts expenses = $3453000 b) Collection period from customers = Part 3: Long – Term Assets: 1. The price of the Buildings and Equipments as of Dec 2000 = 2,216,046 Assumed Depreciation = 155,000 Therefore, the actual price of the buildings and equipments = 2,371,046 2. Land possessed by the company as of Dec 1999 = 67,149 Land possessed by the company as of Dec 2000 = 72,228 Therefore, the extra money paid to buy the land during the year = 5,079 3. Estimate the average useful life of the buildings and equipment 4. Assuming: NYT purchased additional equipment of =$185,300 NYT sold one printing equipment in cash =$191,171 Therefore; Original cost of printing equipment = $197042 Accumulated depreciation at time of sale = $39,408 Part 4: Long Term Bonds: a) Interest expenses for 9.375% Debentures due 2011 during 2002 = 28.125 b) Coupon payments for 9.375% Debentures due 2011 during 2002 = 16.425 c) Interest expense for zero- coupon bonds during 2001 = 21.024 d) Amortization of discount for the zero-coupon bonds during 2002 = 12% e) Assuming: Coupons paid on 30/06 and 31/12 Company retires the bonds on 31 December 2001 Market interest rate is 11% Therefore the gain/loss from the bond retirement = 1.752 f) Amount paid to retire 6% debentures =$ 18,000,000 Part 5: Alza Company 1. 2. Effective interest rate = 3. 4. Zero Coupon Bonds, $ 1000 face value Due July 1, 2014, effective rate 5. Investors who are prefer to invest safely and who are looking for security would invest in zero coupon bonds. The bonds provide the entire face value at maturity and are very liquid i.e. it can be sold in the secondary market. These types of bonds generally attract small investors as the denominations are as low as $1000. Also these bonds can be purchased at values lower than the face value, hence they attract small investors. Part 6: Aztar Hotels and Casino – Leases 1. Total amount of payment for all leases = $158+ $4502 = $4660 2. a) Total actual owing under capital lease obligation as of Jan 2003= $158 Amount of current liability = $ Amount of long-term liability = $ b) Total net owned under capital lease as of January 2003 = 104 c) The amounts of capital lease differ from industry to industry. It is difficult to explain the variation among firms, to decide weather to use capital leasing or operating leasing. Specially in industries like airline or gambling. This makes it difficult to compare two firms that use two different methods, because performance measures and ratios can be quite different simply due to the accounting. 3. Assuming; Discount rate 12% Payments made at end of each year After 2007, minimum lease payment each year is $21,000 for 4 years i.e. $84,000 Present value of minimum lease payments for operating leases = $53,383.52 4. Assuming Aztar capitalized all the operating leases to make them capital leases a) Effect on short term debt = Reduces b) Effect on long term debt = Increases c) Effects on property, plant and equipment = remains the same 5. Assuming all the operating leases were classifies as capital at end of 2 January 2003 a) Increase in interest expenses for next year = $6406 b) Decrease in rental expenses for next year = $12770 c) Assuming the life for PPE is 9 years: Additional depreciation for next year = $ 51, 958 d) Assuming the tax rate at 40% Change in Aztar’s net income in 2003 if leases are capitalized = Part 7: Trump Hotels and Casino Resorts Inc. 1. The 11 ¼ % First mortgage notes were issued at a discounted value of 95.70% of the face value, yielding an interest rate of 12%. 2. Cash (Dr) $ 1.2 billion To First Mortgage notes a/c $ 1.2 billion 3. The face value of the Trump AC Funding II 11 ¾ % First Mortgage Notes is $75,000,000. They were issued at a discounted value of 72,643,000. 4. The Trump AC Funding II bonds were issued at discount to get additional capital for the company. This could be one of the reasons that the company agreed to issue at a discounted rate. 5. Cash a/c (Dr) $ 1148400000 To First Mortgage Notes A/c $1148400000 6. Cash a/c (Dr) $ 72643000 To First Mortgage II Notes A/c $72643000 7. Unamortized discount for First Mortgage II Notes = $2068000 8. $ 1015000 gain from repurchase of Castle PIK Notes 9. – 10. At the rate of 12% on bonds Trump would need to pay $ 14,461,800 to repurchase all the bonds. 11. - Part 8: Owners equity Description Common Stock Additional Paid In capital Shares repurchase Retained Earning Total share Equity   (£000) (£000) (£000) (£000) (£000) Balance 1/1/2002 2500 20239 - 15549 38288 31/01/2002           31/03/2002   160        30/04/2002 -44000         30/06/2002     8000     31/10/2002 5000         30/12/2002       -8500   31/12/2002           Read More