Chapter 6 Financial Information Analysis & Valuation Questions and Answers

Chapter 6 Financial Information Analysis & Valuation Questions and Answers Which of the following estimates are not always required when calculating depreciation expense? Select all that apply. Salvage value Hasten Corporation has the following metrics for the year. Days sales outstanding: 58.9 Days payables outstanding: 58.3 Days inventory outstanding: 28.8 The cash conversion cycle for the year is: 29.4 T or F In general, in a period of falling prices, LIFO produces higher gross profits than FIFO. True T or F LIFO inventory costing yields more accurate reporting of the inventory balance on the balance sheet. False T or F When a firm uses an accelerated method of depreciation for tax reporting in order to minimize its tax burden, it will not really save any tax dollars in the end because depreciation method merely changes the timing of the depreciation expenses but not the total. False Acadia, Inc. recorded restructuring charges of $188,434 thousand during the year related entirely to anticipated employee separation payments. Acadia, Inc. had never before incurred restructuring charges. At the end of the year, the company's balance sheet included a restructuring accrual of $23,714 thousand. The cash flow effect of Acadia's restructuring during the year was: $164,720 thousand The total restructuring charge accrued was $188,434 thousand of which $23,714 thousand was still unpaid (a liability) at the end of the year. The difference of $164,720 thousand must have been paid in cash during the year. The cash flow effect is $164,720 thousand. Car Facts Inc. reports sales of $15,081,362 thousand and cost of sales of $13,691,824 thousand for the fiscal year ended February 28. The gross profit for the year is: $1,389,538 thousand Gross profit = Sales - COGS = $15,081,362 thousand - $13,691,824 thousand = $1,389,538 thousand. The year-end financial statements of Collette, Inc. reported the following information (in thousands): Year 2 Cost of sales: $1,441,527 Inventories, net: 585,764 LIFO reserve: 4,345 Year 1 Cost of sales: $1,453,051 Inventories, net: 546,745 LIFO reserve: 4,094 The Year 2 average days inventory outstanding is: 143.4 days Average days inventory outstanding = (365 x Avg. Inventory) / COGS = [365 x (($585,764 + $546,745)/2)] / $1,441,527 = 143.4 days In times of falling prices, choosing LIFO over FIFO as an inventory cost method would affect the financial statements as follows: Cost of goods sold will be lower and ending inventory will be higher Fiscal 2018: Gross profit margin % Publix: 30.2% Kroger:22.1% Village Market: 27.7% Number of stores at year-end Publix: 1,235 Kroger: 2,819 Village Market: 31 Sales ($ per square foot) Publix: $652 Kroger: $691 Village Market: $1,188 Sales per store ($ millions) Publix: $31 Kroger: $45 Village Market: $55 Average store size (thousand square feet) Publix: 47 Kroger: 65 Village Market: 46 COGS (per square foot) Publix: $459 Kroger: $541 Village Market: $865 Days inventory outstanding Publix: 27.0 Kroger: 26.2 Village Market: 12.9 On average, which company has the freshest food? Which company is least efficient with its space? Which company has the lowest prices? Which company is busiest? Which company has the smallest stores? On average, which company has the freshest food? - Village Market Which company is least efficient with its space? - Publix Which company has the lowest prices? - Kroger Which company is busiest? - Village Market Which company has the smallest stores? - Village Market T or F Employee severance costs, as part of board-approved restructuring plans, are reported in the income statement even if the actual payment for these costs occurs in subsequent periods. True T or F The percent used up ratio indirectly measures the likelihood of future capital expenditures that the company will have to make. True The year-end financial statements for Pratt, Inc., report the following information: Year ended December 31, (in millions) Year 2: Depreciation expense: $86.8 Property and equipment, net: 565.5 Land: 37.7 Accumulated depreciation: 932.0 Year 1: Depreciation expense: $83.5 Property and equipment, net: 540.8 Land: 40.0 Accumulated depreciation: 917.2 Which of the following estimates the property and equipment's percent-used-up at December 31, Year 2? 64.8% Percent used up = Accumulated depreciation / Average depreciable asset cost = $932.0/ [$565.5 + $932.0 - $37.7 + $540.8 + $917.2 - $40.0) / 2] = 64.8% Aiello, Inc. had the following inventory in its fiscal year. The company uses the FIFO method of accounting for inventory. Beginning Inventory, Jan 1st 260units @ $15.00 Purchase 400units @ $18.00 Purchase 100units @$13.50 Purchase 220units @ $15.75 Ending Inventory, Dec 31: 240 The company's cost of goods sold for its fiscal year is: $12,180.00 *Cost of goods available for sale: ( 260 units x $15) + (400 units x $18) + ( 100 units x $13.50) + ( 220 units x $15.75) = $15,915.00 Hasten Corporation has the following metrics for the year. Amount in days Days sales outstanding 34.7 Days payables outstanding 23.6 Days inventory outstanding 56.1 The cash conversion cycle for the year is: 67.2 days Cash conversion cycle = Days sales outstanding + Days inventory outstanding - Days payable outstanding Which of the following estimates are not always required when calculating depreciation expense? Select all that apply Salvage value Hasten Corporation has the following metrics for the year. Days sales outstanding: 50.4 Days payables outstanding: 63.7 Days inventory outstanding: 30.7 The cash conversion cycle for the year is: 17.4 T or F The cash conversion cycle is defined as: Days sales outstanding - Days inventory outstanding + Days payable outstanding False Rationale: Cash conversion cycle equals Days sales outstanding plus Days inventory outstanding less Days payable outstanding. T or F Increasing inventory turnover rate will improve profitability. False T or F Impairment of long-term assets is determined by comparing the sum of the present value of the asset's expected future cash flows to the asset's net book value. False Central Supply purchased a new printer for $64,125. The printer is expected to operate for nine (9) years, after which it will be sold for salvage value (estimated to be $6,413). How much is the first year's depreciation expense if the company uses the double-declining-balance method? $14,250 Depreciation rate: 2 Straight-line rate (1/Useful life) = 2 × (1/9) Depreciation expense, Year 1: $64,125 × 2 x 1/9 = $14,250 The year-end financial statements of City Health Corporation reported the following information (in millions): Year 2 Year 1 Net sales $168,650 $145,626 Cost of sales 141,236 120,424 Inventories, net 14,760 14,001 The inventory turnover ratio for Year 2 is: 9.82 Inventory turnover = COGS / Average inventory = $141,236 / [($14,760 + $14,001) / 2] = 9.82 Other than raw materials and manufacturing overhead, what is the third component of inventories for manufacturing companies? Direct labor The January 28 (fiscal year-end) financial statements of Collette, Inc. reported the following information (in millions). Year 2: Cost of sales: $1,213,918 Inventories, net: 468,611 LIFO reserve: 3,476 Year 1: Cost of sales: $1,223,622 Inventories, net: 437,396 LIFO reserve: 3,275 If Collette had used the FIFO method of inventory costing, Year 2 COGS would have been: $1,213,717 thousand FIFO COGS = LIFO COGS - Increase in LIFO reserve = $1,213,918 - ($3,476 - $3,275) = $1,213,717 thousand The year-end financial statements for North Railway report the following information: Year 2 Revenue: $19,829 PPE: 67,375 Total Assets: 84,122 Year 1: Revenue: $21,967 PPE: 65,461 Total Assets: 81,703 The annual property, plant and equipment turnover is: 0.30 Turnover = Revenues / Average PPE, net = $19,829 /I $67,375 + $65,461 ) / 2] = 0.3 An asset is impaired when the asset's carrying value is: Greater than the sum of undiscounted expected cash flows. The January 28 (fiscal year-end) financial statements of Collette, Inc. reported the following information (in millions). Year 2 Cost of sales: $1,213,91 Inventories: 468,6118 net LIFO reserve: 3,476 Year 1 Cost of sales: $1,223,622 Inventories: 437,396 net LIFO reserve: 3,275 If Collette had used the FIFO method of inventory costing, Year 2 inventory would have been: $472,087 million FIFO Inventory = LIFO inventory + LIFO reserve = $468,611 million + $3,476 million = $472,087 million