DF: ACCOUNTING PRINC 14E WPNGEC 1 SEM
14th Edition
ISBN: 9781119709947
Author: Weygandt
Publisher: WILEY
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Read the following case study and answer the questions that follow
CORPORATE GOVERNANCE FAILURE IN THE LEHMAN BROTHERS On September 15, 2008, Lehman Brothers filed for bankruptcy. With $639 billion in assets and $619 billion in debt, Lehman's bankruptcy filing was the largest in history, as its assets far surpassed those of previous bankrupt giants such as WorldCom and Enron. Lehman was the fourth-largest U.S. investment bank at the time of its collapse, with 25,000 employees worldwide. Lehman's demise also made it the largest victim of the U.S. subprime mortgage-induced financial crisis that swept through global financial markets in 2008. Lehman's collapse was a seminal event that greatly intensified the 2008 crisis and contributed to the erosion of close to $10 trillion in market capitalization from global equity markets in October 2008 – the biggest monthly decline on record at the time.
The Beginning of the End for Lehman In 2007, Lehman underwrote more mortgage-backed securities…
• Last year, J&H Corp. reported a book value of $700 million in current assets, of which 15% is cash, 17% is short-term investments,
and the rest is accounts receivable and inventory.
• The company reported $595.0 million of current liabilities including accounts payable and accruals. Interestingly, the company had no
notes payable claims last year. There were no changes in the accounts payables during the reporting period.
• The company, however, invested heavily in plant and equipment to support its operations. It reported a book value of $1,120 million
in long-term assets last year.
Income Statement For the Year Ended on December 31 (Millions of dollars)
J&H Corp.
$1,500
1,200
60
Net sales
Operating costs, except depreciation and amortization
Depreciation and amortization
Total operating costs
Operating income (or EBIT)
Less: Interest
Earnings before taxes (EBT)
Less: Taxes (40%)
Net income
1,260
$240
24
$216
86
$130
Industry Average
$1,875
1,500
75
1,575
$300
45
$255
102
$153
Based…
(Related to Checkpoint 4.3) (Profitability analysis) Last year the P. M. Postem Corporation had sales of $401,000, with a cost of goods sold of $113,000. The firm's operating expenses were
$126,000, and its increase in retained earnings was $67,380. There are currently 24,000 shares of common stock outstanding, the firm pays a $1.58 dividend per share, and the firm has no
interest-bearing debt.
a. Assuming the firm's earnings are taxed at 35 percent, construct the firm's income statement.
b. Compute the firm's operating profit margin.
a. Assuming the firm's earnings are taxed at 35%, construct the firm's income statement.
Complete the income statement below: (Round to the nearest dollar.)
Income Statement
Revenues
Cost of Goods Sold
Gross Profit
Operating Expenses
Net Operating Income
$
$
$
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- In an effort to analyze Clockwork Company finances, Jim realized that he was missing the company's net profits after taxes for the current year. Find the company's net profits after taxes using the following information Return on equity = 10.5% Debt ratio = 35% Total Asset Turnover = 2 Cost of Goods Sold = R110,000 Gross Profit Margin = 0.35 Sales = 161538.46arrow_forward(Related to Checkpoint 4.3) (Profitability analysis) Last year the P. M. Postem Corporation had sales of $434,000, with a cost of goods sold of $113,000. The firm's operating expenses were $126,000, and its increase in retained earnings was $92,100. There are currently 21,000 shares of common stock outstanding, the firm pays a $1.65 dividend per share, and the firm has no interest-bearing debt. a. Assuming the firm's earnings are taxed at 35 percent, construct the firm's income statement. b. Compute the firm's operating profit margin. Complete the income statement below: (Kouna to the nearest dollar.) Income Statement Revenues Cost of Goods Sold Gross Profit Operating Expenses Net Operating Income Interest Expense Earnings before Taxes Income Taxes Net Income $ $ $ $ $ CEarrow_forwardAt the end of 2022, Shah Corp. underestimated its annual bad debts expense by $50,000. What is the effect of this error, if any, on total assets and total stockholders’ equity on 12/31/22? Total assets and total stockholders’ equity are both overstated by $50,000. Total assets and total stockholders’ equity are both understated by $50,000. Total assets and total stockholders’ equity are both correctly stated.arrow_forward
- An annual report for PepsiCo contained the following information (in millions of U. S. dollars): Net earnings.. Depreciation and amortization .2,689 The decrease in trade receivables. .250 The decrease in inventories. The decrease in prepayments. Increase in trade payables.. The decrease in taxes payable .9,7 Cash dividends paid.. Repurchase of shares.. Required: 1. Compute the cash flows from operating activities for PepsiCo by using the indirect method. .$6,214 .144 .89 .548 .3,305 .3,226 2. Compute the quality of earnings ratio. 3. What were the major reasons that Pepsi's quality of earnings ratio did not equal 1.0?arrow_forwardWhich of the following statements is the most reasonable conclusion from the given information below of ABC Company? Liabilities: P430,000 Industry average assets: P1,500,000 Equity: P415,000 Industry average liabilities: P630,000 ABC Company's debt ratio is above the industry average, which suggests it is using less debt to finance its assets than the (A average firm in the industry. ABC Company's debt ratio is below the industry average, which suggests it is using less debt to finance its assets than the (B) average firm in the industry. ABC Company's debt ratio is below the industry average, which suggests it is using more debt to finance its assets than the average firm in the industry. ABC Company's debt ratio is above the industry average, which suggests it is using more debt to finance its assets than the average firm in the industry.arrow_forwardToshIba, EY (LO 1, 2, 3) In 2015, the business press reported that Japan’s Toshiba Corp. over stated its operating profit by 151.8 billion yen ($1.22 billion) over several years through accounting irregularities involving top management. This overstatement represents approximately one-third of Toshiba’s pre-tax profits during the misstatement period. Toshiba had a corporate culture in which one could not go against the wishes of superiors. An investigation report noted that when top management presented ‘challenges’, division presidents, line managers and employees below them continually carried our inappropriate accounting practices to meet targets in line with the wishes of their superiors. Improper accounting included overstatements and booking profits early or pushing back the recording of losses or charges, and such steps often led to even higher targets being set for divisions in the following period. The report said much of the improper accounting, stretching back to fiscal year 2008, was intentional and would have been difficult for auditors to detect. The audit firm during this misstatement period was EY (Ernst & Young ShinNihon) who incurred significant reputational damage after they were accused of failing to detect the misstatement and fined $17.4 million by Japanese regulators. The investigation into Toshiba’s accounting practices was initially limited to its home country. However, in 2016 the U.S. Justice Department and the Securities and Exchange Commission began looking into the case since part of the alleged fraud involved a Toshiba unit based in the US (Westinghouse Electric Company). a. Based on this limited information, does this case represent a business failure, an audit failure, or both? b. Should auditors be held liable if their client’s business fails or if the financial statements contain a fraud that the auditors did not detect? c. Under what law would the SEC be likely to pursue this case?arrow_forward
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