Financial Accounting
3rd Edition
ISBN: 9780133791129
Author: Jane L. Reimers
Publisher: Pearson Higher Ed
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Chapter 4, Problem 1IE
1.
To determine
Enlist the revenue of Company I for last three years.
2.
To determine
Analyze the general credit policy of Company I.
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Identify the ratio that is relevant to answering each of the following questions.a. How much net income does the company earn from each dollar of sales?b. Is the company financed primarily by debt or equity?c. How many dollars of sales were generated for each dollar invested in fixed assets?d. How many days, on average, does it take the company to collect on credit sales made tocustomers?e. How much net income does the company earn for each dollar owners have invested in it?f. Does the company have sufficient assets to convert into cash for paying liabilities as theycome due in the upcoming year?
Use the information provided below to answer the following questions:
Comment on the financial result of the company.
Is the company efficient in its collection of debts arising from credit sales? Motivate your
answer by using an appropriate ratio.
Will creditors allow credit under distress business conditions to Silverstone Limited?
Explain your answer with the relevant ratio.
INFORMATION
Extracts of the statement of comprehensive income and statement of financial position of Silverstone Limited for 2021 and 2020 are as follows:
Statement of Comprehensive Income for the year ended 31 December:
2021 (R)
2020 (R)
Sales
6 400 000
5 440 000
Cost of sales
4 000 000
3 264 000
Gross profit
2 400 000
2 176 000
Operating expenses
960 000
1 056 000
Operating profit
1 440 000
1 120 000
Profit before tax
1 280 000
1 040 000
Profit after tax
896 000
728 000
Statement of Financial…
Certain financial ratios for The Gap for its most recent year are given below, along with the average ratios for its industry. Based on those ratios, answer the following.
1) Does The Gap seem to prefer to finance its assets with debt or with equity? How can you tell? What percent of its assets are funded with debt? What percent of its assets are funded with equity?
2) A supplier to The Gap sells merchandise to The Gap and asks to be paid within 60 days. While any of The Gap’s financial ratios might be of interest to the supplier, which of the ratios listed below do you think would likely be the most important one to the supplier? Why?
3) Which of the ratios presented suggest that, compared to its industry, The Gap may have a problem controlling its operating expenses? How can you tell? Your answer should clearly indicate that you understand why the ratio that you chose answers this question.
Here is the data for The Gap and its industry.
Financial Ratios…
Chapter 4 Solutions
Financial Accounting
Ch. 4 - Prob. 1YTCh. 4 - Prob. 2YTCh. 4 - Suppose at the end of the year Pendleton Corp.s...Ch. 4 - Prob. 4YTCh. 4 - Prob. 5YTCh. 4 - Prob. 6YTCh. 4 - Prob. 7YTCh. 4 - Prob. 1QCh. 4 - Prob. 2QCh. 4 - Prob. 3Q
Ch. 4 - Prob. 4QCh. 4 - What does true cash balance refer to?Ch. 4 - Identify and explain the financial statements on...Ch. 4 - Describe how accounts receivable arise. What does...Ch. 4 - Prob. 8QCh. 4 - Define net realizable value, book value, and...Ch. 4 - Explain the difference between the direct...Ch. 4 - If a company uses the allowance method of...Ch. 4 - Describe the two allowance methods used to...Ch. 4 - Which method of calculating the allowance for...Ch. 4 - Which method of calculating the allowance for...Ch. 4 - What are the advantages and disadvantages of...Ch. 4 - What is the difference between accounts receivable...Ch. 4 - What is the formula to calculate the accounts...Ch. 4 - How does a firm use its accounts receivable...Ch. 4 - Prob. 19QCh. 4 - Prob. 20QCh. 4 - Prob. 1MCQCh. 4 - Prob. 2MCQCh. 4 - Prob. 3MCQCh. 4 - Prob. 4MCQCh. 4 - Prob. 5MCQCh. 4 - Prob. 6MCQCh. 4 - Prob. 7MCQCh. 4 - Prob. 8MCQCh. 4 - Prob. 9MCQCh. 4 - Prob. 1SEACh. 4 - Prob. 2SEACh. 4 - Prob. 3SEACh. 4 - Prob. 4SEACh. 4 - Prob. 5SEACh. 4 - Prob. 6SEACh. 4 - Prob. 7SEACh. 4 - Prob. 8SEACh. 4 - Prob. 9SEACh. 4 - Prob. 10SEBCh. 4 - Prob. 11SEBCh. 4 - Prob. 12SEBCh. 4 - Prob. 13SEBCh. 4 - Prob. 14SEBCh. 4 - Prob. 15SEBCh. 4 - Prob. 16SEBCh. 4 - Prob. 17SEBCh. 4 - Prob. 18SEBCh. 4 - Prob. 19EACh. 4 - Prob. 20EACh. 4 - Prob. 21EACh. 4 - Prob. 22EACh. 4 - Prob. 23EACh. 4 - Prob. 24EACh. 4 - Prob. 25EACh. 4 - Prob. 26EACh. 4 - Prob. 27EACh. 4 - Prob. 28EACh. 4 - Prob. 29EACh. 4 - Prob. 30EACh. 4 - Prob. 31EACh. 4 - Prob. 32EBCh. 4 - Prob. 33EBCh. 4 - Prob. 34EBCh. 4 - Prob. 35EBCh. 4 - Prob. 36EBCh. 4 - Prob. 37EBCh. 4 - Prob. 38EBCh. 4 - Prob. 39EBCh. 4 - Prob. 40EBCh. 4 - Prob. 41EBCh. 4 - Prob. 42EBCh. 4 - Prob. 43EBCh. 4 - Prob. 44EBCh. 4 - Prob. 45PACh. 4 - Prob. 46PACh. 4 - Prob. 47PACh. 4 - Prob. 48PACh. 4 - Prob. 49PACh. 4 - Prob. 50PACh. 4 - Prob. 51PACh. 4 - Prob. 52PACh. 4 - Prob. 53PBCh. 4 - Prob. 54PBCh. 4 - Prob. 55PBCh. 4 - Prob. 56PBCh. 4 - Prob. 57PBCh. 4 - Prob. 58PBCh. 4 - Prob. 59PBCh. 4 - Prob. 60PBCh. 4 - Prob. 1FSACh. 4 - Prob. 2FSACh. 4 - The following information has been adapted from...Ch. 4 - Prob. 1CTPCh. 4 - Prob. 2CTPCh. 4 - The information given here was taken from Yahoo!...Ch. 4 - Prob. 1IECh. 4 - Prob. 2IECh. 4 - The information given here was taken from Yahoo!...
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- Consider again the example introduced in Section 7.5 of a credit card company that has a database of information provided by its customers when they apply for credit cards. An analyst has created a multiple regression model for which the dependent variable in the model is credit card charges accrued by a customer in the data set over the past year (y), and the independent variables are the customers annual household income (x1), number of members of the household (x2), and number of years of post-high school education (x3). Figure 7.23 provides Excel output for a multiple regression model estimated using a data set the company created. a. Estimate the corresponding simple linear regression with the customers annual household income as the independent variable and credit card charges accrued by a customer over the past year as the dependent variable. Interpret the estimated relationship between the customers annual household income and credit card charges accrued over the past year. How much variation in credit card charges accrued by a customer over the past year is explained by this simple linear regression model? b. Estimate the corresponding simple linear regression with the number of members in the customers household as the independent variable and credit card charges accrued by a customer over the past year as the dependent variable. Interpret the estimated relationship between the number of members in the customers household and credit card charges accrued over the past year. How much variation in credit card charges accrued by a customer over the past year is explained by this simple linear regression model? c. Estimate the corresponding simple linear regression with the customers number of years of posthigh school education as the independent variable and credit card charges accrued by a customer over the past year as the dependent variable. Interpret the estimated relationship between the customers number of years of posthigh school education and credit card charges accrued over the past year. How much variation in credit card charges accrued by a customer over the past year is explained by this simple linear regression model? d. Recall the multiple regression in Figure 7.23 with credit card charges accrued by a customer over the past year as the dependent variable and customers annual household income (x1), number of members of the household (x2), and number of years of post-high school education (x3) as the independent variables. Do the estimated slopes differ substantially from the corresponding slopes that were estimated using simple linear regression in parts (a), (b), and (c)? What does this tell you about multicollinearity in the multiple regression model in Figure 7.23? e. Add the coefficients of determination for the simple linear regression in parts (a), (b), and (c), and compare the result to the coefficient of determination for the multiple regression model in Figure 7.23. What does this tell you about multicollinearity in the multiple regression model in Figure 7.23? f. Add age, a dummy variable for sex, and a dummy variable for whether a customer has exceeded his or her credit limit in the past 12 months as independent variables to the multiple regression model in Figure 7.23. Code the dummy variable for sex as 1 if the customer is female and 0 if male, and code the dummy variable for whether a customer has exceeded his or her credit limit in the past 12 months as 1 if the customer has exceeded his or her credit limit in the past 12 months and 0 otherwise. Do these variables substantially improve the fit of your model?arrow_forwardConsider again the example introduced in Section 4.5 of a credit card company that has a database of information provided by its customers when the customers apply for credit cards. An analyst has created a multiple regression model for which the dependent variable in the model is credit card charges accrued by a customer in the data set over the past year (y), and the independent variables are the customers annual household income (x1), number of members of the household (x2), and number of years of posthigh school education (x3). Figure 4.23 provides Excel output for a multiple regression model estimated using a data set the company created. a. Estimate the corresponding simple linear regression with the customers annual household income as the independent variable and credit card charges accrued by a customer over the past year as the dependent variable. Interpret the estimated relationship between the customers annual household income and credit card charges accrued over the past year. How much variation in credit card charges accrued by a customer over the past year does this simple linear regression model explain? b. Estimate the corresponding simple linear regression with the number of members in the customers household as the independent variable and credit card charges accrued by a customer over the past year as the dependent variable. Interpret the estimated relationship between the number of members in the customers household and credit card charges accrued over the past year. How much variation in credit card charges accrued by a customer over the past year does this simple linear regression model explain? c. 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What does this tell you about multicollinearity in the multiple regression model in Figure 4.23? e. Add the coefficients of determination for the simple linear regression in parts a, b, and c, and compare the result to the coefficient of determination for the multiple regression model in Figure 4.23. What does this tell you about multicollinearity in the multiple regression model in Figure 4.23? f. Add age, a dummy variable for gender, and a dummy variable for whether a customer has exceeded his or her credit limit in the past 12 months as independent variables to the multiple regression model in Figure 4.23. Code the dummy variable for gender as 1 if the customers gender is female and 0 if male, and code the dummy variable for whether a customer has exceeded his or her credit limit in the past 12 months as 1 if the customer has exceeded his or her credit limit in the past 12 months and 0 otherwise. 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- 2. Using the following select financial statement information from Black Water Industries, compute the accounts receivable turnover ratios for 2018 and 2019 (round answers to two decimal places). What do the outcomes tell a potential investor about Black Water Industries? Year 2017 2018 2019 BLACK WATER INDUSTRIES Net Credit Sales $685,430 700,290 768,500 Ending Accounts Receivable $330,250 360,450 401,650arrow_forwardSuppose you work in the loan department of Third National Bank.Byron Blakely, the owner of Byron’s Beauty Solutions, has come to you seeking a loan for$500,000 to expand operations. He proposes to use accounts receivable as collateral for the loanand has provided you with the following information from the company’s most recent financialstatements: Requirement1. Analyze the trends of sales, days’ sales outstanding, and cash collections from customersfor 2019 and 2018. Would you make the loan to Blakely? Support your decision with factsand figures. Assume there are no write-offs in 2018 and 2019.arrow_forwardYour client, Corp. B, is a trading or distributor of home living product. Corp B import goods and sells them to its customers who are retail stores. In the current year, Corp. B's financial statements reported an increase in net income. The increase was driven by increased sales. Corp B's accounts receivable also increased rapidly. Corp B reportedly has many new customers.You are informed that there may be a fictitious revenue generated using fictitious customers. Corp B makes fictitious credit sales using bogus customers, and when receivables are due, management make kiting in order to look like the fictitious accounts receivable paid by their customer. Question:a. Explain how the fraud scheme can be carried out by Corp B?b. What kind of audit procedure will you use to examine for possible kiting?arrow_forward
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