Chapter 14 Solution

7/22/2019 Chapter 14 Solution

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Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Fifth Canadian Edition

Solutions Manual 14-1 Chapter 14

Copyright 2012 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Posted with permission from John Wiley & Sons Canada, Ltd.

CHAPTER 14

Performance Measurement

EXERCISE 14-2

(a) Homburgs sustainable income is the profit from continuing operations of $18,323thousand. This is the loss of $88,054 thousand plus the loss from its discontinuedoperations of $106,377 thousand.

(b) The loss of $106,377 thousand from Homburgs discontinued operations would bereported in its income statement, after profit from continuing operations.

The current assets held for sale of $144,247 thousand would be reported in the currentasset section of the statement of financial position, and the current liabilitiesassociated with the assets held for sale would be classified in the current liabilitiessection.


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EXERCISE 14-4

(a) DRESSAIRE INC.

Horizontal Analysis of Statement of Financial Position

(% of base-year amount)

2012 2011 2010

Current assets 120.0 80.0 100.0Non-current assets 133.3 116.7 100.0Current liabilities 107.7 138.5 100.0Non-current liabilities 110.0 70.0 100.0Common shares 150.0 115.0 100.0Retained earnings 158.8 141.2 100.0


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Kimmel, Weygandt, Kieso, Trenholm Financial Accounting, Fourth Canadian Edition




EXERCISE 14-4 (Continued)

(b)DRESSAIRE INC.

Horizontal Analysis of Statement of Financial Position

(% change between periods)

2012 Increase (Decrease) 2011 Increase (Decrease) 2010

Amount % Amount %

Assets

Current assets

Non-current assets

Total assets

$120,000

400,000

$520,000

$ 40,000

50,000

$90,000

50.0%

14.3%

20.9%

$ 80,000

350,000

$430,000

$(20,000))

50,000)

$ 30,000)

(20.0)%

16.7 %

7.5 %

$100,000

300,000

$400,000

Liabilities and Shareholders Equity

Liabilities

Current liabilities

Non-current liabilities

Total liabilities

$ 70,000

165,000

235,000

$(20,000)

60,000

40,000

(22.2)%

57.1%

20.5%

$ 90,000

105,000

195,000

$ 25,000

(45,000)

(20,000)

38.5%

(30.0%)

(9.3%)

$ 65,000

150,000

215,000

Shareholders equity

Common shares

Retained earnings

Total shareholders equity

Total liabilities and

shareholders equity

150,000

135,000

285,000

$520,000

35,000

15,000

50,000

$90,000

30.4%

12.5%

21.3%

20.9%

115,000

120,000

235,000

$430,000

15,000

35,000

50,000

($30,000)

15.0%

41.2%

27.0%

7.5%

100,000

85,000

185,000

$400,000


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Solutions Manual 14-4 Chapter14



EXERCISE 14-5

FLEETWOOD CORPORATION

Vertical Analysis of Income Statement

2012 2011

Amount Percent Amount Percent

Net sales

Cost of goods sold

Gross profit

Operating expenses

Profit before income tax

Income tax expense

Profit

$800,000

550,000

250,000

175,000

75,000

15,000

$ 60,000

100.0%

68.7%

31.3%

21.9%

9.4%

1.9%

7.5%

$600,000

375,000

225,000

125,000

100,000

20,000

$ 80,000

100.0%

62.5%

37.5%

20.8%

16.7%

3.3%

13.4%


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SOLUTIONS TO PROBLEMS

($ in millions)

(a) Before Discontinued Operations

Ratio 2010 2009 2008 2007 2006

Return on

common

shareholders

equity

$572

$8,218

70$512

$7,418

69

$1,715

$6,374

269

$1,086

$5,123

212

$601

$4,316

139Return on assets $572

$22,404

26$512

$22,528

23

$1,715

$20,115

85

$1,086

$17,616

62

$601

$15,873

38Profit margin $572

$5,411

106$512

$4,203

122

$1,715

$7,424

231

$1,086

$5,583

195

$601

$3,936

153

After Discontinued Operations

Ratio 2010 2009 2008 2007 2006

Return oncommon

shareholders

equity

$1,197$8,218

146$536

$7,418

72$1,715

$6,374

269$1,086

$5,123

212$601

$4,316

139Return on assets $1,197

$22,404

53

$536

$22,528

24

$1,715

$20,115

85

$1,086

$17,616

62

$601

$15,873

38Profit margin $1,197

$5,411

221

$536

$4,203

128

$1,715

$7,424

231

$1,086

$5,583

195

$601

$3,936

153

PROBLEM 14-5A


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PROBLEM 14-5A (Continued)

(b) Nexens profitability after discontinued operations improved substantially in2007 and 2008, dropped significantly in 2009 and improved again in 2010.For all three ratios, the 2010 profitability showed an increase over the 2006levels.

We get a difference picture of profitability using profits from continuingoperations. Profitability increased substantially in 2007 and 2008 for all threeratios. This is due to the fact that the company did not have discontinuedoperations in those years and the company experienced growth in profit. In2009, profitability from continuing operations fell sharply for all three ratiosand remained at essentially the same level in 2010. Return on equity andreturn on assets showed a slight increase in 2010, but the profit margin

showed a decrease in 2010.

(c) An analysis on profitability before discontinued operations is more relevant toinvestors as it provides a better indication as to how the company willperform in future periods.


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(a)2012 2011

1. Current ratio $180,000

$240,00008 :1 $150,000

$165,00009 :1

2. Receivables

turnover

$700,000

[$60,000$49,5002

]128 times $450,000

[$49,500$52,8002

]88 times

3. Inventory

turnover

$450,000

(

$100,000$85,0002 )

49 times $300,000

(

$85,000$64,0002 )

40 times

4. Debt to total

assets$240,000

$735,000327 $165,000

$590,000280

5. Times interest

earned

$100,000

$10,000100 times $66,000

$4,000165 times

6. Cash total

debt coverage

$102,600

($240,000

$165,000

2 )

05 times $119,600

($165,000

$50,000

2 )

11 times

7.Return on

assets

$72,000

($735,000$590,0002

)109 $49,600

($590,000 $433,0002

) 97

8. Profit margin $72,000

$700,000103 $49,600

$450,000110

* 2. Receivables turnoverGross accounts receivable:2012: $55,000 + $5,0002011: $45,000 + $4,5002010: $48,000 + $4,800

PROBLEM 14-6A


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PROBLEM 14-6A (Continued)

(a) (Continued)

2012 2011

9. Asset

turnover

$700,000

($735,000$590,0002

)11 times $450,000

($590,000$433,0002

)09 times

10. Gross profit

margin

$250,000

$700,000357 $150,000

$450,000333

(b) 1. Current ratio Unfavourable2. Receivables turnover Favourable3. Inventory turnover Favourable4. Debt to total assets Unfavourable5. Times interest earned Unfavourable6. Cash total debt coverage Unfavourable7. Return on assets Favourable8. Profit margin Unfavourable9. Asset turnover Favourable10. Gross profit margin Favourable


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(a) McDonalds is more liquid given its high current ratio and higherreceivables turnover. McDonalds has a current ratio that is higher than

Burger Kings and higher than the industry average Its receivablesturnover is higher than Burger Kings but is significantly lower than theindustry average. However, its inventory turnover is significantly higherthan the industry average.

(b) McDonalds appears to be more solvent than Burger King. Its debt to totalassets ratio indicates more of its assets are financed by debt than BurgerKings, although both companies are better than the industry average.McDonalds times interest earned is better than Burger Kings and is alsobetter than the industry average Burger Kings times interest earned ratiois significantly lower than the industry average. This indicates thatMcDonalds has a higher capacity to service its debt

(c) McDonalds appears to be the more profitable of the two companiesMcDonalds has a significantly higher gross profit margin and profit marginthan Burger Kings McDonalds is better than industry average whileBurger Kings is below industry average for the gross profit margin.McDonalds also has a better return on common shareholders equity and ahigher return on assets. While Burger King has a slightly higher asset

turnover and a higher price-earnings ratio than McDonalds, all otherprofitability ratios indicate that McDonalds is more profitable than BurgerKing and the industry.

(d) Investors seem to favour Burger King as it has a slightly higher price-earnings ratio. Burger Kings price-earnings ratio is lower than the industryaverage, showing that investors on average favour other restaurants in theindustry. This is not consistent with (c), as you would expect investors tofavour the more profitable company, and the company whose profitability

ratios exceed the industry average. Investors must anticipate that BurgerKing and other companies in the industry will have better profitability in thefuture than McDonalds

PROBLEM 14-9A

Chapter 14 Solution

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