Chapter 15: Q1DC (page 800)

Question:Theater by Design and Show Cinemas are asking you to recommend their stock to your clients. Because Theater by Design and Show Cinemas earn about the same net income and have similar financial positions, your decision depends on their statement of cash flows, summarized as follows:
Theater by Design Show Cinemas
Net Cash Provided by Operating Activities \( 30,000 \) 70,000
Cash Provided by (Used for) Investing Activities:
Purchase of Plant Assets \( (20,000) \) (100,000)
Sale of Plant Assets 40,000 20,000 10,000 (90,000)
Cash Provided by (Used for) Financing Activities:
Issuance of Common Stock 0 30,000
Payment of Long-term Debt (40,000) 0
Net Increase (Decrease) in Cash \( 10,000 \) 10,000
Based on their cash flows, which company looks better? Give your reasons.

Short Answer

Expert verified

Answer

The Show cinemas look better than the Theatre Cinemas in terms of statement of cash flow

Step by step solution

Definition of decentralization

A cash flow statement is defined as the financial statement presenting the inflow and outflow of cash and its relatable equivalents during the year.

Evaluation statement of cash flow

The statement of cash flow of Show cinema is better than the Theatre by design because of the following reason:

Operating Activities:

The cash provided by operating activities is one of the key indicators, and the company which is generating more cash from operating activities will have enough cash in hand for future operations. In this case, the Show Cinemas has better cash from operations than the Theatre by designs.

Investing activities:

The company which is investing more in plant assets means the company is expanding its operations; in this case, the Show cinemas are buying plant assets, but on the other hand, Theatre by design is selling their plant assets.

Financing Activities:

By issuing common stock, common stock companies raise cash to fund their future operations, increasing the availability of cash with the companies. In this case, Show Cinemas are raising capital by issuing common stock.

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XYZ ATHLETIC SUPPLY, INC.
Five-Year Financial Summary (Partial; adapted)
(Dollar amounts in thousands except per share data)	2018	2017	2016	2015	2014	2016
Net sales revenue	\(275,000	\)222,000	\(199,000	\)171,000	131,000
Net Sales Revenue Increase	24%	12%	16%	31%	17%
Domestic Comparative Store Sales Increase	6%	6%	5%	8%	10%
Other Income—Net	2,090	1,780	1,770	1,700	1,310
Cost of Goods Sold	208,725	169,386	154,822	134,235	103,883
Selling and Administrative Expenses	41,280	36,340	31,670	27,450	22,540
Interest:
Interest Expense	(1,070)	(1,370)	(1,330)	(1,100)	(800)
Interest Income	140	155	150	230	140
Income Tax Expense	4,420	3,900	3,610	3,390	2,730
Net Income	21,735	12,939	9,488	6,755	2,497
Per Share of Common Stock:
Net Income	1.10	0.80	0.70	0.50	0.28
Dividends	0.45	0.43	0.39	0.35	0.31
Financial Position
Current Assets, Excluding Merchandise Inventory	\(30,900	\)27,200	\(26,800	\)24,400	$21,800
Merchandise Inventory	24,700	22,400	21,600	19,300	17,000	16,800
Property, Plant, and Equipment, Net	51,600	46,200	40,500	35,000	25,200
Total Assets	107,200	95,800	88,900	78,700	64,000
Current Liabilities	32,600	27,800	28,800	25,600	17,000
Long-term Debt	23,000	21,200	16,800	18,600	12,900
Stockholders’ Equity	51,600	46,800	43,300	35,500	34,100
Financial Ratios
Acid-Test Ratio	0.9	1.0	0.9	1.0	1.3
Rate of Return on Total Assets	22.5%	15.5%	12.8%	10.9%	9.9%
Rate of Return on Common Stockholders’ Equity	44.2%	28.7%	24.1%	19.4%	18.9%

ABC ATHLETIC SUPPLY, INC. Five-Year Financial Summary (Partial; adapted)
(Dollar amounts in thousands except per share data)	2018	2017	2016	2015	2014	2013
Net Sales Revenue	\(250,000	\)216,000	\(191,000	\)161,000	\(134,000
Net Sales Revenue Increase	16%	13%	19%	20%	17%
Domestic Comparative Store Sales Increase	5%	6%	4%	7%	9%
Other Income—Net	2,110	1,840	1,760	1,690	1,330
Cost of Goods Sold	189,250	164,592	148,216	126,385	106,396
Selling and Administrative Expenses	41,210	36,330	31,620	27,440	22,540
Interest:
Interest Expense	(1,080)	(1,380)	(1,400)	(1,020)	(830)
Interest Income	125	165	155	235	190
Income Tax Expense	4,470	3,900	3,700	3,320	2,700
Net Income	16,225	11,803	7,979	4,760	3,054
Per Share of Common Stock:
Net Income	1.60	1.30	1.20	1.00	0.78
Dividends	0.40	0.38	0.34	0.30	0.26
Financial Position
Current Assets, Excluding Merchandise Inventory	\)30,700	\(27,200	\)26,700	\(24,400	\)21,500
Merchandise Inventory	24,500	22,600	21,700	19,000	17,500	$16,700
Property, Plant, and Equipment, Net	51,400	45,200	40,000	35,100	25,600
Total Assets	106,600	95,000	88,400	78,500	64,600
Current Liabilities	32,300	28,000	28,300	25,000	16,500
Long-term Debt	23,000	21,500	17,600	19,100	12,000
Stockholders’ Equity	51,300	45,500	42,500	34,400	36,100
Financial Ratios
Acid-Test Ratio	1.0	1.0	0.9	1.0	1.3
Rate of Return on Total Assets	17.2%	14.4%	11.2%	8.1%	7.1%
Rate of Return on Common Stockholders’ Equity	35.5%	26.%	20.8%	13.5%	13.0%

	THE PADDLE COMPANY Comparative Financial Statements Years Ended December 31			RECREATIONAL LIFE VESTS Comparative Financial Statements Years Ended December 31
Income statement	2019	2018	2017	2019	2018	2017
Net sales revenue	\(430,489	\)425,410		\(410,570	\)383,870
Cost of goods sold	258,756	256,797		299,110	280,190
Gross profit	171,733	168,613		111,460	103,680
Operating expenses	153,880	151,922		78,290	70,830
Operating income	17,853	16,691		33,170	32,850
Interest expenses	865	788		2,780	2,980
Income before income tax	16,988	15,903		30,390	29,870
Income tax expenses	5,137	4,809		8,780	8,630
Net income	\(11,851	\)11,094		\(21,610	\)21,240
Balance sheet

Assets
Cash & Cash Equivalents	\(69,159	\)70,793		\(65,730	\)55,270
Accounts Receivable	44,798	44,452	\(44,104	39,810	38,650	\)36,460
Merchandise Inventory	79,919	66,341	76,363	68,500	65,230	59,930
Other Current Assets	15,494	16,264		24,450	37,630
Total Current Assets	209,370	197,850		198,490	196,780
Long-term Assets	89,834	90,776		116,760	116,270
Total Assets	\(299,204	\)288,626	\(276,482	\)315,250	$$313,050	\(310,640

Liabilities
Current Liabilities	\)69,554	\(60,232		\)90,810	\(90,010
Long-term Liabilities	31,682	29,936		96,310	105,890
Total Liabilities	101,236	90,168		187,120	195,900

Stockholders’ Equity
Common Stock	72,795	80,885		111,530	102,480
Retained Earnings	125,173	117,573		16,600	14,670
Total Stockholders’ Equity	197,968	198,458		128,130	117,150	103,840
Total Liabilities and Stockholder’s Equity	\)299,204	\(288,626		\)315,250	\(313,050

Other data
Market price per share	\)21.38	\(33.82		\)46.37	$51.64
Annual dividend per share	0.32	0.30		0.53	0.45
Weighted average number of shares outstanding	9,000	8,000		9,000	8,000

a. Current ratio	h. Profit margin ratio
b. Cash ratio	i. Asset turnover ratio
c. Inventory turnover	j. Rate of return on common stockholders’ equity
d. Accounts receivable turnover	k. Earnings per share
e. Gross profit percentage	l. Price/earnings ratio
f. Debt ratio	m. Dividend yield
g. Debt to equity ratio	n. Dividend payout

Short Answer

Step by step solution

Definition of decentralization

Evaluation statement of cash flow

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