Chapter 24: 2Q (page 1445)
What is the full disclosure principle in accounting? Why has disclosure increased substantially in the last 10 years?
The full disclosure relates to the imperative data, which is expanding due to the complexity of the business environment.
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In calculating inventory turnover, why is cost of goods sold used as the numerator? As the inventory turnover increases, what increasing risk does the business assume?
The FASB requires a reconciliation between the effective tax rate and the federal government’s statutory rate. Of what benefit is such a disclosure requirement?
Olga Conrad, a financial writer, noted recently, “There are substantial arguments for including earnings projections in annual reports and the like. The most compelling is that it would give anyone interested something now available to only a relatively select few—like large stockholders, creditors, and attentive bartenders.” Identify some arguments against providing earnings projections.
(Dividend Policy Analysis) Matheny Inc. went public 3 years ago. The board of directors will be meeting shortly after the end of the year to decide on a dividend policy. In the past, growth has been financed primarily through the retention of earnings. A stock or a cash dividend has never been declared. Presented below is a brief financial summary of Matheny Inc.’s operations.
(\(000 omitted) | |||||
2018 | 2017 | 2016 | 2015 | 2014 | |
Sales revenue | \)20,000 | \(16,000 | \)14,000 | \(6,000 | \)4,000 |
Net income | 2,400 | 14,000 | 800 | 700 | 250 |
Average total assets | 22,000 | 19,000 | 11,500 | 4,200 | 3,000 |
Current assets | 8,000 | 6,000 | 3,000 | 1,200 | 1,000 |
Working capital | 3,600 | 3,200 | 1,200 | 500 | 400 |
Common shares: Number of shares Outstanding (000) Average market price | 2,000 \(9 | 2,000 \)6 | 2,000 $4 | 20 - | 20 - |
Instructions
Picasso Company is a wholesale distributor of packaging equipment and supplies. The company’s sales have averaged about \(900,000 annually for the 3-year period 2015–2017. The firm’s total assets at the end of 2017 amounted to \)850,000.
The president of Picasso Company has asked the controller to prepare a report that summarizes the financial aspects of the company’s operations for the past 3 years. This report will be presented to the board of directors at their next meeting.
In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios which can assist in the identification and interpretation of trends. At the request of the controller, the accounting staff has calculated the following ratios for the 3-year period 2015–2017.
2015 | 2016 | 2017 | |
Current ratio | 1.80 | 1.89 | 1.96 |
Acid-test (quick) ratio | 1.04 | 0.99 | 0.87 |
Accounts receivable turnover | 8.75 | 7.71 | 6.42 |
Inventory turnover | 4.91 | 4.32 | 3.42 |
Debt to assets ratio | 51.0% | 46.0% | 41.0% |
Long-term debt to assets ratio | 31.0% | 27.0% | 24.0% |
Sales to fixed assets (fixed asset turnover) | 1.58 | 1.69 | 1.79 |
Sales as a percent of 2015 sales | 1.00 | 1.03 | 1.07 |
Gross margin percentage | 36.0% | 35.1% | 34.6% |
Net income to sales | 6.9% | 7.0% | 7.2% |
Return on assets | 7.7% | 7.7% | 7.8% |
Return on common stockholders’ equity | 13.6% | 13.1% | 12.7% |
In preparation of the report, the controller has decided first to examine the financial ratios independent of any other data to determine if the ratios themselves reveal any significant trends over the 3-year period.
Instructions
c) Using the ratios provided, what conclusion(s) can be drawn regarding the company’s net investment in plant and equipment?
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