Chapter Review
17-8jCases & Projects
Ethics in Action
Rodgers Industries Inc. completed its fiscal year on December 31. Near the end of the fiscal year, the company’s Internal Audit Department determined that an important internal control procedure had not been functioning properly. The head of Internal Audit, Dash Riprock, reported the internal control failure to the company’s chief accountant, Todd Barleywine. Todd reported the failure to the company’s chief financial officer, Josh McCoy. After discussing the issue, Josh instructed Todd not to inform the external auditors of the internal control failure and to fix the problem quietly after the end of the fiscal year. The external auditors did not discover the internal control failure during their audit. In March, after the audit was complete, the company released its annual report, including associated reports by management. As chief financial officer, Josh authorized the release of Management’s Report on Internal Control, which stated that the management team believed that the company’s internal controls were effective during the period covered by the annual report.
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Did Josh behave ethically in this situation? Explain your answer.
Team Activity
In teams, select a public company that interests you. Obtain the company’s most recent annual report on Form 10-K. The Form 10-K is a company’s annually required filing with the Securities and Exchange Commission (SEC). It includes the company’s financial statements and accompanying notes. The Form 10-K can be obtained either (a) by referring to the investor relations section of the company’s website or (b) by using the company search feature of the SEC’s EDGAR database service found at www.sec.gov/edgar/searchedgar/companysearch.html.
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Based on the information in the company’s most recent annual report, compute the following, rounding ratios and percentages to one decimal place, except for per-share amounts:
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Liquidity analysis:
- (1)
Working capital
- (2)
Current ratio
- (3)
Quick ratio
- (4)
Accounts receivable turnover
- (5)
Number of days’ sales in receivables
- (6)
Inventory turnover
- (7)
Number of days’ sales in inventory
- (1)
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Solvency analysis:
- (1)
Ratio of liabilities to stockholders’ equity
- (2)
Times interest earned
- (1)
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Profitability analysis:
- (1)
Asset turnover
- (2)
Return on total assets
- (3)
Return on common stockholders’ equity
- (4)
Earnings per share
- (5)
Price-earnings ratio
- (1)
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Communication
The president of Freeman Industries Inc. made the following statement in the annual report to shareholders: “The founding family and majority shareholders of the company do not believe in using debt to finance future growth. The founding family learned from hard experience during the Great Depression that debt can cause loss of flexibility and eventual loss of corporate control. The company will not place itself at such risk again. As such, all future growth will be financed either by stock sales to the public or by internally generated resources.”
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Write a brief memo to the company’s president, Boss Freeman, outlining the errors in his logic.
Common-Sized Income Statements
The condensed income statements through income from operations for Amazon.com, Inc., Best Buy, Inc., and Walmart Inc., for a recent fiscal year follow (in millions):
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Prepare comparative common-sized income statements for each company. Round percentages to one decimal place.
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Use the common-sized analysis to compare the financial performance of the three companies.
Profitability Analysis
Deere & Company manufactures and distributes farm and construction machinery that it sells around the world. In addition to its manufacturing operations, Deere’s credit division loans money to customers to finance the purchase of their farm and construction equipment.
The following information is available for three recent years (in millions except per-share amounts):
Year 3 |
Year 2 |
Year 1 |
|
Net income |
$2,368.4 |
$2,159.1 |
$1,523.9 |
Preferred dividends |
$0.00 |
$0.00 |
$0.00 |
Interest expense |
$1,203.6 |
$899.5 |
$763.7 |
Shares outstanding for computing earnings per share |
323 |
320 |
315 |
Cash dividend per share |
$2.58 |
$2.40 |
$2.40 |
Average total assets |
$67,947 |
$61,852 |
$57,933 |
Average stockholders’ equity |
$10,426 |
$8,046 |
$6,644 |
Average stock price per share |
$134.16 |
$110.59 |
$83.94 |
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Compute the following ratios for each year, rounding ratios and percentages to one decimal place, except for per-share amounts:
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Return on total assets
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Return on stockholders’ equity
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Earnings per share
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Dividend yield
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Price-earnings ratio
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Based on these data, evaluate Deere’s profitability.
Comprehensive Profitability and Solvency Analysis
Marriott International, Inc., and Hyatt Hotels Corporation are two major owners and managers of lodging and resort properties in the United States. Abstracted income statement information for the two companies is as follows for a recent year (in millions):
Balance sheet information is as follows:
The average liabilities, average stockholders’ equity, and average total assets are as follows:
Marriott |
Hyatt |
|
Average total liabilities |
$20,868 |
$3,848 |
Average total stockholders’ equity |
2,903 |
3,760 |
Average total assets |
23,771 |
7,608 |
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Determine the following ratios for both companies, rounding ratios and percentages to one decimal place:
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Return on total assets
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Return on stockholders’ equity
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Times interest earned
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Ratio of total liabilities to stockholders’ equity
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Based on the information in (1), analyze and compare the two companies’ solvency and profitability.