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Spiceland_Inter_Accounting8e_Ch05

294 SECTION 1 The Role of Accounting as an Information System b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2017? c. What will Citation report in its 2017 balance sheet related to this contract? (Ignore cash.) 5. When should Citation recognize revenue for the sale of its single-family homes? 6. What will Citation report in its 2016 income statement and 2016 balance sheet related to the single-family home business (ignore cash in the balance sheet)? P 5–14 Financial statements for Askew Industries for 2016 are shown below (in $000’s): Calculating activity and profitability ratios ● LO5–10 Required: Calculate the following ratios for 2016. 1. Inventory turnover ratio 2. Average days in inventory 3. Receivables turnover ratio 4. Average collection period 5. Asset turnover ratio 6. Profit margin on sales 7. Return on assets 8. Return on shareholders’ equity 9. Equity multiplier 10. Return on shareholders’ equity (using the DuPont framework) Presented on the next page are condensed financial statements adapted from those of two actual companies competing in the pharmaceutical industry— Johnson and Johnson (J&J) and Pfizer, Inc. ($ in millions, except per share amounts). Required: Evaluate and compare the two companies by responding to the following questions. Note: Because two-year comparative statements are not provided, you should use year-end balances in place of average balances as appropriate. 1. Which of the two companies appears more efficient in collecting its accounts receivable and managing its inventory? 2. Which of the two firms had greater earnings relative to resources available? 3. Have the two companies achieved their respective rates of return on assets with similar combinations of profit margin and turnover? 4. From the perspective of a common shareholder, which of the two firms provided a greater rate of return? 5. From the perspective of a common shareholder, which of the two firms appears to be using leverage more effectively to provide a return to shareholders above the rate of return on assets? P 5–15 Use of ratios to compare two companies in the same industry ● LO5–10 2016 Income Statement Sales $ 9,000 Cost of goods sold (6,300) Gross profit 2,700 Operating expenses (2,000) Interest expense (200) Tax expense (200) Net income $ 300 Comparative Balance Sheets Dec. 31 2016 2015 Assets Cash $ 600 $ 500 Accounts receivable 600 400 Inventory 800 600 Property, plant, and equipment (net) 2,000 2,100 $4,000 $3,600 Liabilities and Shareholders’ Equity Current liabilities $1,100 $ 850 Bonds payable 1,400 1,400 Paid-in capital 600 600 Retained earnings 900 750 $4,000 $3,600


Spiceland_Inter_Accounting8e_Ch05
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