Financial and Managerial Accounting for MBAs 8th Edition Easton Solutions Manual | Complete Test Bank

Financial and Managerial Accounting for MBAs 8th Edition Easton Solutions Manual | Complete Test Bank . Long-term debt 6,487 6,573 Nonoperating liabilities 6,487 6,573 Cash and cash equivalents $ 6,055 $ 4,546 Short-term investments 1,204 1,233 Nonoperating assets 7,259 5,779 NNO = Nonoperating liabilities - Nonoperating assets (772) 794 NOA = (772)+13,103 12,331 Total equity 13,103 11,079 Total Costco stockholders' equity 12,799 10,778 e. Return on equity = Net income attributable to Costco / Average Total Costco stockholders' equity 26.59% f. Nonoperating return = ROE - RNOA 0.07% g. ROE > RNOA implies that Costco is able to borrow money to fund operating assets that yield a return greater than the cost of its debt. The number is very small, but still positive. The excess accrues to the benefit of Costco’s stockholders. ©Cambridge Business Publishers, 2021 Financial Accounting for MBAs, 8 th 4-28 Edition P4-46. (30 minutes) $ millions Sep. 02, 2018 Sep. 03, 2017 a. Current assets 20,289 17,317 Current liabilities 19,926 17,495 Current ratio = Current assets / Current liabilities 1.02 0.99 Cash and equivalents 6,055 4,546 Short-term investments 1,204 1,233 Accounts receivable - net 1,669 1,432 Quick assets 8,928 7,211 Current liabilities 19,926 17,495 Quick ratio = Quick assets / Current liabilities 0.45 0.41 b. Earnings before interest and tax 4,480 4,111 Interest expense, gross 159 134 Times interest earned = EBIT / Interest expense, gross 28.18 30.68 Total liabilities 27,727 25,268 Equity 13,103 11,079 Liabilities-to-Equity ratio 2.12 2.28 c. Costco is reasonably liquid (current ratio near 1.0 and quick ratio near 0.40) especially for a retail organization that turns inventory frequently. The company has reasonable level of financial leveraged and its times interest earned ratio is fairly high. The company generates sizeable operating profits and cash flow. In sum, there are no liquidity or solvency concerns for Costco. ©Cambridge Business Publishers, 2021 Solutions Manual, Module 4 4-29 P4-47. (40 minutes) $ millions a. Net nonoperating expense, before tax 38 Tax shield at 22% 8 Net nonoperating expense (NNE) = Net nonoperating expense, before tax - Tax shield 30 Net income 3,179 NOPAT 3,209 b. Long-term debt 6,487 6,573 Nonoperating liabilities 6,487 6,573 Cash and cash equivalents $ 6,055 $ 4,546 Short-term investments 1,204 1,233 Nonoperating assets 7,259 5,779 NNO = Nonoperating liabilities - Nonoperating assets (772) 794 c. NNO (772) 794 Total equity 13,103.0 11,079.0 FLEV = Average NNO / Average Equity 0.001 d. NNE 30 NNO (772) 794 NNEP = NNE / Average NNO 272.73% RNOA 26.52% NNEP 272.73% Spread = RNOA - NNEP -246.21% e. Net income attributable to Costco 3,134 Net income 3,179 Equity attributable to Costco shareholders 12,799 10,778 Total equity 13,103 11,079 NCI ratio = (Net income attributable to Costco / Net income) / (Average equity attributable to Costco shareholders / Average total equity) 1.0111 ©Cambridge Business Publishers, 2021 Financial Accounting for MBAs, 8 th 4-30 Edition f. $ millions ROE = (RNOA + (Spread × FLEV)) × NCI ratio = [26.52% + (-246.21% × 0.001)] × 1.0111 26.59% g. Costco’s NNO in 2018 is negative because nonoperating liabilities are less than nonoperating assets, which include significant levels of cash and short-term investments. In 2017 NNO was positive such that the average NNO in 2018 is very small (only $11 million) which creates a large NNEP and a negative Spread. The effect on ROE is minimal because FLEV is close to zero. P4-48. (40 minutes) $ millions a. Nonoperating items before tax (448) tax shield at 22% (99) Nonoperating items after tax (NNE) (349) Net income 22,112 NOPAT 21,763 b. Accounts receivable, net 7,587 5,832 Prepaid expenses and other current assets 1,779 1,020 Property and equipment, net 24,683 13,721 Intangible assets, net 1,294 1,884 Goodwill 18,301 18,221 Other assets 2,576 2,135 Operating assets 56,220 42,813 Total liabilities 13,207 10,177 Operating liabilities 13,207 10,177 NOA = Operating assets - Operating liabilities 43,013 32,636 c. RNOA = NOPAT / Average NOA 57.54% NOPM = NOPAT / Total revenue 38.98% NOAT = Total revenue / Average NOA 1.48 RNOA = 38.98% × 1.48 57.54% ©Cambridge Business Publishers, 2021 Solutions Manual, Module 4 4-31 d. $ miillions Net income 22,112 Total equity 84,127 74,347 ROE = Net income / Average Total equity 27.91% e. The difference between ROE and RNOA is -29.63% because Facebook is holding so much cash and marketable securities and not making a very high return. This is destroying shareholder value – return to the owners (ROE) would be nearly 30% higher absent all the cash the company holds. P4-49. (20 minutes) $ millions a. Net income 22,112 Total equity 84,127 74,347 ROE = Net income / Average Total equity 27.91% b. Net nonoperating items before tax (448) Tax shield at 22% (99) Net nonoperating expense (NNE ) (349) Net income 22,112 NOPAT = Net income + NNE 21,763 Nonoperating liabilities 0 0 Cash and cash equivalents 10,019 8,079 Marketable securities 31,095 33,632 Nonoperating assets 41,114 41,711 NNO = Nonoperating liabilities - Nonoperating assets (41,114) (41,711) NNEP = NNE / Average NNO 0.84% ©Cambridge Business Publishers, 2021 Financial Accounting for MBAs, 8 th 4-32 Edition $ millions c. NNO (41,114) (41,711) Total equity 84,127 74,347 FLEV = Average NNO / Average total equity (0.5226) NNE (349) NNO (41,114) (41,711) NNEP = NNE / Average NNO 0.84% RNOA - given 57.54% Spread = RNOA - NNEP 56.70% d. ROE = RNOA + (Spread × FLEV) ROE = 57.54% + (56.70% × -0.5226) 27.91% e. Nonoperating return = FLEV × Spread -29.63% Facebook’s nonoperating return is negative because the company has a negative NNO, which means that the company holds very significant levels of cash and marketable securities. Like many other tech firms, Facebook has excess cash on hand, presumably to be able to respond to investment opportunities such as acquisitions. While this liquidity allows the company to be nimble, it comes at a cost. The cash and marketable securities earn a very small return (0.84%) while the operating assets earn a significant return. The company is tying up cash that could be returned to stockholders who could presumably, invest the cash at a return greater than 0.84%. Thus, Facebook is “destroying” shareholder value. ©Cambridge Business Publishers, 2021 Solutions Manual, Module 4 4-33 P4-50. (45 minutes) $ thousands a. NNE before tax ($420,493 - $41,725) $ 378,768 tax shield at 22% 83,329 NNE after tax 295,439 Net income 1,211,242 NOPAT $1,506,681 b. Current content assets, net $5,151,186 4,310,934 Other current assets 748,466 536,245 Non-current content assets, net 14,960,954 10,371,055 Property and equipment, net 418,281 319,404 Other non-current assets 901,030 652,309 Operating assets $22,179,917 16,189,947 Current content liabilities $4,686,019 4,173,041 Accounts payable 562,985 359,555 Accrued expenses 477,417 315,094 Deferred revenue 760,899 618,622 Non-current content liabilities 3,759,026 3,329,796 Other non-current liabilities 129,231 135,246 Operating liabilities $10,375,577 8,931,354 NOA = Operating assets - Operating liabilities $11,804,340 $7,258,593 c. RNOA = NOPAT / Average NOA 15.81% NOPM = NOPAT / Total revenue 9.54% NOAT = Total revenue / Average NOA 1.66 RNOA = 9.54% × 1.66 15.81% d. Long-term debt 10,360,058 6,499,432 Less Cash and cash equivalents 3,794,483 2,822,795 Nonoperating obligations (NNO) 6,565,575 3,676,637 Equity 5,238,765 3,581,956 NOA = NNO + Equity 11,804,340 7,258,593 ©Cambridge Business Publishers, 2021 Financial Accounting for MBAs, 8 th 4-34 Edition $ thousands e. Net income 1,211,242 Total equity 5,238,765 3,581,956 ROE = Net income / Average Total equity 27.46% f. Nonoperating return = ROE - RNOA 11.65% g. ROE > RNOA implies that Netflix is able to borrow money to fund operating assets that yield a return greater than the cost of its debt. The excess of 11.65% accrues to the benefit of the Netflix stockholders. P4-51. (30 minutes) $ thousands a. Net income 1,211,242 Total equity 5,238,765 3,581,956 ROE = Net income / Average Total equity 27.46% Net income 1,211,242 Total assets 25,974,400 19,012,742 ROA = Net income / Average Total assets 5.38% b. Net income 1,211,242 Revenue 15,794,341 Profit margin (PM) = Net income / Revenue 7.67% Revenue 15,794,341 Total assets 25,974,400 19,012,742 Asset turnover (AT) = Revenue / Average Total assets 0.70 Total assets 25,974,400 19,012,742 Total equity 5,238,765 3,581,956 Financial leverage (FL) = Average Total assets / Average Total equity 5.10 ROE = PM × AT × FL = 7.67% × 0.70 × 5.10 = 27.38% 27.46% Small rounding difference ©Cambridge Business Publishers, 2021 Solutions Manual, Module 4 4-35 c. $ thousands Interest expense, net 378,768 Interest expense, after tax 295,439 Net income 1,211,242 Adjusted ROA = (Net income + Interest expense, after tax) / Average Total assets 6.70% P4-52. (30 minutes) a. This graph is similar to the one in the module and reveals the trade-off between profit margin and asset turnover. Basic economics suggest that companies with high turnover have low margin and vice versa. b. High performing companies are those that exhibit a higher profit margin when holding asset turnover constant, and have a higher turnover when holding profit margin constant. Thus, increasing RNOA requires managers to manage both the income statement and the balance sheet. ©Cambridge Business Publishers, 2021 Financial Accounting for MBAs, 8 th 4-36 Edition P4-53. (30 minutes) a. $ millions Ratio K GIS Days sales outstanding (DSO) 37.24 36.11 Days inventory outstanding (DIO) 52.72 55.32 Days payables outstanding (DPO) 97.16 86.11 Cash conversion cycle -7.20 5.32 Computations K GIS Total revenue 13,547 15,740 Average accounts receivable 1,382 1,557 Accounts receivable turnover = Total revenue / Average AR 9.80 10.11 DSO = 365 / Accounts receivable turnover 37.24 36.11 Cost of goods sold 8,821 10,313 Average inventory 1,274 1,563 Inventory turnover = Cost of sales and services / Average inventory 6.92 6.60 DIO = 365 / Inventory turnover 52.72 55.32 Cost of goods sold 8,821 10,313 Average accounts payable 2,348 2,433 Accounts payable turnover = Cost of sales and services / Average AP 3.76 4.24 DPO = 365 / Accounts payable turnover 97.16 86.11 Cash conversion cycle = DSO + DIO - DPO -7.20 5.32 b. K GIS Which company better manages its accounts receivable? X Which company uses inventory more efficiently? X Which company better manages its accounts payable? X ©Cambridge Business Publishers, 2021 Solutions Manual, Module 4 4-37 IFRS APPLICATIONS I4-54. (15 minutes) C$ millions a. Net income attributable to Husky 1,457 Equity attributable to Husky shareholders 19,602 17,956 ROE = Net income attributable to Husky / Equity attributable to Husky shareholders 7.76% Pre-tax NNE 236 Tax shield at 27.2% 64 NNE 172 Net income 1,457 NOPAT = Net income + NNE 1,629 Operating assets 32,231 30,222 Operating liabilities 9,864 9,520 Net operating assets (NOA) = Op Assets - Op Liab 22,367 20,702 RNOA = NOPAT / Average NOA 7.56% b. NOPAT 1,629 Revenues, net 22,252 NOPM = NOPAT / Revenues 7.32% Revenues, net 22,252 NOA 22,367 20,702 NOAT = Revenues / Average NOA 1.03 c. RNOA / ROE 97.42% Nonoperating return = ROE - RNOA 0.20% ©Cambridge Business Publishers, 2021 Financial Accounting for MBAs, 8 th 4-38 Edition I4-55. (25 minutes) C$ millions a. Current assets 5,688 5,616 Current liabilities 4,994 3,507 Current ratio = Current assets / Current liabilities 1.14 1.60 Cash and equivalents 2,866 2,513 Short-term investments 0 0 Accounts receivable 1,355 1,355 Quick assets 4,221 3,868 Current liabilities 4,994 3,507 Quick ratio = Quick assets / Current liabilities 0.85 1.10 b. Earnings before interest and tax 2,095 724 Interest expense, gross 314 392 Times interest earned = EBIT / Interest expense, gross 6.67 1.85 Total liabilities 15,611 14,960 Equity 19,614 17,967 Liabilities-to-Equity ratio 0.80 0.83 Husky has a fairly solid liquidity: current ratio and quick ratio are both strong. Times interest earned is in the moderate range and the liabilities to equity ratio is low. The company is well able to service its debt and make its interest payments. The company is solvent.