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7/22/2019 Chapter 14 Solution
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Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Fifth Canadian Edition
Solutions Manual 14-1 Chapter 14
Copyright 2012 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Posted with permission from John Wiley & Sons Canada, Ltd.
CHAPTER 14
Performance Measurement
EXERCISE 14-2
(a) Homburgs sustainable income is the profit from continuing operations of $18,323thousand. This is the loss of $88,054 thousand plus the loss from its discontinuedoperations of $106,377 thousand.
(b) The loss of $106,377 thousand from Homburgs discontinued operations would bereported in its income statement, after profit from continuing operations.
The current assets held for sale of $144,247 thousand would be reported in the currentasset section of the statement of financial position, and the current liabilitiesassociated with the assets held for sale would be classified in the current liabilitiessection.
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Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Fifth Canadian Edition
Solutions Manual 14-2 Chapter 14
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Posted with permission from John Wiley & Sons Canada, Ltd.
EXERCISE 14-4
(a) DRESSAIRE INC.
Horizontal Analysis of Statement of Financial Position
(% of base-year amount)
2012 2011 2010
Current assets 120.0 80.0 100.0Non-current assets 133.3 116.7 100.0Current liabilities 107.7 138.5 100.0Non-current liabilities 110.0 70.0 100.0Common shares 150.0 115.0 100.0Retained earnings 158.8 141.2 100.0
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Kimmel, Weygandt, Kieso, Trenholm Financial Accounting, Fourth Canadian Edition
Solutions Manual 14-3 Chapter 14
Copyright 2009 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Posted with permission from John Wiley & Sons Canada, Ltd.
EXERCISE 14-4 (Continued)
(b)DRESSAIRE INC.
Horizontal Analysis of Statement of Financial Position
(% change between periods)
2012 Increase (Decrease) 2011 Increase (Decrease) 2010
Amount % Amount %
Assets
Current assets
Non-current assets
Total assets
$120,000
400,000
$520,000
$ 40,000
50,000
$90,000
50.0%
14.3%
20.9%
$ 80,000
350,000
$430,000
$(20,000))
50,000)
$ 30,000)
(20.0)%
16.7 %
7.5 %
$100,000
300,000
$400,000
Liabilities and Shareholders Equity
Liabilities
Current liabilities
Non-current liabilities
Total liabilities
$ 70,000
165,000
235,000
$(20,000)
60,000
40,000
(22.2)%
57.1%
20.5%
$ 90,000
105,000
195,000
$ 25,000
(45,000)
(20,000)
38.5%
(30.0%)
(9.3%)
$ 65,000
150,000
215,000
Shareholders equity
Common shares
Retained earnings
Total shareholders equity
Total liabilities and
shareholders equity
150,000
135,000
285,000
$520,000
35,000
15,000
50,000
$90,000
30.4%
12.5%
21.3%
20.9%
115,000
120,000
235,000
$430,000
15,000
35,000
50,000
($30,000)
15.0%
41.2%
27.0%
7.5%
100,000
85,000
185,000
$400,000
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Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Fifth Canadian Edition
Solutions Manual 14-4 Chapter14
Copyright 2012 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Posted with permission from John Wiley & Sons Canada, Ltd.
EXERCISE 14-5
FLEETWOOD CORPORATION
Vertical Analysis of Income Statement
2012 2011
Amount Percent Amount Percent
Net sales
Cost of goods sold
Gross profit
Operating expenses
Profit before income tax
Income tax expense
Profit
$800,000
550,000
250,000
175,000
75,000
15,000
$ 60,000
100.0%
68.7%
31.3%
21.9%
9.4%
1.9%
7.5%
$600,000
375,000
225,000
125,000
100,000
20,000
$ 80,000
100.0%
62.5%
37.5%
20.8%
16.7%
3.3%
13.4%
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Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Fifth Canadian Edition
Solutions Manual 14-5 Chapter14
Copyright 2012 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Posted with permission from John Wiley & Sons Canada, Ltd.
SOLUTIONS TO PROBLEMS
($ in millions)
(a) Before Discontinued Operations
Ratio 2010 2009 2008 2007 2006
Return on
common
shareholders
equity
$572
$8,218
70$512
$7,418
69
$1,715
$6,374
269
$1,086
$5,123
212
$601
$4,316
139Return on assets $572
$22,404
26$512
$22,528
23
$1,715
$20,115
85
$1,086
$17,616
62
$601
$15,873
38Profit margin $572
$5,411
106$512
$4,203
122
$1,715
$7,424
231
$1,086
$5,583
195
$601
$3,936
153
After Discontinued Operations
Ratio 2010 2009 2008 2007 2006
Return oncommon
shareholders
equity
$1,197$8,218
146$536
$7,418
72$1,715
$6,374
269$1,086
$5,123
212$601
$4,316
139Return on assets $1,197
$22,404
53
$536
$22,528
24
$1,715
$20,115
85
$1,086
$17,616
62
$601
$15,873
38Profit margin $1,197
$5,411
221
$536
$4,203
128
$1,715
$7,424
231
$1,086
$5,583
195
$601
$3,936
153
PROBLEM 14-5A
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PROBLEM 14-5A (Continued)
(b) Nexens profitability after discontinued operations improved substantially in2007 and 2008, dropped significantly in 2009 and improved again in 2010.For all three ratios, the 2010 profitability showed an increase over the 2006levels.
We get a difference picture of profitability using profits from continuingoperations. Profitability increased substantially in 2007 and 2008 for all threeratios. This is due to the fact that the company did not have discontinuedoperations in those years and the company experienced growth in profit. In2009, profitability from continuing operations fell sharply for all three ratiosand remained at essentially the same level in 2010. Return on equity andreturn on assets showed a slight increase in 2010, but the profit margin
showed a decrease in 2010.
(c) An analysis on profitability before discontinued operations is more relevant toinvestors as it provides a better indication as to how the company willperform in future periods.
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Posted with permission from John Wiley & Sons Canada, Ltd.
(a)2012 2011
1. Current ratio $180,000
$240,00008 :1 $150,000
$165,00009 :1
2. Receivables
turnover
$700,000
[$60,000$49,5002
]128 times $450,000
[$49,500$52,8002
]88 times
3. Inventory
turnover
$450,000
(
$100,000$85,0002 )
49 times $300,000
(
$85,000$64,0002 )
40 times
4. Debt to total
assets$240,000
$735,000327 $165,000
$590,000280
5. Times interest
earned
$100,000
$10,000100 times $66,000
$4,000165 times
6. Cash total
debt coverage
$102,600
($240,000
$165,000
2 )
05 times $119,600
($165,000
$50,000
2 )
11 times
7.Return on
assets
$72,000
($735,000$590,0002
)109 $49,600
($590,000 $433,0002
) 97
8. Profit margin $72,000
$700,000103 $49,600
$450,000110
* 2. Receivables turnoverGross accounts receivable:2012: $55,000 + $5,0002011: $45,000 + $4,5002010: $48,000 + $4,800
PROBLEM 14-6A
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Posted with permission from John Wiley & Sons Canada, Ltd.
PROBLEM 14-6A (Continued)
(a) (Continued)
2012 2011
9. Asset
turnover
$700,000
($735,000$590,0002
)11 times $450,000
($590,000$433,0002
)09 times
10. Gross profit
margin
$250,000
$700,000357 $150,000
$450,000333
(b) 1. Current ratio Unfavourable2. Receivables turnover Favourable3. Inventory turnover Favourable4. Debt to total assets Unfavourable5. Times interest earned Unfavourable6. Cash total debt coverage Unfavourable7. Return on assets Favourable8. Profit margin Unfavourable9. Asset turnover Favourable10. Gross profit margin Favourable
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Posted with permission from John Wiley & Sons Canada, Ltd.
(a) McDonalds is more liquid given its high current ratio and higherreceivables turnover. McDonalds has a current ratio that is higher than
Burger Kings and higher than the industry average Its receivablesturnover is higher than Burger Kings but is significantly lower than theindustry average. However, its inventory turnover is significantly higherthan the industry average.
(b) McDonalds appears to be more solvent than Burger King. Its debt to totalassets ratio indicates more of its assets are financed by debt than BurgerKings, although both companies are better than the industry average.McDonalds times interest earned is better than Burger Kings and is alsobetter than the industry average Burger Kings times interest earned ratiois significantly lower than the industry average. This indicates thatMcDonalds has a higher capacity to service its debt
(c) McDonalds appears to be the more profitable of the two companiesMcDonalds has a significantly higher gross profit margin and profit marginthan Burger Kings McDonalds is better than industry average whileBurger Kings is below industry average for the gross profit margin.McDonalds also has a better return on common shareholders equity and ahigher return on assets. While Burger King has a slightly higher asset
turnover and a higher price-earnings ratio than McDonalds, all otherprofitability ratios indicate that McDonalds is more profitable than BurgerKing and the industry.
(d) Investors seem to favour Burger King as it has a slightly higher price-earnings ratio. Burger Kings price-earnings ratio is lower than the industryaverage, showing that investors on average favour other restaurants in theindustry. This is not consistent with (c), as you would expect investors tofavour the more profitable company, and the company whose profitability
ratios exceed the industry average. Investors must anticipate that BurgerKing and other companies in the industry will have better profitability in thefuture than McDonalds
PROBLEM 14-9A