...promote sales, the Marketing Manager offers a one-year warranty and credit sales. These warranty costs and bad debt expense are estimated at 1% of total sales and 1% of credit sales respectively. According to Mydin, since these are estimations the accountant should just ignore them. Otherwise, the amount of profit will not be accurate. Part 1 : Learning Issues 1. What are credit sales? 2. What are warranty costs? 3. What are bad debts expenses? 4. What are the methods of accounting for bad debts expenses? 5. What are the methods to estimate bad debt expenses? 6. What are the significance of the estimation of bad debt expense and warranty cost to the financial statements? Introduction A sales promotion is an activity designed to boost the sales of a product or service. It may include an advertising campaign, increased PR activity, a free-sample campaign, offering free gifts or trading stamps, arranging demonstrations or exhibitions, setting up competitions with attractive prizes, temporary price reductions, door-to-door calling, and telemarketing. Price promotions are also commonly known as “price discounting”. These offer either (1) a discount to the normal selling price of a product, or (2) more of the product at the normal price. Increased sales gained from price promotions are at the expense of a loss in profit – so these promotions must be used with care. For TechnoMaju Sdn Bhd, the company is offering a one-year warranty and credit sales to promote...
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...after tax/net debt)* (net debt/ equity) 8. ROE =(NOPAT/net assets)*(1+ net debt/equity)-( net interest expense after tax/net debt) )* (net debt/ equity) 9. ROE = operating ROA + (operating ROA- effective interest rate after tax) * (net financial leverage) 10. ROE = operating ROA + spread * net financial leverage 11. Financial leverage = assets/shareholder’s equity 12. ROA = net income/ assets 13. ROA= (net income/ sales)*(sales/ assets) 14. ROA = net profit margin * (sales / assets) 15. ROA =(net income/ sales)*asset turnover 16. Net interest expense after tax = (interest expense-interest income)*(1-tax rate) 17. Net operating profit after tax = net income+ net interest expense after tax 18. Operating working capital = (current asset- cash and marketable equities)-(current liabilities-short term debt and current portion of long term debt) 19. Net long term assets=total long term assets- non interest bearing long term liabilities 20. Net debt = total interest bearing liabilities – cash and marketable securities 21. Net assets = operating working capital + net long term assets 22. Net capital = net debt +shareholder’s equity 23. Net capital = net debt +ROE*net income 24. Spread = operating ROA- effective interest rate after tax 25. Operating ROA = (NOPAT / sales)*(sales/net assets) 26. Operating ROA = NOPAT / net assets 27. After tax factor = 1- tax rate 28. Gross profit margin = (sales –cost...
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...would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable. b. Issue new common stock and use the proceeds to increase inventories. c. Speed up the collection of receivables and use the cash generated to increase inventories. d. Use some of its cash to purchase additional inventories. e. Issue new common stock and use the proceeds to acquire additional fixed assets. Answer: a 2. Amram Company’s current ratio is 2.0. Considered alone, which of the following actions would lower the current ratio? a. Borrow using short-term notes payable and use the proceeds to reduce accruals. b. Borrow using short-term notes payable and use the proceeds to reduce long-term debt. c. Use cash to reduce accruals. d. Use cash to reduce short-term notes payable. e. Use cash to reduce accounts payable. Answer: b A quick scan of the alternatives would indicate that b is obviously correct—it would lower the CR. Since there is only one correct answer, b must be the right answer. The following equation can also be used. If you add equal amounts to the numerator and denominator, then if Orig CR = or > 1.0, CR will decline, but if Orig CR < 1.0, CR will increase. Obviously, if you add to one but not the other, CR will increase or decrease in a predictable manner. This is the situation with choice b. CR = (Orig CA +/- ∆)/(Orig CL +/- ∆). a is false; it would leave the QR unchanged. b would obviously reduce...
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...would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable. b. Issue new common stock and use the proceeds to increase inventories. c. Speed up the collection of receivables and use the cash generated to increase inventories. d. Use some of its cash to purchase additional inventories. e. Issue new common stock and use the proceeds to acquire additional fixed assets. Answer: a 2. Amram Company’s current ratio is 2.0. Considered alone, which of the following actions would lower the current ratio? a. Borrow using short-term notes payable and use the proceeds to reduce accruals. b. Borrow using short-term notes payable and use the proceeds to reduce long-term debt. c. Use cash to reduce accruals. d. Use cash to reduce short-term notes payable. e. Use cash to reduce accounts payable. Answer: b A quick scan of the alternatives would indicate that b is obviously correct—it would lower the CR. Since there is only one correct answer, b must be the right answer. The following equation can also be used. If you add equal amounts to the numerator and denominator, then if Orig CR = or > 1.0, CR will decline, but if Orig CR < 1.0, CR will increase. Obviously, if you add to one but not the other, CR will increase or decrease in a predictable manner. This is the situation with choice b. CR = (Orig CA +/- ∆)/(Orig CL +/- ∆). a is false; it would leave the QR unchanged. b would obviously reduce...
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...terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable. b. Issue new common stock and use the proceeds to increase inventories. c. Speed up the collection of receivables and use the cash generated to increase inventories. d. Use some of its cash to purchase additional inventories. e. Issue new common stock and use the proceeds to acquire additional fixed assets. Answer: a 2. Amram Company’s current ratio is 2.0. Considered alone, which of the following actions would lower the current ratio? a. Borrow using short-term notes payable and use the proceeds to reduce accruals. b. Borrow using short-term notes payable and use the proceeds to reduce long-term debt. c. Use cash to reduce accruals. d. Use cash to reduce short-term notes payable. e. Use cash to reduce accounts payable. Answer: b A quick scan of the alternatives would indicate that b is obviously correct—it would lower the CR. Since there is only one correct answer, b must be the right answer. The following equation can also be used. If you add equal amounts to the numerator and denominator, then if Orig CR = or > 1.0, CR will decline, but if Orig CR < 1.0, CR will increase. Obviously, if you add to one but not the other, CR will increase or decrease in a predictable manner. This is the situation with choice b. CR = (Orig CA +/- ∆)/(Orig CL +/- ∆). a is false; it would leave the QR unchanged. b would obviously reduce the CR—CA...
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...statement: "All else equal, firms with relatively stable sales are able to carry relatively high debt ratios." Is this statement true or false? Explain. Are there instances where the opposite could be true? Sales revenues are, no doubt, the ultimate determining factor for the success of any business. Debt providers always look financial statements of the company to know about the sales revenue and profitability in order to judge about the company’s ability to repay interest and principal amount of debt. The statement that firms with relatively stable sales are able to carry relatively high debt ratios is true. Debt financing becomes more attractive when sales revenues are stable. Debt providers would have the confidence that company’s cash flows are adequate to make interest and debt payments on time. If there are large fluctuations in sale trends, cash flows of the company will also fluctuate and company’s ability to service its fixed charges will also vary. Large variations in cash flows would indicate that company will be unable to meet its fixed commitments. As a matter of concern, companies in stable industries have a propensity to use more debt than those whose sales are subject to large fluctuations or unstable sales revenue. The opposite of the above could also be true in some circumstances. Sometimes companies with stable sales tend to use less debt in their capital structure to avoid high leverage position. Debt is known to be a two-edged sword, if it is used wisely,...
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...Assets Current Liabilities Current Ratio Current Assets Current Liabilities Interest Coverage Ratio Net Income before Taxes + Interest Expense Interest Expense Interest Coverage Ratio Net Income before Taxes + Interest Expense Interest Expense Long-term Debt to Shareholders’ Equity (Long-term Debt + Current Portion of Long-Term Debt) Shareholders’ Equity Long-term Debt to Shareholders’ Equity (Long-term Debt + Current Portion of Long-Term Debt) Shareholders’ Equity Long-term Debt to Total Assets (Long-term Debt + Current Portion of Long-Term Debt) Total Assets Long-term Debt to Total Assets (Long-term Debt + Current Portion of Long-Term Debt) Total Assets Receivable Turnover Net Sales Accounts Receivable Receivable Turnover Net Sales Accounts Receivable Receivable Collection Period 365 (Net Sales / Accounts Receivable) Receivable Collection Period 365 (Net Sales / Accounts Receivable) Inventory Turnover Cost of Goods Sold Inventory Inventory Turnover Cost of Goods Sold Inventory Inventory-on-hand Period 365 (Cost of Goods Sold / Inventory) Inventory-on-hand Period 365 (Cost of Goods Sold / Inventory) Asset Turnover Net Sales Total Assets Asset Turnover Net Sales Total Assets...
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...and balance sheet is conducted using the percentage-of-sales method which initially forecasts firm’s sales then estimates all other accounts based on its relationship with sales. There are many assumptions which are used for conducting the firm’s income statement and balance sheet. However, the key assumptions are about sales, cost of goods sold to sales ratio, operating expense to sales ratio. * Sales: The growth rate of 13% is used for the next three years (2002-2004) as the sales growth rate of Body Shop increased significantly in 1990s because of there was only few competitors in the market. In addition, the growth rate of cosmetic and beauty industry in America and in over the world was a bit low during that time. Therefore, in the future, Body Shop’s sales growth rate should decrease to meet the average growth rate of this industry. Furthermore, it is difficult for Body Shop to improve their sales growth since there are more new entrants in this market in the next few years; and this potential market must be shared among these companies. Also, company tends to keep this growth rate at stable level for the next few years before deciding to make any change. The sales growth at 13% can also be derived from the opening of more than one hundred new stores which increase the total number of the stores over the world to nearly 1800. * Cost of goods sold (COGS): Another key driver for the assumption is the COGS to sales ratio. This ratio seems to be stable for the last three...
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...Margin Net Margin Return on Assets (ROA)2 Return on Beginning Equity (ROBE)3 Return on Invested Capital (ROIC)4 Pretax Return on Invested Capital Gross Profit Sales EBIT Sales Net Income Sales EBIT(1-Tax Rate) Average Total Assets Net Income Beginning Equity EBIT(1-Tax Rate) Interest-bearing Debt + Equity EBIT Interest-bearing Debt + Equity 1 n denotes the number of periods between observations Xt and Xt−n . Ratios that compare balance sheet and income accounts are often computed using the average of the balance sheet item. The average is computed by averaging beginning and year-end account balances. 3 Some analysts use year-end or average equity when computing ROE. 4 Interest-bearing debt is commonly defined as the sum of long-term debt, current portion long-term debt, and shortterm debt. Analysts may use year-end or average invested capital. 2 HBS Finance Tutorial 1 Ratio Formulas Efficiency Ratios Asset Turnover Net Working Capital Turnover Fixed Assets Turnover Days in Inventory (Days) Inventory Turnover Collection Period (Days) Receivables Turnover Days’ Sales in Cash (Days) Payables Period (Days)5 Sales Average Total Assets Sales Average Net Working Capital Sales Net PP&E Average Inventory COGS/365 COGS Average Inventory Average Receivables Sales/365 Sales Average Receivables Cash + Securities Sales/365 Accounts Payable Credit Purchases/365 Liquidity Ratios Current Ratio Quick Ratio6 Cash Ratio Interval Measure7 Current Assets Current Liabilities Cash...
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...Margin Net Margin Return on Assets (ROA)2 Return on Beginning Equity (ROBE)3 Return on Invested Capital (ROIC)4 Pretax Return on Invested Capital Gross Profit Sales EBIT Sales Net Income Sales EBIT(1-Tax Rate) Average Total Assets Net Income Beginning Equity EBIT(1-Tax Rate) Interest-bearing Debt + Equity EBIT Interest-bearing Debt + Equity 1 n denotes the number of periods between observations Xt and Xt−n . Ratios that compare balance sheet and income accounts are often computed using the average of the balance sheet item. The average is computed by averaging beginning and year-end account balances. 3 Some analysts use year-end or average equity when computing ROE. 4 Interest-bearing debt is commonly defined as the sum of long-term debt, current portion long-term debt, and shortterm debt. Analysts may use year-end or average invested capital. 2 HBS Finance Tutorial 1 Ratio Formulas Efficiency Ratios Asset Turnover Net Working Capital Turnover Fixed Assets Turnover Days in Inventory (Days) Inventory Turnover Collection Period (Days) Receivables Turnover Days’ Sales in Cash (Days) Payables Period (Days)5 Sales Average Total Assets Sales Average Net Working Capital Sales Net PP&E Average Inventory COGS/365 COGS Average Inventory Average Receivables Sales/365 Sales Average Receivables Cash + Securities Sales/365 Accounts Payable Credit Purchases/365 Liquidity Ratios Current Ratio Quick Ratio6 Cash Ratio Interval Measure7 Current Assets Current Liabilities Cash...
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...Ratios Debt Ratio = Total Debt Total Assets This measures the extent the firm uses debt to finance asset acquisitions. Debt to tangible net worth = Total Debt Net Worth - Intangibles Debt to equity = Total long term debt Total Stockowner's Equity Total Invested Capital = Book value of debt + Book value of equity. Times Interest Earned = EBIT Interest Payments Shows the ability of the firm to meet their fixed interest payment obligations out of current earnings. Earning debt service coverage : EBIT Interest + (Sinking fund/(1-tax rate) This is used when firms have obligations that require a fixed payment to principal as well as interest payments. Fixed charges coverage = EBIT + Lease Payments Interest + Lease Payments Turnover Ratios Total Asset Turnover = Annual Sales Total Assets Fixed Asset Turnover = Annual Sales Net Fixed Assets Inventory Turnover = (COGS) Ending inv. Capital Turnover = Annual Sales Invested Capital Average Collection Period = A/R x 360 Sales Payables Payment Period = A/P x 360 COGS Cost Ratios COGS Ratio = COGS Annual Sales COGS = cost of goods sold A/P = how much the firm is using suppliers to finance COGS inventories Operating Cost Ratio = Selling and Administrative Expenses Annual Sales Profitability...
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...TABLE OF CONTENT Chapter I 1.1. Introduction Chapter II 2.1. Liquidity Ratio 2.1.1 Current Ratio 2.1.2 Quick or Acid Test Ratio 1. 2. 3.1. 3.2. Asset Management Ratio 2. 3.1. 3.2. 2.2.1 Inventory Turnover Ratio 2.2.2 Fixed Asset Turnover Ratio 2.2.3 Days Sales Outstanding 2.2.4 Total Asset Turnover Ratio 3.3. Debt Management Ratio 2.3.1 Debt Ratio 2.3.2 Times-Interest-Earned-Ratio 3.4. Profitability Ratio 2.4.1 Operating Margin 2.4.2 Profit Margin 2.4.3 Return on Total Asset 2.4.4 Basic Earning Power Ratio 2.4.5 Return on Common Equity Chapter III 3.1. Calculation 3.1.1 Liquidity Ratio 3.1.2 Asset Management Ratio 3.1.3 Debt Management Ratio 3.1.4 Profitability Ratio 1. 2. 3. 3. 4.5. 4.6. Trend Analysis Appendix CHAPTER I INTRODUCTION Pharmaniaga Berhad, the largest integrated local healthcare company has established the reputation of a corporation that delivers value to its clients and stakeholders through impeccable quality products and services. The Group is driven by its goal to enrich the lives of the communities it serves while being guided by its business philosophy of doing business with a conscience. Hence, this cover concept coupled with the theme...
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...concern is with the firm's ability to pay short-term obligations as they come due. Long-term lenders - leverage because they are concerned with the relationship of debt to total assets. They also will examine profitability to insure that interest payments can be made. Shareholders - profitability, with secondary consideration given to debt utilization, liquidity, and other ratios. Since shareholders are the ultimate owners of the firm, they are primarily concerned with profits or the return on their investment. 2. a. Return on investment = Net income Total assets Inflation may cause net income to be overstated and total assets to be understated. Too high a ratio could be reported. b. Inventory turnover = Sales or COGS Inventory Inflation may cause sales to be overstated. If the firm uses FIFO accounting, inventory will also reflect "inflation-influenced" dollars and the net effect will be nil. If the firm uses LIFO accounting, inventory will be stated in old dollars and too high a ratio could be reported. c. Capital asset turnover = Sales . Capital assets Capital assets will be understated relative to sales and too high a ratio could be reported. d. Debt to total assets = Total debt . Total assets Since both are based on historical costs, no major inflationary impact will take place in the ratio. Assets are likely understated, however...
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...business, because revenues are increasing over the years (1984-1986). This can be caused due to the fact that revenues are being split in two sources: the sale of homes and the interest rate spread. But due to sales failures there is a concern about the increasing liabilities. So if these liabilities will rise till really high numbers and will overstate the assets, the business could get damaged and then it will loose its viability. 2. Most of Manufactured Homes its sales were credit sales whereby the customer paid a down payment of 5 to 10 percent of the sales price and entered into an installment sales contract with the company to pay the remaining amount over periods ranging from 84 to 180 months. A sale is recognized when payment is received or in this case of credit sales, when a down payment (5 to 10%) is received and the company and the customer enter into an installment contract. At the time of sale, the company receives immediate payment for the stated principal amount of the installment contract and a portion of the finance participation resulting from the interest rate differential. This accounting treatment is reasonable/not reasonable, because the way Manufactured Homes accounts for these transactions as sales are in accordance with Statement of Financial Accounting Standards. They recognize their sales at the moment the manufactured homes are sold and they will get paid immediately. So it’s approved if we look to the matching principle. 3. The company...
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...Assessments * Assignment Dropbox * Adobe Connect * Student Resources * My Grades * Calendar * FIU Resources * Course Resources * Technical Support My Groups * Group 10 Review Test Submission: Practice Exam I User | Piero Bazo | Course | 1158 - FIN6406 - Corporate Finance - Sections RXK & RXH & RXI & RXJ & RXL & RXW - Fall 2015 | Test | Practice Exam I | Started | 8/24/15 7:09 PM | Submitted | 8/24/15 8:26 PM | Status | Completed | Attempt Score | 85 out of 100 points | Time Elapsed | 1 hour, 16 minutes out of 2 hours | Results Displayed | All Answers, Submitted Answers, Correct Answers, Feedback | * Question 1 5 out of 5 points | | | Garcia Industries has sales of $120,000 and accounts receivable of $18,500, and it gives its customers 25 days to pay. The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed-up by this change, how would that affect its net income, assuming other things are held constant? | | | | | Selected Answer: | $769.86 | Answers: | $623.59 | | $762.16 | | $908.44 | | $769.86 | |...
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