a750 mid-term exam

7/29/2019 A750 Mid-Term Exam

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Poin ts w ill b e awa rd ed a s fo llows : Attainable ActualP art I: Inventory 18Par t ll: Income Taxes 17Part i ll : Analysis and Earnings 24Part N Cash f low Sta tement 18P art V : Ratios 15P art V I: Other areas 8TOTAL:

NAME:STUDENT NUMBER:

FINANCIA L STA TEMENT ANALY SISA7S0

Dura tion: 180 minute s Instructor: E. Bentzen-BilkvistMcMas te r Univer si ty Mid-Term Examina tion Novembe r 2005

INSTRUCTIONS1. This exam ination is com prised of 17 pages. There are 6 parts, w hich are to be answ ered in

th e s pa ce p ro vid ed fo r a to ta l o f 1 00 poin ts. B e b rie f in yo ur a nsw ers.2 . You are respo nsible for ensuring th at yo ur cop y o f t he q uestion p aper is complete. B ring an yd iscrepancy to the a tt en tion ofthe inv ig il ator .3. O n this page, fill in your nam e and student number. T he entire test paper m ust be returned tohave any c redit.4. The use of a calculator is perm itted. YOU MUST SHOW ALL COMPUTATIONS TOHAVE ANY CRED IT.5. A nsw er the questions to the best of your ability. N o questions w ill be entertained by theinvigilators during the exam ination period. This policy w as put in place to assure equalt reatmen t o f a ll s tuden ts .6. Reasonable annotated 8 Y2x 11 sheet o f p aper is allowed in the ex am .7.


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PART I INVENTORY (18 ma rk s)Sele ct ed in fonnation r egarding th e inventor ie s and cos t o f goods sold o f Westwood Ele ct ri ca lS up ply fo r Y ear 5 an d Year 6 app ears below :Income Sta temen t Year 6 Year 5

Sales $17,287Cost of Goods Sold 13.134Gross Margin $ 4.153$14,29611.080$ 3 .2 16

Dec embe r 3 1Balance Sheet Year 6 Year 5Inventories $1,186 $1,473 Year 4$1,258

N ote s to th e F in an cia l S ta te me ntsWestwood Elec tr ical Supp ly uses a las t- in , f ir st -ou t (LIFO) cos t- flow assumption for inven to riesand cos t o f goods sold . I nven to ri es on a f ir st -in , f ir st -out (F IFO) cos t- flow assump tion wouldh av e exceed ed the amounts reported o n a L IFO basis b y $37 6 at the end o f Y ear 6, $4 97 at theend of Y ear 5, and $338 at the end of Y ear 4.a) C om pute the am ount of cost of goods sold and gross m argin on a FIFO basis for Y ear 5 andYear 6. (6 marks)

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b) Com pute the gross m argin percentage (that is, gross margin as a percent of sales) for Y ear 5and Year 6 o n a L IFO and on a F IFO basis. (6 marks)

c) D urin g p erio ds o f risin g p rice s, L IFO g en era lly re su lts in a h ig her c ost o f g oo ds so ld an dlower g ro ss margin th an F IFO . Why doe s th is g en er aliz atio n not d es crib e a ccura te ly th eexperience of Westwood Electrical Supply? (6 marks)

Con tin ued.. ...


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Statutory F ederal tax rate 35.0016 35.0016 35.0%Goodwill amo rtiza tio n an d :w et im pa irm en ts 1.5 5.0Taxes on foreign incom e (3.6) (5.9) (7.1)E ffec t o f fo reig n c urren cy tran sla tio n (0.2) (0.2)S ta te tax es (n et o f F ede ral t2Xben efits ) 0.7 0.9 1.2Other d if fe rences (1.1) 0.9 2.4E ffec tive ta x rate 31.0016 32.2% 36.3%

The components of deferred t2X assets and deferred tax liabilities are shown belm.v.2002 2001

D eferred T ax D eferred T ax D eferred T ax De fe rre d T axA t D ec em ber 3 1, &seES Liabilities AsseIS Liabilities(millions)CurrentAdvertis in g and s ale s p romo tio n $ 35 $ $ 37 $Ben efit p la ns 46 48Discon tinued ope ra tion s 2 41Inventory 85 127Restru ctu rin g an d :w et im pairm ents 15 97Miscel laneous r eserve s and acc rual s 11 2 10 3Opera tin g lo ss a nd c re dit c ar ry fo rward s 2Other 85 26

To ta l cur rent 38 0 $ 48 1 $Net cu rre nt $380 $481NoncurrentBen efit p la ns $7 7 $ - $136 $ -Curre ncy tra ns la tio n e ffe ct o f p as s-th ro ugh entitie s 10 1Intangibles 128 151Opera tin g lo ss a nd c re dit c arr yfo rward s 15 19P rop erty , pla nt a nd e qu ipme nt 522 397Other 27 58Tota l noncurren t 92 778 155 606Valua tion a llowance $ (6) $ (8)

Net n on cu rre nt $692 $459ToulNet def er red t ax a sset sI li ab iI it ie s $312 $22

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PART II INCOME TAXES (17 mark s)T he followin g is th e In come T ax d isc los ure no te fo r G ille tte Compa ny 's 20 02 F in an cial S ta tem en ts.A nswer the fo llowing q ue stio ns reg ardin g G ille tte's ta x d isc los ure.A reconciliation of the statutory F ederal incom e tax rate to the C om pany's effective tax rate follow s.

Yean ended December 31, 2002 2001 2000(percent)


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QUESTIONS:1. W as taxable incom e greater or less than book incom e before taxes for 2002? (3 marks)

2. G iv e the Journal E ntry to reco rd the provision for Incom e tax for 2002. U se deferred taxa ss et a nd d efe rr ed ta x lia bility a ccounts in you r J ou rn al Entry . ( 4 mark s)

Continued. ....


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Page 63 . Assume that dep recia tion expense s for f inancia l r epor tingwas $500,000 ,000 for 2002. Compu tethe am ount of depreciation expenses for tax reporting for 2002. (4 m arks)

4 . Wh at w ere th e d eferred ta x liab ilitie s? P ick o ut o ne item an d ex plain wha t it m ean s. (3 m ark s)

5 . G iv e o ne e xample o f a p erm an en t d ifferen ce b etw ee n F in an cia l R ep ortin g a nd T ax R ep ortin gfor Gillette. (3 marks)

Cont inued .. .. .


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PART III ANALYS IS OF EARNINGS

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(2 4 mark s)I nte rn atio na l P ap er Comp is th e la rg es t fo re st p rodu cts c ompany in th e wo rld . The exh ib it b elowp resen ts. In tern atio na l P ap er's in come statem en t fo r Y ear 4 , Y ea r 5 , Y ear 6 an d Y ea r 7 .

I nte rn atio na l P ap erIncome Statements(amounts in mi ll ions)

Year Ended December 31Year 4

Sales $12,960Cost of Goods Sold. . . . . . . . (9,930)Se lli ng and Adminis trat ive Expenses . (1,595)Restructuring charges (212)Interest Expense (277)Income Taxes (377)Income from C ontinuing $ 569Extraord inary Loss on Debt.. .. ..Changes in Accounting Principles.. .. .. .. ..Net Income $ 569

Y ear 5$ 12,703(10,041)(1,649)

(60)(315)(239)$ 399(215) 89

Y ear 6$ 13,598(10,987)(1,760)

(398)(247)J@$ 142(6 )(50)1.8.6

Year 7$ 13 ,68 5(11,089)(1,786)(310)mu$ 289

T he n otes to the fin an cia l a ssessm ents revea l th e f ollo wing in form atio n.RESTRUCTURING CHARGES . In D ecemb er Y ear 4 , th e C ompan y comp leted a rev iew o fope ra tio ns in th e con ta ct o f its o ngoing p rograms to empha siz e v alu e-a dd ed p rodu cts in g row ingmark ets a nd improv e th e e ff ic ie ncy o f its fa cilitie s. A s a r es ult, th e Company r ecor ded a p re ta xcha rg e o f $212 m illio n ($137 m illio n a fte r ta xe s) ; p rin cip ally re la te d to th e p la nn ed s ale o rc lo su re o f cer ta in wood p roducts and conve rting fac ilitie s, the e stima ted cos t o f r emedia tion, andseverance and o ther per sonnel expense s a ssoc ia ted w ith the improvemen t p rogram .In D ecemb er Y ear 5 , t he C ompan y re co rd ed a $ 60 m illio n ($ 37 m illio n a fter ta xes) red uc tio n inwork cha rg e to cov er s ev era nc e cos ts a ss oc ia te d w ith th e e lim in atio n o f mor e th an 1 ,000pos itions f rom its worldw ide work force .In Nov ember Y ear 6 , th e C ompa ny re co rd ed a p reta x ch arg e o f $ 39 8 m illio n ($ 26 3 m illio n a fter' .ta xe s) to e sta blis h a p rodu ctiv ity imp rovement r es er ve . Over 80 p erc en t o f th is c ha rg e r ep re se ntsa ssets write -downs for f ac ility c lo sings o r r ea lignments and rela ted severance and reloca tioncos ts . The balance cover s one -time cos ts o f env ironmen ta l c le an -up, r emedia tion, and lega lcosts.EXTRAORDINARY ITEM . T he C om pany recorded a loss of$6 m illion on the earlye x t i n g u i s l u n e n t o f h igh- in te re st r ate deb t dur ing Year 6 .

Cont inued . .. ..


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Page 8ACCOUNTING CHANGES. The Company adopted the provision of F ASB Statem ent N o. 106,"Employer's A ccounting for P ostretirem ent B enefits O ther T han P ensions", on January 1, Y ear 5.The C om pany recognized a pretax charge of $350 m illion ($215 m illion after taxes). T hecom pany adopted the provisions of F ASB Statem ent N o. 109, "A ccounting for Incom e Taxes", onJanuary 1, Y ear 6, resulting in a charge of $50 m illion.a ) D isc uss th e ap pro priate trea tm en t o f: 1 ) R e stru ctu rin g Cha rg es (2 ) E xtra ordin ary Item (3)A ccounting C hanges, in an assessm ent of the profitability ofIntem ational Paper. (12 m arks)

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Page 9b) A ssum e now that you have decided to elim inate each of the item s in part a). Indicate the

a dju stm en ts to th e in come sta teme nt o f In te rn atio na l P ap er to e lim in ate e ac h o f th e items in p arta). The income tax rate was 35 percent in Year 4, Year 5, Year 6 and Year 7. (12 marks)

Continued ... . .


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PART IV CASH FLOW STATEMENT (18 marks)Refer to Gillette Com pany statem ent of cash flows in the attachm ents to this m idterm exam (seepages 15 to 17 of the M id-term ).1. Explain the three-year trend in operating cash flow s for G illette C om pany. (5 ma rk s)

2 . Wh at were the free cash flow s for 2 000 ,20 01 and 2 00 2 fo r G illette Compan y?(3mark s)

Continued.. ...


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3 . D id th e c ompa ny in th e 3 y ear p erio d g en era ted en ou gh ca sh ftom operatio ns to fin an ce b otha dd itio ns to ca pita l a ssets, p urch ase o f c ompa ny s to ck a nd p aymen t o f d iv id en ds? (6 m ark )

4 . In 20 02, $529 "fund ing o f C om pany pension p lan" appears as a negativ e item in th eoperating section ofthe cash f low statement. Why? (3 m arks)

Con tin ued.. ...


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Page 12PART V RATIOS (1 5 mark s)In th e G illette C om pan y fin anc ial statem ents (se e pa ges 15 -17 ), comp ute th e fo llow in g ratios fo r th eyear ended D ecem ber 31, 2002.1. Retu rn on Asse ts. (4 marks)

2. Curren t Ratio . (2 marks)

3. F ixed asset s turnover . (3 marks)

4. Retu rn o n Common Equ ity . (4 marks)

5. Accounts rece ivable Turnover (2 marks)

Contin ued.. ...


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PART VI OTHER AREAS (8 mark s)Answe r th e fo llowing que stions in th e space p rovided (e ach mu ltip le que stion = 2 mark s)I. Why m ight th e u se o f a cc ele ra ted dep re cia tion ra th er th an s tr aight-lin e dep re cia tion p roduce

earnings of h igher qua li ty?a ) Acce le ra ted deprecia tion more accurate ly ref lect s f inancia l r ea lit y because h ighe rdep re cia tion expense would be taken in the early yea rs o f its p roductiv e period.b ) Du ring in fla tiona ry periods , r is ing p ric es in cre as e repla cement cos ts o f most a ss ets ,r esul ting in an unders ta tement o f deprecia tion based on h is to ri ca l cos t.c) Both (a) and (b).d) None of the above.

2 . Wh ic h o f th e fo llowin g a re meth od s by whic h man ag emen t c an man ip ulate e arn in gs a ndposs ib ly lower the qua li ty of repor ted earnings?a ) Chang ing an accounting policy to in cre as e e arn ings.b) R efusing to take a loss o n in vento ry in an accou nting period w hen the in vento ry is k now nto be obso le te .c ) Decreasing d iscretionary expenses.d) All of the above.

3. Which of h e fo llow ing statem en ts is false?a) A negative fiv e cash flow can occu r in a year in w hich net incom e is positive.b ) An incre as e in a ccounts re ce ivab le repre sents a ccounts not yet colle cted cash.c) An in cre ase in a cc ounts p ay ab le rep rese nts ac coun ts n ot y et co llec te d in c ash .d ) T o obta in ca sh flow from opera tio ns, th e re po rted n et in come must b e a dju ste d.

4 . G ains and losses o n sales of prop erty, plant and equ ipm ent for casha) a re a pp ro xim ately e qu al to th e ca sh re ceiv ed in th e saleb) app ear in the in vestin g section of the Statem ent o f C ash Flow s, w ith the label gain or lossc ) sh ou ld b e in clu de d in th e sales, g en eral a nd a dm in istrativ e co sts (SG&A) componen t o fmcomed) all of a, b, ce) none of a, b, c

Continued . .. ..


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Attachments toMid - Term Exam

A750November, 2005

Financia l S ta tements Analysis

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Continued.. ...


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Consolidated B alance SheetThe Gillette Company and Subsidiary Companies

At December 31,(miDiOIU,xcept per shareamount) 2002

AssetsC urrent A ssetsC ash and cash equivalentsTrade receivables, less a llowances: 2002 - $73; 2001 - $69O th er re ce iv ab le sInventoriesDeferred incom e UXesO ther current assetsT otal C urrent A ssets

Property, Plant and Equipm ent, netGoodwillIn tan gib le A sse ts, n etO ther A ssets

$ 8011,20231192 83801753,7973,5659624001,139

$9,863Liabilities a nd S to ck ho ld er s' EquityCu rr en t L ia bilitie sLoa ns p ay ab leCurrent portion of long-tenn debtA cco un ts p ay ab le an d acc ru ed lia bilitiesIncom e taxesTota l Curr en t L ia bilitie s

Long-Term DebtDeferred Income TaxesO ther L ong-T erm L iabilitiesM in ority In tere stContingent Redemption Value of Common Stock Put OptionsS to ck ho ld ers' E qu ityCommon stock, par value $ 1 per shareA uthorized: 2,320 shm sIssued 2002 -1,370 shares; 2001 - 1,368 shares

A dd itio nal p aid -in cap italE arn in gs rein veste d in th e b usin essA ccum ulated o ther com prehensiv e lossT reasu ry stock . at cost:2002 - 326 sh2re s; 2 001 - 3 12 sh are s

Tota l S to ckho ld er s' E qu ity

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20

$ 941,47311,0148123 0

4,4553,548935418613

$9,969

$ 6735272,054234

3,4882,45769292046

1,3701,1976,608(1,523)(5,392)2,260$9,863

$2,2354281,88029 54,838

1,6544598054234

1,3681,0946,077(1,437)(4,965)2,137$9,969

Continued . .. ..


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$ 1.14.01

$ 1.15

$1,216

Consolidated Statement of IncomeThe Gillette Company H,d Sublidiary Companiel

Years Ended December 31, 2002 2000(mi lli ON . e xc ep t p er I ha n: amo un ts )

N et SalesCost of SalesG ro ss P ro fit

$8,4533,5114,9423,172(39)1,809

S ellin g, G en eral an d A dm in istrativ e E xp en sesR estructurin g, A sset Im pairm en t an d O therP ro fit fiom Ope ratio nsNonoperating Charges (Income)I nte re st in comeIn te re st e xp en seO th er charges (incom e) - ne t

(25)84(2 )57

1,7525431,209

In come fiom Con tin uin g Ope ratio ns b efo re In come T ax esIn come T ax esIn come fiom Con tin uin g Operatio nsLoss on D isp osal o f D iscontin ue d Ope ratio ns, n et o f taxIn come (Los s) fiom D is contin ue d Ope ratio ns, n et o f ta xN et Incom e

7$1,216

2001

$8,0843,4074,6773,007172

1,498(4 )14515156

1,342432910

$ 910

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$8,3103,4694.8412,75757 2

1,512(5

22 3622 4

1,28846 782 1(428)(1

$ 392Net Income (Loss) per CommonShare, basicC on tin uin g O peratio nsD isp osal o f D isco ntin ue d O peratio nsD isc on tin ue d Ope ra tio ns

Net Incom e

$ 1.15 $ .86 S .78(AI)S 1.15 $ .37.86

Net Income (Loss) per Common Share,assuming full dilutionCon tin uin g O pe ratio nsD isp osal o f D isco ntin ued O peratio nsD is contin ue d Ope ra tio ns

Net Incom e

$ .86 S .77(040$ .86 $ .37

Adju ste d Net In come , a ssuming t he a doptio n o f SPAS 142for 2001 and 2000Adju sted Net In come per C ommon Sh2 re , a ssuming th e adop tio nof SPA S 142 for 2001 and 2000BasicAssuming full d ilu tionWe ighte d ave ra ge number o f c ommon sha re s outs ta nd ingBmcAssumingfulldilutionS oc a n I III (- rf ac N oc a l it C a 1 l1 I1 i'. . FiaIIICiaI ..

S 1.15S 1.151,0551,059

$ 934

$ .89S .88

$ 423

S 040$ 0401,055 1,0541,058 1,063Conti nued .. .. .


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Consolidated Statement of Cash Flows Page 17The Gillelte Company and Subsidiary Companies

a750 mid-term exam

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