On May 1, 2011, Javier Munoz opened Javier’s Repair Service. During the month, he completed the following transactions for the company:
May 1 Began business by depositing $5,000 in a bank account in the name of the company in exchange for 500 shares of $10 par value common stock.
1 Paid the rent for the store for current month, $425.
1 Paid the premium on a one-year insurance policy, $480.
2 Purchased repair equipment from Chmura Company, $4,200. Terms were $600 down and $300 per month for one year. First payment is due June 1.
5 Purchased repair supplies from Brown Company on credit, $468.
8 Paid cash for an advertisement in a local newspaper, $60.
15 Received cash repair revenue for the first half of the month, $400.
21 Paid Brown Company on account, $225.
31 Received cash repair revenue for the last half of May, $975.
31 Declared and paid a cash dividend, $300.
Required for May
1. Prepare journal entries to record the May transactions.
2. Open the following accounts: Cash (111); Prepaid Insurance (117); Repair Supplies (119); Repair Equipment (144); Accumulated Depreciation – Repair Equipment (145); Accounts Payable (212); Common Stock (311); Dividends (313): Income Summary (314); Repair Revenue (411); Store Rent Expense (511); Advertising Expense (512); Insurance Expense (513); Repair Supplies Expense (514); and Depreciation Expense – Repair Equipment (515). Post the May journal entries to the ledger accounts.
3. Using the following information, record adjusting entries in the general journal and post to the ledger accounts:
a. One month’s insurance has expired
b. The remaining inventory of unused repair supplies is $169.
c. The estimated depreciation on repair equipment is $70.
d. Estimated income taxes, $50.
4. From the accounts in the ledger, prepare an adjusted trial balance. (Note: Normally, a trial balance is also prepared before adjustments but is omitted here to save time).
5. From the adjusted trial balance, prepare an income statement, a statement of retained earnings, and a balance sheet for May.
6. Prepare and post closing entries.
7. Prepare a post-closing trial balance.
Second Part:
During June, Javier Munoz completed these transactions for Javier’s Repair Service:
June 1 Paid monthly rent. $425.
1 Made the monthly payment to Chmura Company, $300.
6 Purchased additional repair supplies on credit from Brown Company, $863.
15 Received cash repair revenue for the first half of the month, $914.
20 Paid cash for an advertisement in the local newspaper, $60.
23 Paid Brown Company on account, $600.
30 Received cash repair revenue for the last half of the month, $817.
30 Declared and paid a dividend, $300.
8. Prepare and post journal entries to record the June transactions.
9. Using the following information, record adjusting entries in the general journal and post to the ledger accounts:
a. One month’s insurance has expired
b. The remaining inventory of unused repair supplies is $413.
c. The estimated depreciation on repair equipment is $70.
d. Estimated income taxes, $50.
10. From the accounts in the ledger, prepare an adjusted trial balance. (Note: Normally, a trial balance is also prepared before adjustments but is omitted here to save time).
11. From the adjusted trial balance, prepare an income statement, a statement of retained earnings, and a balance sheet for June.
12. Prepare and post closing entries.
13. Prepare a post-closing trial balance.
In: Accounting
I JUST NEED THE NAMES OF THE ADJUSTING ENTRY ACCOUNTS FOR A) THROUGH I). I don't need the numbers. I attached the balance sheet in case you need it for reference
Problem -
Your required tasks are as follows: On the designated worksheet, prepare in journal entry form the adjusting journal entries for the following items. Letter entries to correspond to the below information and present them in alphabetical order. (Round all numbers to the nearest dollar)
a) On June 1, 2016 B&B paid Lorre Advertising $48,000 for two years of advertising services. Equal services are provided in year 1 and year 2 of the contract.
b) B&B needed some additional storage space so on September 1, 2016 they rented a unit for an annual rate of $10,200. The entire amount was expensed when paid.
c) $4,250 of store supplies were purchased during the year and the asset Store Supplies was increased. $2,150 of these supplies were used during the year.
d) $6,500 of office supplies were purchased during the year and were immediately expensed. A count of the office supplies on hand December 31, 2016, indicates a balance of $1,500.
e) On October 1, 2016, B&B issued a 9-month note receivable to Greenstreet & Co. at an annual interest rate of 4%. Principal and interest will be paid at the end of the 9-months. The note was recorded in Notes Receivable and is the only note outstanding.
f) Sales salaries of $6,200 and office salaries of $4,800 were earned and remained unpaid at 12/31/16.
g) On May 1, 2016, B&B rented a portion of one store to Paul Henreid Co. The contract was for 10 months and B&B required the 10 months of cash upfront on May 1. The rent is being earned equally over the next 10 months. When cash was received, unearned rent was appropriately recorded.
h) On November 1, 2016, B&B collected $18,000 for consulting services to be performed from November 1, 2016 to February 28, 2017. The company credited the revenue account when the cash was received.
i) Based on past experience, B&B calculates bad debt expense at 1.5% of net sales for the year.
Refer to balance sheet:
| Bogie and Bacall Company | ||||||
| End of Period Worksheet | ||||||
| For the Year Ended December 31, 2016 | ||||||
| Unadjusted | Adjusted | |||||
| Account Title | Trial Balance | Adjustments | Trial Balance | |||
| DR | CR | DR | CR | DR | CR | |
| Cash | 49,800 | - | ||||
| Accounts Receivable | 77,450 | - | ||||
| Allowance for Doubtful Accounts | 2,000 | |||||
| Interest Receivable | - | |||||
| Merchandise Inventory | 160,500 | - | ||||
| Prepaid Insurance | 18,000 | - | ||||
| Prepaid Advertising | 48,000 | |||||
| Prepaid Rent | - | |||||
| Store Supplies | 4,250 | - | ||||
| Office Supplies | - | - | ||||
| Note Receivable | 24,000 | |||||
| Store Equipment | 175,000 | - | ||||
| Accumulated Depreciation - Store Equipment | - | 40,050 | ||||
| Office Equipment | 80,000 | - | ||||
| Accumulated Depreciation - Office Equipment | - | - | ||||
| Accounts Payable | - | 85,200 | ||||
| Salaries Payable | - | - | ||||
| Interest Payable | - | - | ||||
| Unearned Rent | - | 20,000 | ||||
| Unearned Consulting Revenue | ||||||
| Note Payable (payment due 2020) | - | 146,000 | ||||
| Common Stock | - | 60,000 | ||||
| Retained Earnings | - | 111,500 | ||||
| Dividends | 35,000 | - | ||||
| Sales Revenues | - | 808,950 | ||||
| Consulting Revenue | 24,000 | |||||
| Sales Returns and Allowances | 11,700 | - | ||||
| Sales Discounts | 7,200 | - | ||||
| Cost of Goods Sold | 457,200 | - | ||||
| Sales Salaries Expense | 94,650 | - | ||||
| Advertising Expense | - | |||||
| Depreciation Expense - Store Equipment | - | - | ||||
| Store Supplies Expense | - | - | ||||
| Miscellaneous Selling Expense | 2,600 | - | ||||
| Office Salaries Expense | 34,000 | - | ||||
| Rent Expense | 10,200 | - | ||||
| Insurance Expense | - | - | ||||
| Depreciation Expense - Office Equipment | - | - | ||||
| Office Supplies Expense | 6,500 | - | ||||
| Miscellaneous Administrative Expense | 1,650 | - | ||||
| Rent Revenue | - | - | ||||
| Interest Revenue | ||||||
| Interest Expense | - | - | ||||
| Bad Debt Expense | - | - | ||||
| 1,297,700 | 1,297,700 | |||||
In: Accounting
M - After reviewing details of sales, you note that the sales taxes collected on the last week of December’s sales were included in sales revenue. Sales recorded the last week of December that included the sales tax of 2% amounted to $350,000.
N -Accounting Creations uses the Dollar Value LIFO inventory method. For internal purposes, the Merchandise Inventory Account is maintained at FIFO (current costs). At the end of the year, the LIFO reserve account is adjusted so inventory on the balance sheet reflects Dollar Value LIFO. You need to calculate the proper inventory balance and adjust the LIFO reserve. The price index for this year is 1.25. Prior year inventory records show the following calculation for 2018:
175,000 X 1.0 = 175,000
100,000 X 1.05 = 105,000
O - All office equipment was purchased January 1, 2017. Accounting Creations uses the DDB method to depreciate office equipment. No office equipment has been added since the initial purchase. It is estimated that the office equipment has a useful life of 10 years with a salvage value of $12,000.
Accounting Creations was authorized to issue 3,000,000 shares of $1 par Common Stock but has only issued 650,000 shares of common stock as of 12/31/2018. No new shares were issued during 2018.
1. On the “Adjusting Journal Entries” worksheet, prepare in journal entry form all adjusting and correcting journal entries based on the following information. All information was provided to you as of 12/31/2018. (Round all numbers to the nearest dollar). Label journal entries a through t.
| Accounting Creations Incorporated | ||||||
| End of Period Worksheet | ||||||
| For the Year Ended December 31, 2018 | ||||||
| Unadjusted | Adjusted | |||||
| Account Title | Trial Balance | Adjustments | Trial Balance | |||
| DR | CR | DR | CR | DR | CR | |
| Cash | 330,000 | - | ||||
| Accounts Receivable | 694,980 | - | ||||
| Allowance for Doubtful Accounts | - | 17,000 | ||||
| Interest Receivable | - | - | ||||
| Merchandise Inventory | 425,000 | - | ||||
| Prepaid Insurance | - | - | ||||
| LIFO Reserve | - | 32,000 | ||||
| Prepaid Advertising | - | - | ||||
| Prepaid Rent | 17,000 | - | ||||
| Office Supplies | 6,000 | - | ||||
| Note Receivable | 25,000 | |||||
| Available for Sale Securities | 375,000 | - | ||||
| Office Building | 3,750,000 | - | ||||
| Accumulated Depreciation - Office Building | - | 87,500 | ||||
| Storage Building | 1,275,000 | - | ||||
| Accumulated Depreciation - Storage Building | - | - | ||||
| Land | 750,000 | - | ||||
| Leasehold Improvements | 225,000 | - | ||||
| Accumulated Depreciation - Leasehold Improvements | - | - | ||||
| Office Equipment | 325,000 | - | ||||
| Accumulated Depreciation - Office Equipment | - | 65,000 | ||||
| Patent | 150,000 | - | ||||
| Accounts Payable | - | 345,000 | ||||
| Sales Tax Payable | - | - | ||||
| Salaries Payable | - | 142,000 | ||||
| Payroll Taxes Payable | - | 25,000 | ||||
| Interest Payable | - | - | ||||
| Income Tax Payable | - | - | ||||
| Unearned Rent Revenue | - | - | ||||
| Loan Payable - Onstar Bank | - | 650,000 | ||||
| Loan Payable - Coldstar Bank | - | 2,000,000 | ||||
| Common Stock | - | 650,000 | ||||
| Additional Paid in Capital | - | 1,998,750 | ||||
| Retained Earnings | - | 920,000 | ||||
| Accumulated Other Comprehensive Income | - | 25,000 | ||||
| Dividends | 84,750 | - | ||||
| Sales | - | 4,528,200 | ||||
| Sales Returns and Allowances | 42,250 | - | ||||
| Sales Discounts | 19,250 | - | ||||
| Cost of Goods Sold | 1,979,500 | - | ||||
| Sales Salaries Expense | 436,400 | - | ||||
| Office Salaries Expense | 274,000 | - | ||||
| Advertising Expense | 16,000 | - | ||||
| Depreciation Expense - Office Building | - | |||||
| Depreciation Expense - Leasehold Improvements | - | - | ||||
| Depreciation Expense - Office Equipment | - | - | ||||
| Leasing Expense - Stores | 132,000 | - | ||||
| Miscellaneous Selling Expense | 23,000 | - | ||||
| Research & Development Expense | 15,000 | |||||
| Rent Expense - Storage Facility | - | - | ||||
| Insurance Expense | 15,000 | - | ||||
| Office Supplies Expense | 35,000 | - | ||||
| Miscellaneous Administrative Expense | 9,170 | - | ||||
| Rent Revenue | - | 75,000 | ||||
| Interest Revenue on Note Receivable | - | - | ||||
| Dividend Revenue on AFS Securities | - | 25,000 | ||||
| Interest Expense | - | - | ||||
| Bad Debt Expense | 35,000 | - | ||||
| Amortization Expense | - | - | ||||
| Income Tax Expense | - | - | ||||
| Payroll Taxes Expense | 121,150 | - | ||||
| 11,585,450 | 11,585,450 | |||||
In: Accounting
The Company: T&K Solutions
T&K Solutions is a boutique accounting firm offering taxation, bookkeeping and advisory services to a broad range of clients across the Brisbane and Gold Coast area. The firm was established by Terry Thompson in 1998 as a small suburban accounting firm where he offered taxation and bookkeeping services to local businesses. Terry soon developed a reputation for his expertise in taxation and his client base grew considerably.
A few years ago Terry recognised a growing need for advisory services from his clients. Sincethis was not Terry’s area of expertise he searched for a partner that could provide this service to his clients. In 2014 he met Kerry Chua who was working in consulting and advisory for one of the Big 4 accounting firms. Terry was impressed with Kerry’s skills and enthusiasm andinvited her to join him as a partner and head of the advisory service. Together, Terry and Kerry rebranded the firm to T&K Solutions. They invested heavily in advertising to promote their new service and relocated the office from the suburbs to the centre of Brisbane. All of these activities added substantial fixed costs to the business but Kerry was confident their investment would pay off.
Kerry was right. Since rebranding and relocating, T&K Solutions have tripled their billable hours by expanding their services to existing clients and attracting new ones. However, despite the success and growth in revenue, Terry remains concerned by the high amount of fixed overheads. Furthermore, the most recent profit and loss statement indicates that the bookkeeping division is losing money. Terry also feels he is losing control over the budgeting process. In the past Terry spent minimal time planning, however with the rapid growth in clients and fixed costs, Terry thinks the firm would benefit from a more thorough budgeting process using flexible budgeting to identify and manage variations between actual and expected outcomes. If only he had the spare time to devote to this!
To manage individual client accounts T&K Solutions use normal job costing. Each job is assigned actual direct labour costs (i.e. hours worked by professional staff). Indirect costs are allocated to each job using a firm-wide predetermined overhead rate allocated to each job based on the amount of billable hours. Then a profit margin of 30% is added to calculate the amount chargeable to each client. This simplistic costing system worked well when Terry was the sole partner and offered only two services. However since the expansion in service and client base, along with the increase in fixed overheads, Terry has become concerned that a single overhead rate applied equally across all services is resulting in an unequitable distribution of costs and that clients are being incorrectly invoiced.
Terry has proposed the firm review their costing process and move to an Activity Based Costing (ABC) method for allocating fixed overheads. Kerry doesn’t see any point in reviewing the costallocation basis and thinks moving to ABC costing will only add administrative time, reducing the overall profitability of the firm. Moreover she tells Terry that “ABC is only relevant to manufacturing companies and has no benefit to a service firm such as T&K Solutions”.
Question
whether you think Terry and Kerry should continue to operate or drop the bookkeeping service. Analysing should include reference to your calculations from above as well as any relevant qualitative factors that T&K should consider before deciding whether to continue or drop bookkeeping services ?limited 250 words?.
| DATA FOR TASK A: | 2017 Profit and Loss Statement for T&K Solutions: | ? | ? | ? | ? |
| ? | Taxation | Bookkeeping | Advisory | Total | ? |
| ? | $ | $ | $ | $ | ? |
| Revenue | 800,000 | 195,000 | 950,000 | 1,945,000 | ? |
| Less: Costs | ? | ? | ? | ? | ? |
| - Partner Salary | 75,000 | 75,000 | 150,000 | 300,000 | ? |
| - Professional Staff Costs | 320,000 | 120,000 | 400,000 | 840,000 | ? |
| - Office Staff | 45,000 | 45,000 | 45,000 | 135,000 | ? |
| - Client travel costs | 25,000 | 5,000 | 52,000 | 82,000 | ? |
| - IT Support | 5,000 | 3,000 | 9,000 | 17,000 | ? |
| - Printing & Stationary | 8,000 | 3,200 | 11,000 | 22,200 | ? |
| - Advertising | 8,000 | 8,000 | 8,000 | 24,000 | ? |
| - Rent | 16,000 | 16,000 | 16,000 | 48,000 | ? |
| - Utilities | 8,000 | 8,000 | 8,000 | 24,000 | ? |
| - Depreciation | 5,000 | 5,000 | 5,000 | 15,000 | ? |
| - Bad debts | 2,000 | 3,000 | - | 5,000 | ? |
| Net Profit | 283,000 | -96,200 | 246,000 | 432,800 | ? |
| ADDITIONAL INFORMATION: | ? | ? | ? | ? | ? |
| Partner Wages | Terry and Kerry are both paid a salary of $150k pa. Terry's salary is spread between Tax & Bookkeeping. Kerry's salary is charged to Advisory | ||||
| Professional Staff | Professional Staff are paid $80k per full-time equivelent (FTE). Tax has 4 professional staff , Advisory has 5 professional staff and Bookkeeping has 3 part time staff who each work 0.5 of a FTE. If bookeeping was to close, these staff would no longer be required. | ||||
| Office Support Staff | The firm has 3 office support staff each paid $45k per year. Currently their costs are spread evenly between the 3 service units. It is expected that if bookkeeping was to close there would be no change to the support staff. | ||||
| Client Travel Costs | Client travel costs vary depending on the service and client needs. | ||||
| IT support | IT support costs vary with the associated service unit. | ||||
| Printing & Stationary | Printing and stationary costs vary depending on the client needs and service performed. | ||||
| Advertising | Advertising costs are alloacted evenly across the firm. However, if bookkeeping was to close it is expected advertising costs would only reduce by 10% in total. | ||||
| Rent & Utilities | Rent and Utilities are currently spread evenly across the 3 service units. If bookkeeping was to close the additional floor space would be absorbed by the remaining services and there would be no savings in utilitity costs. | ||||
| Deprectiation | Depreciation relates to shared office equipment and is charged evenly across each service unit. If bookkeeping was to close all existing equipment would remain. | ||||
| Bad debts | Bad debts relate specifically to clients within that service unit. | ||||
| TASK A SCHEDULE 1: | 2017 Profit & Loss - If T&K Drop Bookkeeping | ? | ? | ? |
| ? | Taxation | Bookkeeping | Business Advisory | Total |
| ? | $'000 | $'000 | $'000 | $'000 |
| Revenue | 800,000 | - | 950,000 | ? |
| Less: Costs | ? | ? | ? | ? |
| - Partner Salary | 75,000 | 75,000 | 150,000 | 300,000 |
| - Professional Staff Costs | 320,000 | - | 400,000 | 720,000 |
| - Office Staff | 45,000 | 45,000 | 45,000 | 135,000 |
| - Client travel costs | 25,000 | - | 52,000 | 77,000 |
| - IT Support | 5,000 | - | 9,000 | 14,000 |
| - Printing & Stationary | 8,000 | - | 11,000 | 19,000 |
| - Advertising | 7,200 | 7,200 | 7,200 | 21,600 |
| - Rent | 16,000 | 16,000 | 16,000 | 48,000 |
| - Utilities | 8,000 | 8,000 | 8,000 | 24,000 |
| - Depreciation | 5,000 | 5,000 | 5,000 | 15,000 |
| - Bad debts | 2,000 | - | - | 2,000 |
| ? | ? | ? | ? | ? |
| Net Profit | $283,800.0 | -$156,200.0 | $246,800.0 | $374,400.0 |
| ? | ? | ? | net profit of last year | $432,800.0 |
| If bookkeeping was closed, the net change in profit for T&K solutions would be : | -$58,400 | |||
In: Accounting
Using the financial statements for HealthSouth Corp for the quarter ending 6/30/2002, or use the current financial statements for either Microsoft or Facebook. Choose your primary ratio and post your analysis.
2 Calculate several ratios—I would suggest at least one from each of the categories (profitability, liquidity, solvency, and activity/efficiency) from chapter 4 (chapter 11 in Marshall) in the text plus at least one ratio that you have found somewhere else or even made up. You should examine these ratios over a 4 year period (No need to look at every quarter). For example you might look at quarter 2 every year for 4 years—including the quarter that I have chosen. Once you are used to looking up financial statements--if you do this strategically you should be able to examine 4 years of data by looking at only two separate years of financial statements. Please do not discuss all of these ratios. Your goal in calculating a number of ratios is to increase your chances of finding a ratio that is interesting and important.
|
INCOME STATEMENTS - USD ($) |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
| Dec. 31, 2017 | Dec. 31, 2016 | Dec. 31, 2017 | Dec. 31, 2016 | |
| Revenue | ||||
| Product | $ 17,926 | $ 18,273 | $ 32,224 | $ 33,241 |
| Service and other | 10,992 | 7,553 | 21,232 | 14,513 |
| Total revenue | 28,918 | 25,826 | 53,456 | 47,754 |
| Cost of revenue | ||||
| Product | 5,498 | 5,378 | 8,478 | 8,959 |
| Service and other | 5,566 | 4,523 | 10,864 | 8,786 |
| Total cost of revenue | 11,064 | 9,901 | 19,342 | 17,745 |
| Gross margin | 17,854 | 15,925 | 34,114 | 30,009 |
| Research and development | 3,504 | 3,062 | 7,078 | 6,168 |
| Sales and marketing | 4,562 | 4,079 | 8,374 | 7,297 |
| General and administrative | 1,109 | 879 | 2,275 | 1,924 |
| Operating income | 8,679 | 7,905 | 16,387 | 14,620 |
| Other income, net | 490 | 117 | 766 | 229 |
| Income before income taxes | 9,169 | 8,022 | 17,153 | 14,849 |
| Provision for income taxes | 15,471 | 1,755 | 16,879 | 2,915 |
| Net income (loss) | $ (6,302) | $ 6,267 | $ 274 | $ 11,934 |
| Earnings (loss) per share: | ||||
| Basic | $ (0.82) | $ 0.81 | $ 0.04 | $ 1.54 |
| Diluted | $ (0.82) | $ 0.80 | $ 0.04 | $ 1.52 |
| Weighted average shares outstanding: | ||||
| Basic | 7,710 | 7,755 | 7,709 | 7,772 |
| Diluted | 7,710 | 7,830 | 7,799 | 7,853 |
| Cash dividends declared per common share | $ 0.42 | $ 0.39 | $ 0.84 | $ 0.78 |
|
BALANCE SHEETS - USD ($) |
Dec. 31, 2017 | Jun. 30, 2017 |
|---|---|---|
| Current assets: | ||
| Cash and cash equivalents | $ 12,859 | $ 7,663 |
| Short-term investments (including securities loaned of $4,247 and $3,694) | 129,921 | 125,318 |
| Total cash, cash equivalents, and short-term investments | 142,780 | 132,981 |
| Accounts receivable, net of allowance for doubtful accounts of $337 and $345 | 18,428 | 22,431 |
| Inventories | 2,003 | 2,181 |
| Other | 4,422 | 5,103 |
| Total current assets | 167,633 | 162,696 |
| Property and equipment, net of accumulated depreciation of $26,849 and $24,179 | 26,304 | 23,734 |
| Operating lease right-of-use assets | 6,749 | 6,555 |
| Equity and other investments | 3,961 | 6,023 |
| Goodwill | 35,355 | 35,122 |
| Intangible assets, net | 9,034 | 10,106 |
| Other long-term assets | 6,967 | 6,076 |
| Total assets | 256,003 | 250,312 |
| Current liabilities: | ||
| Accounts payable | 7,850 | 7,390 |
| Short-term debt | 12,466 | 9,072 |
| Current portion of long-term debt | 3,446 | 1,049 |
| Accrued compensation | 4,427 | 5,819 |
| Short-term income taxes | 788 | 718 |
| Short-term unearned revenue | 21,309 | 24,013 |
| Securities lending payable | 26 | 97 |
| Other | 7,787 | 7,587 |
| Total current liabilities | 58,099 | 55,745 |
| Long-term debt | 73,348 | 76,073 |
| Long-term income taxes | 30,050 | 13,485 |
| Long-term unearned revenue | 2,500 | 2,643 |
| Deferred income taxes | 3,186 | 5,734 |
| Operating lease liabilities | 5,640 | 5,372 |
| Other long-term liabilities | 4,820 | 3,549 |
| Total liabilities | 177,643 | 162,601 |
| Commitments and contingencies | ||
| Stockholders’ equity: | ||
| Common stock and paid-in capital – shares authorized 24,000; outstanding 7,705 and 7,708 | 70,192 | 69,315 |
| Retained earnings | 8,567 | 17,769 |
| Accumulated other comprehensive income (loss) | (399) | 627 |
| Total stockholders’ equity | 78,360 | 87,711 |
| Total liabilities and stockholders' equity | $ 256,003 | $ 250,312 |
In: Accounting
At June 30, 2017, the end of its most recent fiscal year, Blue
Computer Consultants’ post-closing trial balance was as
follows:
| Debit | Credit | |||
|---|---|---|---|---|
| Cash | $6,380 | |||
| Accounts receivable | 1,460 | |||
| Supplies | 840 | |||
| Accounts payable | $490 | |||
| Unearned service revenue | 1,370 | |||
| Common stock | 4,400 | |||
| Retained earnings | 2,420 | |||
| $8,680 | $8,680 |
The company underwent a major expansion in July. New staff was
hired and more financing was obtained. Blue conducted the following
transactions during July 2017, and adjusts its accounts
monthly.
| July | 1 | Purchased equipment, paying $4,400 cash and signing a 2-year note payable for $24,400. The equipment has a 4-year useful life. The note has a 6% interest rate which is payable on the first day of each following month. | |
| 2 | Issued 24,400 shares of common stock for $61,000 cash. | ||
| 3 | Paid $4,200 cash for a 12-month insurance policy effective July 1. | ||
| 3 | Paid the first 2 (July and August 2017) months’ rent for an annual lease of office space for $4,900 per month. | ||
| 6 | Paid $4,600 for supplies. | ||
| 9 | Visited client offices and agreed on the terms of a consulting project. Blue will bill the client, Connor Productions, on the 20th of each month for services performed. | ||
| 10 | Collected $1,460 cash on account from Milani Brothers. This client was billed in June when Blue performed the service. | ||
| 13 | Performed services for Fitzgerald Enterprises. This client paid $1,370 in advance last month. All services relating to this payment are now completed. | ||
| 14 | Paid $490 cash for a utility bill. This related to June utilities that were accrued at the end of June. | ||
| 16 | Met with a new client, Thunder Bay Technologies. Received $14,600 cash in advance for future services to be performed. | ||
| 18 | Paid semi-monthly salaries for $13,400. | ||
| 20 | Performed services worth $34,200 on account and billed customers. | ||
| 20 | Received a bill for $2,700 for advertising services received during July. The amount is not due until August 15. | ||
| 23 | Performed the first phase of the project for Thunder Bay Technologies. Recognized $12,200 of revenue from the cash advance received July 16. | ||
| 27 | Received $18,300 cash from customers billed on July 20. |
Adjustment data:
| 1. | Adjustment of prepaid insurance. | |
| 2. | Adjustment of prepaid rent. | |
| 3. | Supplies used, $1,550. | |
| 4. | Equipment depreciation, $600 per month. | |
| 5. | Accrual of interest on note payable. | |
| 6. | Salaries for the second half of July, $13,400, to be paid on August 1. | |
| 7. | Estimated utilities expense for July, $980 (invoice will be received in August). | |
| 8. | Income tax for July, $1,460, will be paid in August. |
The chart of accounts for Blue Computer Consultants contains the
following accounts: Cash, Accounts Receivable, Supplies, Prepaid
Insurance. Prepaid Rent, Equipment, Accumulated
Depreciation—Equipment, Accounts Payable, Notes Payable, Interest
Payable, Income Taxes Payable, Salaries and Wages Payable, Unearned
Service Revenue, Common Stock, Retained Earnings, Dividends, Income
Summary, Service Revenue, Supplies Expense, Depreciation Expense,
Insurance Expense, Salaries and Wages Expense, Advertising Expense,
Income Tax Expense, Interest Expense, Rent Expense, Supplies
Expense, and Utilities Expense.
Here is the adjusted trial balance
| Adjusted Trial Balance | ||||||||||||||||
| ACCOUNT | DEBIT | CREDIT | ||||||||||||||
| Cash | $64,850 | |||||||||||||||
| Accounts Receivable | $15,900 | |||||||||||||||
| Supplies | $3,890 | |||||||||||||||
| Accounts Payable | $ 3,680 | |||||||||||||||
| Unearned Service Revenue | $ 2,400 | |||||||||||||||
| Common stock | $ 65,400 | |||||||||||||||
| Retained earning(beginning) | $ 2,420 | |||||||||||||||
| Notes payable | $ 24,400 | |||||||||||||||
| Equipment | $28,800 | |||||||||||||||
| Prepaid Insurance | $3,850 | |||||||||||||||
| Prepaid Rent | $4,900 | |||||||||||||||
| Sevice Revenue | $ 47,770 | |||||||||||||||
| Salaries and Wages expense | $26,800 | |||||||||||||||
| Salaries and Wages Payable | $ 13,400 | |||||||||||||||
| Advertising expense | $2,700 | |||||||||||||||
| Insurance expense | $350 | |||||||||||||||
| Rent Expense | $4,900 | |||||||||||||||
| Supplies Expense | $1,550 | |||||||||||||||
| Depreciation expense | $600 | |||||||||||||||
| Accumulated depreciation | $ 600 | |||||||||||||||
| Interest expense | $122 | |||||||||||||||
| Interest payable | $ 122 | |||||||||||||||
| Utilities expense | $980 | |||||||||||||||
| Income tax expense | $1,460 | |||||||||||||||
| Income tax payable | $ 1,460 | |||||||||||||||
| Total | $161,652 | $161,652 |
So with all this info can you Journalize and post closing entries and complete the closing process. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. For accounts that have zero ending balance, the entry should be the balance date and zero for the amount.)
In: Accounting
J&L Packaging, Inc.: Cash-to-Cash Conversion Cycle Case Study
Jake and Lilly Gifford founded J&L Packaging, Inc. (J&LP) in 1995 after graduating from the University of Cincinnati. Jake earned a degree in robotics and mechanical engineering, while Lilly graduated with a degree in computer science. They met at the university while working on an information systems course project and married immediately after graduation. Their privately held firm manufactured cardboard packaging and boxes for computer devices such as personal computers, keyboards, replacement hard drives, servers, and so on. Many of their packages were high-end boxes with glossy finishes and the company’s logo on the box. Last year, J&L Packaging, Inc. sales were $106 million.
J&LP Packaging provided many services with their products, such as box and packaging design engineering and consulting, embossing and foil guidance, barcode advice, cartons that fold and collapse for easy storage, and a variety of colors and box strengths. In 2010, J&LP began to research the sustainability issues regarding boxes in the reverse logistics supply chain.Their research lead to a change in production technologies to accommodate up to 100 percent recycled fiber content and solar panels on the roofs of their two U.S. factories. They also hired an engineer to lead the company’s efforts to become a “Green Cycle”-certified manufacturer.
J&LP recently purchased and installed an ISOWA FALCON state-of-the-art, four-color, high-speed flexo box machine with an extensive zero defects quality control system. This box cutting and fabrication machine is manufactured in Kasugai, Japan, by the ISOWA Corporation (www.isowa.com). There are several videos of this automated machine in operation on YouTube,” for example https://www.youtube.com/watch?v5XofTns666Aw.
J&LP’s financial information for last year follows. It is assumed the business operates 300 days per year. One note in J&LP financial statement states that the $4,906,000 of inventory does not include $886,000 in inventory allowances for excess, cancelled orders, and obsolete inventories. The note goes on to say, “Inventory management remains an area of focus as we balance the need to maintain strategic inventory levels to ensure competitive lead times versus the risk of inventory obsolescence because of changing technology and customer requirements. The box and packaging business is a dynamic industry that must quickly accommodate customer requirements, changes in forecasts, and new findings from research and development on product features and options.” The following data (in thousands of dollars $) is provided.
|
Sales |
|
|
• Manufactured Goods |
$87,475 |
|
• Services |
$18,619 |
|
• Total |
$106,094 |
|
Cost of Sales |
|
|
• Manufactured Goods |
$25,818 |
|
• Services |
$ 5,907 |
|
• Total |
$31,725 |
|
Operating Expenses |
|
|
• Research and Development |
$17,619 |
|
• Sales and Marketing |
$23,132 |
|
• Other |
$ 6,182 |
|
• Total |
$46,933 |
|
Obsolete Inventories |
$ 886 |
|
Inventories |
$ 4,906 |
|
Accounts Receivable |
$ 7,593 |
|
Accounts Payable |
$ 9,338 |
1. Should we consider services in the cash-to-cash conversion
cycle computations?
2. How will you handle the $886,000 in obsolete inventory?
3. What is the total cash-to-cash conversion cycle for J&L
Packaging, Inc. for last year?
4. What are your conclusions and final recommendations?
I do not want someone to simply answer the questions for me. I want to make sure I am doing it correctly.
Specifically, I would like help with question #3
The formula provided for cash-to-conversion is:
ARDS= Accounts receivable value/Revenue per day
APDS=Accounts payable value/Revenue per day
Revenue per day (R/D) =Total revenue/Operating days per year
Cash-to-cash conversion cycle =IDS+ARDS-APDS
Here's what I got:
Inventory days’ supply (IDS) =
Average total inventory/ Cost of goods sold per day=4,906+886=5792
Cost of goods sold per day (CGS/D) = 31,725/300 Days per year= 105.75
Cost of goods sold value/ Operating days per year
5792/105.75=54.77
IDS=54.77
IDS+ARDS= the firms receivable cycle is 80.08
ARDS= Accounts receivable value/ Revenue per day =7,593/300=25.31
APDS= Accounts payable value/ Revenue per day =9,338/300=31.13
APDS =31.13, which is how many days the firm has to pay back its bill.
Which means the firm receives it payments, “receivables” 48.95 days later.
Is this right? Help!
In: Operations Management
The
Situation:
In the summer of 2015, Photonics, a leader in the production of biometric sensors, started to experience a decline in sales growth for one of their most popular products, OxyAlert. OxyAlert was launched in 2011 and quickly became the industry standard in analyzing the oxygen levels of surgically repaired tissue after emergency care procedures. In the first year of sales this product captured 25% of the market in post operation biometric devices. By the second year it had rapidly overtaken the industry leader with a 55% share of the market. The success of this product was primarily due to innovative features that were not found on any other product. Features such as wireless disposable sensor probes and advance analytic software allowed doctors to shorten the recovery time of their patients in ICU units, which decreased per patient ICU expense by 10%. Based on these innovative features Photonics was able to charge a premium for this product and establish themselves as one of the most profitable companies in the industry.
Several competitors have now closed the gap in product design and functionality. In the fall of 2014, SeaBridge, one of Photonics biggest rivals, launched the product TotalDiagnostic. This product contains similar disposable sensory technology as OxyAlert, however, it allows doctors to analyze a broader range of a patient’s biometrics. While this product was priced around 10% higher than OxyAlert, doctors had the added advantage of not only maintaining the same recovery rates but also decrease the rate of post surgical infection by 15%. By February of 2015, TotalDiagnostic had captured 30% of the market.
Photonics response was swift. They immediately reduced the price of OxyAlert by 20% in order to regain market share. From March through May, sales of OxyAlertrebounded. While profit margins of the company did take a hit, it appeared that the price reduction stabilized the company’s market share. Unfortunately, recent sales reports from June show that pre-orders for OxyAlert are significantly down. As the CFO of Photonics you are worried that OxyAlert has become an obsolete product and further price reduction will have very little impact on sales growth.
Background and History:
Photonics was founded in 2008 by Rachel Walker, a professor of Bioengineering. From 2001 through 2006, Dr. Walker authored several papers on photonic measuring systems and it’s applications in biometrics. By 2007 she developed a prototype sensor that that was extremely non-invasive to the patient. She realized that this type of sensor combined with advanced computer algorithms could quickly analyze oxygen levels in surgically repaired tissues giving doctors “real time” information on the likelihood that a patient’s body would accept or reject the repaired tissue.
Dr. Walker believed that she had an important technology that could be highly profitable if she could find a way to commercialize it. Given the uniqueness of this technology she was able to obtain a patent in 2008. She felt fairly confident that her technology would be a major improvement in post-surgical care. However, several obstacles existed. The cost to turn this technology into a commercialized product was fairly substantial. However, more importantly, this was a highly disrupted technology that would require hospitals to change ICU and post operation processes. She wasn’t even sure if hospitals had a desire to change their current practices.
After interviewing several prominent hospital administrators, she concluded that that demand would be high if she could find a way to mass-produce her prototype at a cost that was on par with biometric sensors currently being sold to hospitals and other surgical centers. After several investor presentations, she was able to attract significant funding from a venture capital firm that specialized in funding small biomedical start-ups. With a $15 million dollar investment, Photonics was able to launch its first product, The BMD 1000, in January 2010.
In the first three months of 2010, sales of the BMD 1000 were tepid at best. While the product design was innovative, it did not integrate well with the current technology employed by most hospitals. Based on the criticisms of this product, Dr. Walker and her engineering team went back to the drawing board. The redesigned product was named OxyAlert and was introduced to the industry with much fanfare in January of 2011. By July of 2011, Photonics had secured orders with several large health care facilities on the East Coast. One year later, OxyAlert become the standard in the biometrics device industry.
Solutions
All along, you and Dr. Walker have known that five years was the typical product life cycle in this industry. Fortunately, you employ some of the brightest engineers in the field who have been developing three new interesting products that could restore your company’s sales growth. The first product is an improved version of OxyAlert, codenamed “OxyAlertII”. The second product is completely new to the industry and will allow doctors in emergency rooms to diagnose pre-existing conditions of incapacitated patients through breathalyzer tests. This product is codenamed “AutoAnalytics”. The third product is a complimentary product to OxyAlert that will enhance OxyAlert’s diagnostic capabilities. This product is codenamed “Diagnostic Solutions”.
The following are brief descriptions of each product’s financial costs and revenue projections:
OxyAlertII
Your marketing department believes that this product will not completely replace OxyAlert, as there will still be some companies who will want the older and cheaper version. However, they do believe that there will be significant cannibalization of your old product. By introducing this new product, sales of OxyAlert is forecasted to steadily decrease by 20% each year over the next 5 years. First year sales of OxyAlertII are projected to be $15 million with a 10% increase in revenue each year over the next 5 years. In the prior two years your company has spent $1 million on the development of this project. To finish the development of OxyAlertII and create the manufacturing infrastructure to produce it, your engineers estimate that they will need another $20 million in equipment purchases. This equipment has a 5-year life. The manufacturing process for this product will be fairly automated. As a result, cost of goods sold will be only 45% of revenue, much lower than current company averages. Incremental SG&A will be 15% of revenue. Working capital requirements will be 8% of revenue. In order to successfully launch this product, your marketing department is requesting a one-time advertising budget of $2.5 million, which will be spent in the first year of sales.
“AutoAnalytics”
This product is neither a complimentary product nor a replacement product for OxyAlert. The launch of this product is intended to create a new product line by extending Photonics core competencies into the emergency response market. Prior years’ development cost for this product has totaled $1.5 million dollars. Your engineering team estimates that it will cost $10 million dollars in new equipment purchases to manufacture this product. The economic life of this equipment is also 5 years. Your marketing department forecasts first year revenue at $9.5 million with initial one time marketing expense of $1.25 million. Based on projected demand, revenue is expected to increase by 7% year over year for the next 5 years. Because of the lack of experience in manufacturing this type of product, your operations management team expects that costs of goods sold will be somewhat high at 55% of revenue. Incremental SG&A will be 13% of revenue with an additional working capital requirement of 10% of revenue.
“DiagnosticSolutions”
DiagnosticSolutions is a series of networked probes that will allow customers to use OxyAlert in more efficient ways. Marketing believes that this complimentary product will actually help the sales of OxyAlert and prevent the full adoption of your competitor’s product, TotalDiagnostic, in the marketplace. Market share for OxyAlert is projected to slightly increase by 1.5 percent over the next 5 years. Your finance team believes that this will provide an additional $50,000 of cash flow per year in this five-year time period. While this product will help the sales of OxyAlert, it will be sold separately. Revenue projections for DiagnosticSolutions will be $4 million in the first year of sales. Since this is already a fairly saturated market, the sales of DiagnosticSolutions are projected to increase by only 2% per year over the next five years. As this is a complimentary product, the development cost is nominal. You will, however, need to expand your assembly line with more specialized equipment. This will require an additional $6 million of capital. Since this equipment is custom made it tends to have a longer life than the equipment used for the other products under consideration. Typically the economic useful life of this equipment is 7 years. Your incremental cost of goods sold and SG&A expense will be in line with current company margins of 50% and 10% respectively. Projected working capital is 12% of revenue. Given that this is a complimentary product, you will not incur any additional one time marketing expenses for launching this product.
Decisions
As the year progresses, investors and creditors are getting nervous that your company cannot maintain its leadership position within the industry. They still believe in your management team and your company’s ability to produce innovative products. As a result you have the ability to access up to $30 million dollars from your financiers. Your creditors are willing to loan you money at a 6% interest rate, while your investors expect a return of 12% on their equity. Based on the required returns on equity and debt, the company’s weighted average cost of capital is 9.45%. On all projects, assume a 30% tax rate on income. With good financial backing you have some important decisions to make in regards to these product launches. Again, your assignment is to make a recommendation on what new products to launch and provide an analysis on each product’s projected cash flow over a 5-year period. In order to support your recommendation, you will need to integrate the principles of capital budgeting decision-making in your analysis.
In: Finance
Superdry Plc
Planning for the statutory audit for the year ended 30th April 2021
You are the audit manager in charge of planning the 2021 audit of Superdry Plc. At the time of writing the 2020 financial statements have not been published and the information relates to that which is currently available in the Permanent Audit File for Superdry Plc. It is anticipated that the financial statements for 2020 will have been finalised in June or July 2020 and additional information will be available to support your research.
Attached are extracts from the audited financial statements for the year ended 24th April 2019
Chairman’s Statement
“The last year has been a year of considerable challenge and change for Superdry.”
The last year has been a year of considerable challenge and change for Superdry with profit warnings issued in October and December 2018 and May 2019, amidst a difficult trading landscape for most fashion retailers. Unseasonably warm weather over a prolonged period had led to a declining sales performance and it appeared that Superdry may have been losing its appeal to its traditionally broad consumer base.
Towards the end of 2018, shareholder and founder Julian Dunkerton engaged with the Board to express his frustration with the Company’s performance and to request a place on the Plc Board. The Board and Julian were unable to reach a consensus as to his ongoing involvement in the business and so, on 1 March 2019 Julian, together with fellow founder and shareholder James Holder, took the step of requisitioning a general meeting of shareholders. That meeting took place on 2 April 2019 and the resolutions proposed at the meeting, to appoint Julian and me to the Board of the Company as Directors, were duly passed.
At the first Board meeting following the General Meeting on 2 April 2019, the Chief Executive Officer, Euan Sutherland, and the Chief Financial Officer, Ed Barker, stood down from the Board with immediate effect. Julian Dunkerton was appointed Interim Chief Executive Officer. At the same meeting the previous Chairman, Peter Bamford, and Non-Executive Director Penny Hughes also stood down from the Board with immediate effect. The other Non-Executive Directors, Minnow Powell, Dennis Millard, John Smith and Sarah Wood, gave notice that they would also step down from the Board on 1 July 2019 after serving the three-month notice period under their contracts. As a result I agreed to take up the role of Chairman with effect from 2 April. I have welcomed the opportunity to work with the existing Non-Executive Directors over the last three months and greatly appreciate the support they have given me. On 3 June 2019 we were delighted to announce that Nick Gresham had joined the Company as Interim Chief Financial Officer.
After just 14 weeks Julian and I are stabilising the business and working hard together to reset Superdry’s strategy in order to provide the foundations for the future. While there may be early wins, the turnaround to sustained profitable growth will take time. We are fortunate that Julian agreed to take on the role as Interim Chief Executive Officer until we find a suitable permanent successor. It will be vital to ensure that the successful candidate can work closely with Julian and the rest of his leadership team to ensure that the direction of the business remains true to Julian’s vision; preliminary work has started to ensure that we have a clear specification of the skills and experience that will be necessary for the role.
The business also needs to modernise itself in terms of its infrastructure, working environment and leadership structure to operate in the multi-channel world of retail. We have made good progress on finding replacement Non Executive Directors. On 4 July we announced the appointment of Helen Weir as Senior Independent Director and Alistair Miller as Chairman of the Audit Committee. They both have extensive relevant experience both in the retail sector and in the public company environment. The search for an additional two Non Executive Directors is also well advanced.
It has been a year of considerable change and I would particularly like to thank all of my new colleagues at Superdry, who are working so hard despite the challenges we are facing. There will be more change to come. I would also like to thank our shareholders and wider stakeholder community for their support as Superdry looks to the future.
Peter Williams Chairman 9 July 2019
Extracted from Note One Principal Accounting Policies
e) Revenue recognition
Revenue is measured at the fair value of the consideration received, or receivable, and represents amounts receivable for goods supplied, stated net of discounts, returns and value added taxes.
Own store revenue: Own store revenue from the provision of sale of goods is recognised at the point of sale of a product to the customer. Own store sales are settled in cash or by credit or payment card. It is the Group’s policy to sell its products to the customer with a right to exchange or full refund within 28 days. Provisions are made for own store returns based on the expected level of returns, which in turn is based upon the historical rate of returns. At the point of sale, a refund liability and corresponding adjustment to revenue is recognised for those products expected to be returned.
Concession revenue: Concession revenues from the provision of sale of goods are recognised gross at the point of sale of a product to the customer; this is on the basis that the vendor acts as principal. Concession revenues are settled in cash, by the concession grantors net of commissions or other fees payable. It is the concessions’ policy to sell its products with a right to exchange within 28 days and a cash refund within 14 days. Provisions are made for concession returns based on the expected level of returns, which in turn is based upon the historical rate of returns. At the point of sale, a refund liability and corresponding adjustment to revenue is recognised for those products expected to be returned.
E-commerce revenue: Revenue from the provision of the sale of goods on the internet is recognised at the point that control of the inventory has passed to the customer, which is when the goods are received by the customer. Transactions are settled by credit card, payment card or PayPal. Customers have a right to exchange or full refund within a range of 21 to 100 days, depending on the website the purchase is made from. Provisions are made for e-commerce credit notes based on the expected level of returns, which in turn is based upon the historical rate of returns. At the point of sale, a refund liability and corresponding adjustment to revenue is recognised for those products expected to be returned.
Wholesale revenue: Wholesale revenues from the sale of goods are recognised at the point that control of the inventory has passed to the customer, which depends on the specific terms and conditions of sales transactions and which is typically upon delivery. Revenues are settled in cash, net of discounts. Provisions are made for Wholesale credit notes based on the expected level of returns, which in turn is based upon the historical rate of returns. At the point of sale, a refund liability and corresponding adjustment to revenue is recognised for those products expected to be returned.
o) Inventories
Inventories are valued at the lower of cost or net realisable value. Cost comprises costs associated with the purchase and bringing of inventories to the distribution centres and is based on the weighted average principle. Provisions are made for obsolescence, mark-downs and shrinkage.
s) Provisions
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, it is more likely than not that an outflow of economic benefits will be required to settle the obligation and the obligation can be estimated reliably. Provisions are discounted using the risk free rate if the impact on the provision is deemed to be material. Provisions for onerous leases are recognised when the Group believes that the unavoidable costs of meeting or exiting the lease obligations exceed the economic benefits expected to be received under the lease
Note Five
|
2019 |
2018 |
|
|
£m |
£m |
|
|
Staff costs (note 7) |
115.7 |
116.9 |
|
Operating lease rentals for leasehold properties |
68.8 |
73.8 |
|
Depreciation and amortisation |
41.9 |
41.1 |
|
Impairment of property, plant and equipment and intangibles |
42.6 |
5.3 |
|
Restructuring, strategic change and other costs |
8.1 |
- |
|
Onerous lease charge |
86.9 |
2.2 |
|
Other (including rates, service charges and professional fees) |
223.2 |
190.0 |
|
Total selling, general and administrative expenses |
587.2 |
429.4 |
Restructuring, strategic change and other costs include a credit of £0.3m which relates to staff costs for the purpose of note 7.
Question:
|
Extracted from Note One Principal Accounting Policies o) Inventories Inventories are valued at the lower of cost or net realisable value. Cost comprises costs associated with the purchase and bringing of inventories to the distribution centres and is based on the weighted average principle. Provisions are made for obsolescence, mark-downs and shrinkage. Extracted from Superdry Plc audited financial statements for the year ended 24th April 2019 |
Required.
Draft the audit guidance notes for your audit team to support the attendance at the interim stock count in the largest Superdry Plc warehouse which explores:
In: Accounting
Bartman Industries’ and Reynolds Incorporated’s stock prices and dividends, along with the Wilshire 5000 Index, are shown below for the period 1996-2001. The Wilshire 5000 data are adjusted to include dividends.
|
Year Bartman Industries Reynolds Incorporated Wilshire 5000 Stock Price Dividend Stock Price Dividend Includes Divs. |
|
2001 $ 17.250 1.15 $ 48.750 3.00 52.300 2.90 48.750 2.75 57.250 2.50 60.000 2.25 55.750 2.00 11,663.98 8,785.70 8,679.98 6,434.03 5,602.28 4,705.97 2000 1999 1998 1997 1996 14.750 1.06 16.500 1.00 10.750 0.95 11.375 0.90 7.625 0.85 |
Use the data given to calculate annual returns for Bartman, Reynolds, and the Wilshire 5000 Index, and then calculate average returns over the 5-year period. (Hint: Remember, returns are calculated by subtracting the beginning price from the ending price to get the capital gain or loss, adding the dividend to the capital gain or loss and dividing the result by the beginning price. Assume that dividends are already included in the index. Also, you cannot calculate the rate of return for 1996 because you do not have 1995 data).
Calculate the standard deviations of the returns for Bartman, Reynolds, and the Wilshire 5000. (Hint: Use the sample standard deviation formula given in the chapter, which corresponds to the STDEV function in Excel.)
Now calculate the coefficients of variation for Bartman, Reynolds, and the Wilshire 5000.
Construct a scatter diagram graph that shows Bartman’s, Reynolds’ returns on the vertical
axis and the market index’s returns on the horizontal axis.
Estimate Bartman’s and Reynolds’ betas by running regressions of their returns against the
Wilshire 5000’s returns. Are these betas consistent with your graph?
The risk-free rate on long-term Treasury bonds is 6.04 percent. Assume that the market risk premium is 5 percent. What is the expected return on the market? Now use the SML
equation to calculate the two companies’ required returns.
If you formed a portfolio that consisted of 50 percent of Bartman stock and 50 percent of
Reynolds stock, what would be its beta and its required return?
Suppose an investor wants to include Bartman Industries’ stock in his on her portfolio.
Stocks A, B and C are currently in the portfolio and their betas are 0.769, 0.985 and 1.423, respectively. Calculate the new portfolio’s required return if it consists of 25 percent of Bartman, 15 percent of Stock A, 40 percent of Stock B and 20 percent of Stock C.
In: Finance