Problem 2-12
Free Cash Flows

Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)

Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars)

Using Rhodes Corporation's financial statements (shown above), answer the following questions.

What is the net operating profit after taxes (NOPAT) for 2016? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place.
$    million

What are the amounts of net operating working capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
2016 $    million
2015 $    million

What are the amounts of total net operating capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
2016 $    million
2015 $    million

What is the free cash flow for 2016? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place.
$    million

What is the ROIC for 2016? Round your answer to two decimal places.
  %

How much of the FCF did Rhodes use for each of the following purposes: after-tax interest, net debt repayments, dividends, net stock repurchases, and net purchases of short-term investments? (Hint: Remember that a net use can be negative.) Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.

Problem 2-12
Free Cash Flows

Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)

Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars)

Using Rhodes Corporation's financial statements (shown above), answer the following questions.

1. What is the net operating profit after taxes (NOPAT) for 2016? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place.
   $   million
   
2. What are the amounts of net operating working capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
   2016 $   million
   2015 $   million
   
3. What are the amounts of total net operating capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
   2016 $   million
   2015 $   million
   
4. What is the free cash flow for 2016? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place.
   $   million
   
5. What is the ROIC for 2016? Round your answer to two decimal places.
   %
   
6. How much of the FCF did Rhodes use for each of the following purposes: after-tax interest, net debt repayments, dividends, net stock repurchases, and net purchases of short-term investments? (Hint: Remember that a net use can be negative.) Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.

   After-tax interest payment	$   million
   Reduction (increase) in debt	$   million
   Payment of dividends	$   million
   Repurchase (Issue) stock	$   million
   Purchase (Sale) of short-term investments	$   million

Problem 2-12
Free Cash Flows

Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)

Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars)

Using Rhodes Corporation's financial statements (shown above), answer the following questions.

What is the net operating profit after taxes (NOPAT) for 2016? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place.
$    million

What are the amounts of net operating working capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
2016 $    million
2015 $    million

What are the amounts of total net operating capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
2016 $    million
2015 $    million

What is the free cash flow for 2016? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place.
$    million

What is the ROIC for 2016? Round your answer to two decimal places.
  %

How much of the FCF did Rhodes use for each of the following purposes: after-tax interest, net debt repayments, dividends, net stock repurchases, and net purchases of short-term investments? (Hint: Remember that a net use can be negative.) Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.

Skysong Corporation, a manufacturer of steel products, began operations on October 1, 2016. The accounting department of Skysong has started the fixed-asset and depreciation schedule presented below. You have been asked to assist in completing this schedule. In addition to ascertaining that the data already on the schedule are correct, you have obtained the following information from the company’s records and personnel.

Intangibles. Sorenson Manufacturing Corporation was incorporated on January 3, 2016. The corporation’s financial statements for its first year’s operations were not examined by a CPA. You have been engaged to audit the financial statements for the year ended December 31, 2017, and your work is substantially completed. A partial trial balance of the company’s accounts follows:

* An intangible asset representing the right to use a patent.

The following information relates to accounts that may yet require adjustment:

Patents for Sorenson’s manufacturing process were purchased January 2, 2017, at a cost of $68,000. An additional $17,000 was spent in December 2016 to improve machinery covered by the patents and charged to the Patents account. The patents had a remaining legal term of 17 years.

On January 3, 2014, Sorenson purchased two licensing agreements; at that time they were believed to have unlimited useful lives. The balance in the Licensing Agreement No. 1 account included its purchase price of $48,000 and $2,000 in acquisition expenses. Licensing Agreement No. 2 also was purchased on January 3, 2016, for $50,000, but it has been reduced by a credit of $1,000 for the advance collection of revenue from the agreement.

In December 2016, an explosion caused a permanent 60 percent reduction in the expected revenue-producing value of Licensing Agreement No. 1 and, in January 2017, a flood caused additional damage, which rendered the agreement worthless.

A study of Licensing Agreement No. 2 made by Sorenson in January 2017 revealed that its estimated remaining life expectancy was only 10 years as of January 1, 2017.

The balance in the Goodwill account includes $24,000 paid December 30, 2016, for an advertising program, which it is estimated will assist in increasing Sorenson’s sales over a period of four years following the disbursement.

The Leasehold Improvement account includes (a) the $15,000 cost of improvements with a total estimated useful life of 12 years, which Sorenson, as tenant, made to leased premises in January 2016; (b) movable assembly-line equipment costing $8,500, which was installed in the leased premises in December 2017; and (c) real estate taxes of $2,500 paid by Sorenson, which, under the terms of the lease, should have been paid by the landlord. Sorenson paid its rent in full during 2017. A 10-year nonrenewable lease was signed January 3, 2016, for the leased building that Sorenson used in manufacturing operations.

The balance in the Organization Expenses account includes preoperating costs incurred during the organizational period.

Required:

1. For each of the items 1–7, prepare adjusting entries as necessary. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

In Fall 2016, you are hired as Controller of the Medical Device division of Virtek. You report to Steve Slack, the General Manager of the division. Virtek has annual sales of approximately $1.7 billion. The Medical Device Division annual sales are approximately $170 million, about 10% of Virtek’s total annual sales. The Medical Device Division had a very good 2016. As you close the books for 2016 in January 2017, you are reporting a net profit of $21.6 million, well above the 2016 target profit of $20 million for the division. After reviewing the preliminary 2016 financial statements, Steve Slack says,

“We get our bonuses as long as we meet or exceed our $20 million target for net profit. It doesn’t help us to exceed the target by more than one and a half million, that will only encourage corporate to make our target that much higher for 2017. I want you to develop a rational for increasing our reserve for inventory obsolescence that will reduce our 2016 net profit to just over $20 million.”

By taking a pessimistic view of future market prospects, you are able to identify $1.25 million worth of inventory that under those market conditions could be justifiably fully reserved (written off) using conservative accounting. Steve Slack is pleased with the results you reported to him. He said,

“That’s very good! I’m fairly confident we can sell all that inventory in 2017 without offering any more than a small discount off our regular price. That will boost our 2017 net profit by nearly $1 million. With that extra cushion, we’re almost certain to achieve our 2017 earnings targets and our bonuses. I want you to book that adjusting entry to increase our inventory reserve for obsolescence. Oh, by the way, are you sure you can’t find another $200,000 or so of inventory we could write off in the same manner? It wouldn’t hurt to have even more of a cushion.”

You were a little uncomfortable reviewing inventory for obsolescence with a specific target value in mind, and following the meeting with Steve Slack, you decide that before you book the adjusting entry to increase the inventory reserve for obsolescence as he instructed, you want to review the entire situation before proceeding.

Required

Write a memo to Steve Slack in good form. Your memo should:

Identify the ethical issues you both face.

Identify the major stakeholders involved and state how the stakeholders would be affected by the course of action ordered by Steve Slack.

Explain why you believe the course of action proposed by Steve Slack (identifying inventory that can be written down for 2016 that will likely be sold at no more than a small discount to normal prices in 2017) is ethical or unethical.

Regardless of whether you believe the course of action proposed by Steve Slack is ethical or unethical, identify an ethical alternative to his proposed course of action. Recommend one course of action, and explain and support your recommended choice.

Case Study 1:

Zhivago Brands Ltd makes a special-purpose horse and dog rug sewing machine, Multiweaver (MW), used in the textile industry. In early 2015, Zhivago Brands Ltd designed the MW machine with the strategic purpose of being distinct from its competitors. From the feedback received at trade shows, the MW machine has been generally regarded as a superior machine to others in the market. Zhivago Brands Ltd presents the following performance for its accounting years 1 January 2016 to 30 December 2016 as well as 1 January 2017 to 30 December 2017.

Zhivago Brands Ltd produces no defective machines but it did experience some material quality issues from its suppliers. It wants to reduce direct materials usage per MW machine in 2017. Conversion Costs in each year depending on production capacity defined in terms of MW units that can be produced, not the actual units produced. Selling and customer-service costs depend on the number of customers that Zhivago Brands can support, not the actual number of customers it serves. Zhivago Brands has75customers in 2016 and 80 customers in 2017.

Required

1. Identify the business strategy adopted by Zhivago Brands and explain briefly how you reached your decision on the type of business strategy adopted. 2. Calculate the Growth Component analysis of strategic profitability analysis.

(Include whether Favourable or Unfavourable for Qs 2 to 5).

3. Calculate the Price-Recovery component of strategic profitability analysis.     

4. Calculate the productivity component of strategic profitability analysis.   

5. Calculate the variance in operating profit for Zhivago Brands Ltd for the 2016-2017 accounting years.

6. Provide one measure from any of the above tables for each of the four Balanced Scorecard perspectives. Relate your measure to its perspective.

PLEASE POST EXCEL SPREADSHEET

1. Please show all computation and underline your final answer in your submission.

6. Income statements and balance sheets follow for Microsoft Corporation. Refer to these financial statements to answer the requirements. (non-operating items are red-marked)

Required:

2015. (8 points) Compute net operating profit after tax (NOPAT) for 2016 and 2015. Assume that combined federal and state statutory tax rates are 37% for both years.

2015. (8 points) Compute net operating assets (NOA) for 2016 and 2015. Assume Equity and other investments are operating assets.

2015. (8 points) Compute return on net operating assets (RNOA) for 2016 and 2015. Net operating assets are $26,720 million in 2014.

2015. (4 points) Compute return on equity (ROE) for 2016 and 2015. (Stockholders’ equity in 2014 is $89,784 million.)

1. (4 points) What is nonoperating return component of ROE for 2016 and 2015?

1. (4 points)Comment on the difference between ROE and RNOA. What inference do you draw from this comparison?

PLEASE POST EXCEL SPREADSHEET

Problem 2-12
Free Cash Flows

Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)

Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars)

Using Rhodes Corporation's financial statements (shown above), answer the following questions.

1. What is the net operating profit after taxes (NOPAT) for 2016? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place.
   $   million
   
2. What are the amounts of net operating working capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
   2016 $   million
   2015 $   million
   
3. What are the amounts of total net operating capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
   2016 $   million
   2015 $   million
   
4. What is the free cash flow for 2016? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place.
   $   million
   
5. What is the ROIC for 2016? Round your answer to two decimal places.
   %
   
6. How much of the FCF did Rhodes use for each of the following purposes: after-tax interest, net debt repayments, dividends, net stock repurchases, and net purchases of short-term investments? (Hint: Remember that a net use can be negative.) Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.

   After-tax interest payment	$   million
   Reduction (increase) in debt	$   million
   Payment of dividends	$   million
   Repurchase (Issue) stock	$   million
   Purchase (Sale) of short-term investments	$   million

Problem 2-12
Free Cash Flows

Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)

Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars)

Using Rhodes Corporation's financial statements (shown above), answer the following questions.

1. What is the net operating profit after taxes (NOPAT) for 2016? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place.
   $   million______
2. What are the amounts of net operating working capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
   2016 $   million________
   2015 $   million________
   
3. What are the amounts of total net operating capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
   2016 $   million_______
   2015 $   million_______
   
4. What is the free cash flow for 2016? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place.
   $   million_______
   
5. What is the ROIC for 2016? Round your answer to two decimal places.
   %_______
   
6. How much of the FCF did Rhodes use for each of the following purposes: after-tax interest, net debt repayments, dividends, net stock repurchases, and net purchases of short-term investments? (Hint: Remember that a net use can be negative.) Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.

   After-tax interest payment	$   million
   Reduction (increase) in debt	$   million
   Payment of dividends	$   million
   Repurchase (Issue) stock	$   million
   Purchase (Sale) of short-term investments	$   million