You are the controller for Bizbee Corporation, and a few days ago, you provided a draft of this year's financial statements to the chief executive officer (CEO) of the company, Mr. Bizbee. You rode up in the elevator with him today, and he began to quiz you about how you reported the company's investments in debt and equity securities. He said to you, "When I took accounting in college, investment securities were reported at historical cost. I remember what we paid for some of our investments, and the numbers on the financial statements don't match those amounts! What's going on? Be in my office this afternoon to explain!"

To get ready for your meeting, assemble the following:

• The valuation approach was used on the balance sheet for the investments. Provide an analysis on why you used this approach. Assume your company has only debt and equity securities where the equity interest is less than 20%. The company's debt securities are all classified as held to maturity, but it has both trading and available-for-sale equity securities.
• Assemble and evaluate which generally accepted accounting principles (GAAP) for investment securities changed from historical cost to the current valuation approach.
• Assess how investment securities should be valued on the company's financial statements.

Corporate executives make thousands of operational decisions every day on behalf of their companies. Those decisions are often made to present the best possible financial picture, but is that ethical?

Instructions

Lionel Industries, Inc. Board of Directors authorized the sale of $15,000,000 of corporate bonds in May, 2017. The treasurer, William Browning, is concerned about the date when the bonds will be issued. The company really needs the cash, but he is worried that if the bonds are issued before the December 31, 2017, year-end that the additional liability will have an adverse effect on a number of important financial ratios. In June, 2017, he explains to the company CEO Julie Friesling that if they delay issuing the bonds until immediately after December 31, 2017 the bonds will not affect the financial statements until 2018. The 2017 financial statements would then only need a footnote disclosure and Browning feels that "no one pays attention to those numerous pages of notes anyway."

Answer the following questions:

If the bond issue is delayed as Browning suggests, why would a footnote disclosure be needed in 2017?

Who are the primary financial statement users, and is Browning correct in his assumptions as to how they view the information included in the footnotes?

What ethical issues are involved in Browning's suggestion and do you think that Friesling should agree to the delay?

Hamama Sdn Bhd is a company that specialises in online school uniforms retailing. Each set school uniforms sells for RM40 each. The company expects to produce and sell 100,000 sets this year, although there is a total production capacity of 120,000 in the current factory setup. Fixed costs are RM160,000 per year. The direct costs of production are RM24 per set. Its finance director is considering a proposal to put forward by the company’s CEO to buy in a new automated sewing machine that links with new design software. Production capacity could be increased to 180,000 set per year. There are very large overheads associated with the purchase of the new machine and IT system, namely the high cost of financing these purchases. Total fixed costs would double to RM320,000 per year. Savings would be made by reducing the number of factory workers directly employed in the manufacturing process. Direct costs of production would decrease to RM18.00 per set. Research from the marketing department indicates that higher quality designs and a price reduction to RM36 would increase the demand for uniforms by 50 per cent to 150,000 sets per year.

Required: a. Construct a break-even graph to represent the current data, identifying the breakeven level of production and the safety margin.

Felix's Fine Jewelry produces fine jewelry for department stores. The following costs incurred by the company may be classified as direct materials, direct labor, manufacturing overhead, or period costs.

Classify the costs and total by classification.

Prepare an operating income statement which shows the deductions of expense in terms of total classification by category: direct materials, direct labor, manufacturing overhead, or period costs. Assume Felix's Fine Jewelry's revenue for the period was $8,000,000, and there is no change in ending inventory.

West Coast Architects (WCA) has been operating for the last ten years now. No longer the new kid on the block, the organization has steadily become more professional during your time here.
Five years ago, the company had 50 employees and now has grown to 100 staff in Vancouver, Calgary, and Toronto. You have been successful in your career as a people manager practicing what you learned in your BCIT OBRG 1105 class many years ago. You are managing an HR Department that is based out of Vancouver and has a mixture of recruiters, HR consultants, and payroll staff. You silently take stock of your situation and marvel at how lucky it has been to grow with a company that has really appreciated your contributions. That brass name plaque on your office door could use some polishing as its developing some patina!

question

COV19 has hit all of the offices. Your boss has asked you to prepare speaking points for Jane (the CEO) on how you will handle the announcement to layoff 50% of the workforce and how the change will affect them. Identify and apply the concepts of change management and leadership on what you would write for Jane to say to all staff about the layoffs

Problem 8-07A (Video)

On January 1, 2020, Harter Company had Accounts Receivable $139,000, Notes Receivable $25,000, and Allowance for Doubtful Accounts $13,200. The note receivable is from Willingham Company. It is a 4-month, 9% note dated December 31, 2019. Harter Company prepares financial statements annually at December 31. During the year, the following selected transactions occurred.

Journalize the transactions. (Omit cost of goods sold entries.) (Round answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.)

Problem 9-4A (Video)

Colter Company prepares monthly cash budgets. Relevant data from operating budgets for 2020 are as follows.

January

February

Sales$360,000$400,000

Direct materials purchases120,000125,000

Direct labor90,000100,000

Manufacturing overhead70,00075,000

Selling and administrative expenses79,00085,000

All sales are on account. Collections are expected to be 50% in the month of sale, 30% in the first month following the sale, and 20% in the second month following the sale. Sixty percent (60%) of direct materials purchases are paid in cash in the month of purchase, and the balance due is paid in the month following the purchase. All other items above are paid in the month incurred except for selling and administrative expenses that include $1,000 of depreciation per month.

Other data:

1.Credit sales: November 2019, $250,000; December 2019, $320,000.

2.Purchases of direct materials: December 2019, $100,000.

3.Other receipts: January—Collection of December 31, 2019, notes receivable $15,000;

                      February—Proceeds from sale of securities $6,000.

4.Other disbursements: February—Payment of $6,000 cash dividend.

The company’s cash balance on January 1, 2020, is expected to be $60,000. The company wants to maintain a minimum cash balance of $50,000.
Prepare schedules for (1) expected collections from customers and (2) expected payments for direct materials purchases for January and February.

Expected Collections from Customers

January

February

November

$

$

December

January

February

    Total collections$$

Expected Payments for Direct Materials

January

February

December

$

$

January

February

    Total payments$$

Prepare a cash budget for January and February in columnar form.

COLTER COMPANY
Cash Budget

For the Two Months Ending February 28, 2020February 28, 2020For the Quarter Ending February 28, 2020

January

February

Ending Cash BalanceManufacturing OverheadNotes ReceivableExcess (Deficiency) of Available Cash Over Cash DisbursementsTotal DisbursementsReceiptsRepaymentsTotal ReceiptsDirect MaterialsSale of SecuritiesBorrowingsDisbursementsFinancingCollections from CustomersDirect LaborSelling and Administrative ExpensesTotal Available CashCash DividendBeginning Cash Balance

$$

AddLess

:

BorrowingsExcess (Deficiency) of Available Cash Over Cash DisbursementsCollections from CustomersTotal DisbursementsTotal Available CashManufacturing OverheadTotal ReceiptsDirect LaborDirect MaterialsRepaymentsFinancingDisbursementsEnding Cash BalanceNotes ReceivableReceiptsSale of SecuritiesSelling and Administrative ExpensesCash DividendBeginning Cash Balance

    Repayments    Receipts    Cash Dividend    Excess (Deficiency) of Available Cash Over Cash Disbursements    Sale of Securities    Selling and Administrative Expenses    Total Available Cash    Notes Receivable    Total Disbursements    Total Receipts    Beginning Cash Balance    Collections from Customers    Borrowings    Disbursements    Direct Labor    Direct Materials    Ending Cash Balance    Financing    Manufacturing Overhead    

    Manufacturing Overhead    Notes Receivable    Sale of Securities    Beginning Cash Balance    Total Disbursements    Excess (Deficiency) of Available Cash Over Cash Disbursements    Total Receipts    Repayments    Direct Materials    Receipts    Collections from Customers    Selling and Administrative Expenses    Total Available Cash    Cash Dividend    Borrowings    Direct Labor    Disbursements    Financing    Ending Cash Balance    

    Cash Dividend    Beginning Cash Balance    Total Receipts    Disbursements    Direct Labor    Borrowings    Notes Receivable    Total Disbursements    Financing    Total Available Cash    Collections from Customers    Direct Materials    Manufacturing Overhead    Receipts    Sale of Securities    Ending Cash Balance    Repayments    Selling and Administrative Expenses    Excess (Deficiency) of Available Cash Over Cash Disbursements    

    Disbursements    Total Receipts    Sale of Securities    Total Disbursements    Cash Dividend    Total Available Cash    Ending Cash Balance    Manufacturing Overhead    Receipts    Beginning Cash Balance    Notes Receivable    Borrowings    Excess (Deficiency) of Available Cash Over Cash Disbursements    Repayments    Selling and Administrative Expenses    Collections from Customers    Direct Labor    Direct Materials    Financing    

BorrowingsFinancingReceiptsDirect MaterialsCollections from CustomersTotal ReceiptsBeginning Cash BalanceRepaymentsTotal Available CashCash DividendTotal DisbursementsEnding Cash BalanceDisbursementsManufacturing OverheadDirect LaborExcess (Deficiency) of Available Cash Over Cash DisbursementsNotes ReceivableSelling and Administrative ExpensesSale of Securities

AddLess

:

Manufacturing OverheadFinancingExcess (Deficiency) of Available Cash Over Cash DisbursementsRepaymentsCash DividendDirect LaborTotal Available CashBorrowingsBeginning Cash BalanceSelling and Administrative ExpensesEnding Cash BalanceTotal DisbursementsSale of SecuritiesNotes ReceivableReceiptsTotal ReceiptsDirect MaterialsCollections from CustomersDisbursements

    Ending Cash Balance    Cash Dividend    Excess (Deficiency) of Available Cash Over Cash Disbursements    Beginning Cash Balance    Manufacturing Overhead    Selling and Administrative Expenses    Direct Labor    Collections from Customers    Direct Materials    Total Disbursements    Total Available Cash    Financing    Disbursements    Notes Receivable    Borrowings    Total Receipts    Receipts    Repayments    Sale of Securities    

    Total Available Cash    Cash Dividend    Selling and Administrative Expenses    Total Disbursements    Total Receipts    Borrowings    Direct Materials    Beginning Cash Balance    Excess (Deficiency) of Available Cash Over Cash Disbursements    Financing    Collections from Customers    Repayments    Manufacturing Overhead    Notes Receivable    Receipts    Direct Labor    Disbursements    Ending Cash Balance    Sale of Securities    

    Excess (Deficiency) of Available Cash Over Cash Disbursements    Disbursements    Notes Receivable    Financing    Receipts    Collections from Customers    Sale of Securities    Manufacturing Overhead    Ending Cash Balance    Direct Materials    Total Disbursements    Repayments    Selling and Administrative Expenses    Borrowings    Direct Labor    Beginning Cash Balance    Total Available Cash    Total Receipts    Cash Dividend    

    Total Available Cash    Borrowings    Direct Labor    Manufacturing Overhead    Disbursements    Repayments    Total Receipts    Cash Dividend    Direct Materials    Ending Cash Balance    Receipts    Beginning Cash Balance    Financing    Selling and Administrative Expenses    Total Disbursements    Excess (Deficiency) of Available Cash Over Cash Disbursements    Notes Receivable    Collections from Customers    Sale of Securities    

    Total Disbursements    Disbursements    Direct Materials    Direct Labor    Ending Cash Balance    Borrowings    Excess (Deficiency) of Available Cash Over Cash Disbursements    Financing    Manufacturing Overhead    Notes Receivable    Selling and Administrative Expenses    Receipts    Repayments    Total Receipts    Cash Dividend    Sale of Securities    Total Available Cash    Collections from Customers    Beginning Cash Balance    

    Total Available Cash    Beginning Cash Balance    Direct Labor    Cash Dividend    Sale of Securities    Total Disbursements    Total Receipts    Borrowings    Financing    Collections from Customers    Excess (Deficiency) of Available Cash Over Cash Disbursements    Direct Materials    Disbursements    Selling and Administrative Expenses    Ending Cash Balance    Manufacturing Overhead    Notes Receivable    Receipts    Repayments    

Total DisbursementsTotal ReceiptsManufacturing OverheadCollections from CustomersCash DividendBeginning Cash BalanceNotes ReceivableFinancingDirect LaborBorrowingsRepaymentsDirect MaterialsDisbursementsExcess (Deficiency) of Available Cash Over Cash DisbursementsEnding Cash BalanceReceiptsSale of SecuritiesSelling and Administrative ExpensesTotal Available Cash

Notes ReceivableCollections from CustomersSale of SecuritiesDirect MaterialsCash DividendTotal DisbursementsDisbursementsBeginning Cash BalanceManufacturing OverheadExcess (Deficiency) of Available Cash Over Cash DisbursementsFinancingDirect LaborReceiptsRepaymentsEnding Cash BalanceSelling and Administrative ExpensesTotal Available CashTotal ReceiptsBorrowings

AddLess

:

RepaymentsDirect MaterialsCash DividendManufacturing OverheadSale of SecuritiesSelling and Administrative ExpensesBeginning Cash BalanceFinancingBorrowingsTotal ReceiptsCollections from CustomersNotes ReceivableReceiptsDisbursementsTotal Available CashTotal DisbursementsDirect LaborEnding Cash BalanceExcess (Deficiency) of Available Cash Over Cash Disbursements

AddLess

:

Excess (Deficiency) of Available Cash Over Cash DisbursementsFinancingManufacturing OverheadTotal Available CashBeginning Cash BalanceCollections from CustomersCash DividendTotal ReceiptsRepaymentsReceiptsDirect LaborNotes ReceivableBorrowingsDirect MaterialsDisbursementsEnding Cash BalanceSale of SecuritiesSelling and Administrative ExpensesTotal Disbursements

Notes ReceivableCash DividendEnding Cash BalanceFinancingManufacturing OverheadReceiptsRepaymentsExcess (Deficiency) of Available Cash Over Cash DisbursementsSale of SecuritiesDirect LaborCollections from CustomersSelling and Administrative ExpensesTotal DisbursementsTotal Available CashBeginning Cash BalanceTotal ReceiptsBorrowingsDirect MaterialsDisbursements

$$

Quantitative Problem 1: Assume today is December 31, 2019. Barrington Industries expects that its 2020 after-tax operating income [EBIT(1 – T)] will be $430 million and its 2020 depreciation expense will be $65 million. Barrington's 2020 gross capital expenditures are expected to be $110 million and the change in its net operating working capital for 2020 will be $25 million. The firm's free cash flow is expected to grow at a constant rate of 6% annually. Assume that its free cash flow occurs at the end of each year. The firm's weighted average cost of capital is 8.4%; the market value of the company's debt is $2.6 billion; and the company has 190 million shares of common stock outstanding. The firm has no preferred stock on its balance sheet and has no plans to use it for future capital budgeting projects. Also, the firm has zero non-operating assets. Using the corporate valuation model, what should be the company's stock price today (December 31, 2019)? Do not round intermediate calculations. Round your answer to the nearest cent.
$   per share

Quantitative Problem 2: Hadley Inc. forecasts the year-end free cash flows (in millions) shown below.

The weighted average cost of capital is 12%, and the FCFs are expected to continue growing at a 4% rate after Year 5. The firm has $25 million of market-value debt, but it has no preferred stock or any other outstanding claims. There are 18 million shares outstanding. Also, the firm has zero non-operating assets. What is the value of the stock price today (Year 0)? Round your answer to the nearest cent. Do not round intermediate calculations.
$   per share

According to the valuation models developed in this chapter, the value that an investor assigns to a share of stock is dependent on the length of time the investor plans to hold the stock.

The statement above is -Select-truefalseCorrect 2 of Item 2.

Case Problem:

John invents The Night Truck, a mobile night-shop with home delivery service between 8

pm and 6 am.

We are end December 2019 and John needs your help to evaluate this project. The project could generate annual sales of 150.000 € in 2020. The sales could then increase by 10% a year. John anticipates that a new regulation as from 2024 would prevent the sales of

alcohol during the night, meaning that sales would stop on the 31st of December 2023. Cost of sales amounts to 60% of sales.

The project requires a new warehouse as well as two trucks. The initial total investment (in 2019) is estimated at 200.000 € (which can be depreciated linearly over 10 years from 2020 onwards). At the end of 2023, the initial investment could be sold for 92,300 €.

John recently travelled to New York, where the concept already exists, to study the feasibility of the project. This trip cost 5.000 € and will be paid in 2020. In 2020, accounts receivable would increase by 75,000 €, inventories by 25.000 € and accounts payable by 50.000 €. Those accounts will stay stable until 2022, with the exception of inventories which John expects to further increase by 10.000 € in 2022 to meet the increasing demand. At the end of the project, all these amounts would be recovered.

The company is subject to a tax rate of 25%. Assume that all cash flows occur at the end of the year, that the inflation rate is 0% and that the annual risk-free rate is 2% (annually compounded). The risk premium for similar projects is 6% (annually compounded).

Questions:

1) What is a sunk cost? Do you identify such cost for the project?

2) Calculate the incremental net incomes and free cash flows of the project.

3) Which discount rate should you choose to evaluate the project? How do you interpret your answer? What is the main information included in this number?

4) Calculate the NPV of this project? What would you advise to John? Why?

5) What would be the impact of this project on the company’s value (if the project is undertaken...)?

Case Problem:

John invents The Night Truck, a mobile night-shop with home delivery service between 8

pm and 6 am.

We are end December 2019 and John needs your help to evaluate this project. The project could generate annual sales of 150.000 € in 2020. The sales could then increase by 10% a year. John anticipates that a new regulation as from 2024 would prevent the sales of

alcohol during the night, meaning that sales would stop on the 31st of December 2023. Cost of sales amounts to 60% of sales.

The project requires a new warehouse as well as two trucks. The initial total investment (in 2019) is estimated at 200.000 € (which can be depreciated linearly over 10 years from 2020 onwards). At the end of 2023, the initial investment could be sold for 92,300 €.

John recently travelled to New York, where the concept already exists, to study the feasibility of the project. This trip cost 5.000 € and will be paid in 2020. In 2020, accounts receivable would increase by 75,000 €, inventories by 25.000 € and accounts payable by 50.000 €. Those accounts will stay stable until 2022, with the exception of inventories which John expects to further increase by 10.000 € in 2022 to meet the increasing demand. At the end of the project, all these amounts would be recovered.

The company is subject to a tax rate of 25%. Assume that all cash flows occur at the end of the year, that the inflation rate is 0% and that the annual risk-free rate is 2% (annually compounded). The risk premium for similar projects is 6% (annually compounded).

Questions:

1) What is a sunk cost? Do you identify such cost for the project?

2) Calculate the incremental net incomes and free cash flows of the project.

3) Which discount rate should you choose to evaluate the project? How do you interpret your answer? What is the main information included in this number?

4) Calculate the NPV of this project? What would you advise to John? Why?

5) What would be the impact of this project on the company’s value (if the project is undertaken...)?